The functional diversity of protein phosphatase-1 (PP1), with its countless substrates, relies on the ordered assembly of alternative PP1 holoenzymes. Here, we show that newly synthesized PP1 is first held by its partners SDS22 and inhibitor-3 (I3) in an inactive complex, which needs to be disassembled by the p97 AAA-ATPase to promote exchange to substrate specifiers. Unlike p97-mediated degradative processes that require the Ufd1-Npl4 ubiquitin adapters, p97 is targeted to PP1 by p37 and related adapter proteins. Reconstitution with purified components revealed direct interaction of the p37 SEP domain with I3 without the need for ubiquitination, and ATP-driven pulling of I3 into the central channel of the p97 hexamer, which triggers dissociation of I3 and SDS22. Thus, we establish regulatory ubiquitin-independent protein complex disassembly as part of the functional arsenal of p97 and define an unanticipated essential step in PP1 biogenesis that illustrates the molecular challenges of ordered subunit exchange.