5 Ways To Avoid And Resolve Partnership Disputes
Going into business with a partner can be a great way to work. Two heads are often better than one.
Going into business with a partner can be a great way to work. Two heads are often better than one. It is also usually more fun to work with a friend. These types of collaborations are common in many businesses, particularly professional services firms and startups.
Unfortunately, disputes can arise in these situations. They can even arise with the person – such as a longtime friend – whom you know very well and trust. A partnership dispute can become one of the most bitter disputes you will ever experience.
Fortunately, a partnership dispute can be avoided. However, it requires a reasonable degree of effort up front, a small investment of time and money, and patience throughout the process. There are five things you can do to avoid a partnership dispute, potentially resolve one, and, above all, prevent from having your partnership irrevocably damaged.
A Written Agreement
First, make sure you have a written agreement in place. Depending on the type of business involved, this can be either an operating agreement or a partnership agreement.
The agreement should, at a minimum, clearly define the following items:
- Who has control and how much;
- Each partner’s role;
- Each partner’s duties and obligations;
- Capital contributions and what kind;
- How additional capital contributions will be handled, if necessary;
- Compensation and distributions;
- What procedures the business will adopt and follow for making decisions;
- Worst-case scenarios, such as what happens when there is a conflict, the removal of co-founders or partners, whether and when a partner can withdraw, and how ownership percentages change if an existing partner or a new partner invests additional money in the business; and
- When and under what circumstances the relationship between the partners, or the business, can end or be terminated.
This agreement should be in writing and should specifically address the items above in as much detail as possible. Disputes often arise with agreements when they are not clear or do not provide the partners with the right guidance. More detail is better. It will help all partners be on the same page. There is no question that planning for all possible scenarios is impossible. To address unknown issues that may arise, your agreement should specify a procedure for how all other disputes and disagreements will be resolved.
Addressing these issues may be uncomfortable. It may seem like discussing a prenuptial agreement with your future spouse. However, it is imperative that you take the time to discuss these issues for several reasons. First, it should be natural for you to address these issues because, over time, expectations and pressures on business owners or partners usually change; agreements can anticipate these changes. Second, an agreement will provide clarity for you and your partner if certain situations or events occur. Third, it will provide you with an enforceable set of guidelines you can use to navigate difficult problems. Fourth, it will remove any surprises or uncertainty you may experience if or when a dispute arises.
Every agreement – not just the operating/partnership agreement – that you and your partner(s) make should be in writing. You do not need to go crazy, however. For example, most operating agreements will require that certain major decisions be memorialized with written consents signed by a majority of the partners. You should focus on reducing these types of decisions to paper. Getting every major agreement – both an operating or partnership agreement and other major decisions – between the partners documented and signed off on is critical. Having documented agreements means that, if there is a future dispute, you can refer back to the written agreement as a starting point for a discussion and, hopefully, resolving the dispute.
Hire An Attorney To Assist You With The Operating or Partnership Agreement
An experienced attorney can assist you with preparing the operating or partnership agreement. Often, many individuals will forego having an agreement or try and prepare one themselves (either from scratch or from a template they find online). Either the excitement of starting a business or the desire to save time and money may entice them to overlook the importance of a clear agreement. I do not advise this. You should invest in having an attorney assist you for several reasons.
First, every business is different, and each individual has different interests, goals, and comfort levels. Trying to modify a generic agreement you found online might expose you to certain procedures or obligations you may not want. Instead, the right agreement for you and your partner should be tailored to your business and your personality traits. An attorney can help you craft the proper agreement for you and your business.
Second, hiring an attorney is a good monetary investment. The money you spend on an attorney for this assistance would likely amount to just a few hundred dollars. It would outweigh spending thousands of dollars (or more) down the road if an irreconcilable dispute arises or if an ambiguity in the agreement must be litigated. Many business owners do not understand this simple cost-benefit analysis. Spend a little money and time now to get it right, and you will avoid many headaches in the future.
Make Time To Discuss Your Dispute, And Focus On The Solution, Not The Problem
If there is a dispute, the partners should set aside a specific time to talk about it. Having a conversation or a negotiation about the dispute in the middle of your work day can be difficult and unproductive. During the work day, there are often many distractions that will prevent you from having a constructive discussion. Instead, find the time to sit down and have a calm, reasoned conversation about the issue without any distractions. An after-hours meeting, a relaxing dinner, or a simple conversation on a Saturday morning over coffee would suffice. Making this effort will have a positive effect on the situation and hopefully steer you in the right direction.
If and when you have a conversation with your partner about your dispute, make an effort to focus on the solution to your dilemma rather than the problem. Your goal should not be to win the argument or beat your partner. If all you do is talk about the problem, you will further irritate one another and cast blame on each other. For the long-term relationship to survive, you need to focus on what is best for the business. You cannot spend time blaming each other for your predicament.
Instead, talk about the outcome you want and that you believe is best for the business, and consider how you will persuade your partner to adopt it. When presenting this outcome, focus on objective reasons for achieving it. Be specific about how you can get from point A to point B. By doing so, you can focus on a pathway forward instead of dwelling on where you have been. This forward vision will create a more positive atmosphere and environment. This more beneficial setting will create more opportunities for a resolution.
If The Dispute Worsens, Consider Bold Solutions, Such As Hiring A Mediator Or Agreeing To Go Your Separate Ways
If you and your partner cannot see eye to eye, and the dispute worsens, you should consider hiring a mediator to help you resolve it. This decision should not be viewed as an admission that you have failed. Rather, it should be perceived as a proactive measure to prevent other, more dire consequences. Many standard operating agreements, in fact, contain a provision requiring that, if there is a disagreement regarding a certain set of issues, the partners must hire a mediator to help them resolve those issues.
A mediator, or neutral individual, can assist the partners in several ways.
- First, a mediator can help both sides present their opinions or positions in a non-confrontational way. This exchange will likely result in a much different, and more productive, outcome.
- Second, a mediator can ensure that the partners’ emotions are kept out of the discussion. When there is a dispute, emotions are often a major reason why a discussion cannot progress, or a resolution cannot be reached. Eliminating or tempering one’s emotions can help both sides focus on the substantive issues between them. This focus will allow both sides a fair chance to present their opinions and proposed solutions.
- Third, a mediator usually will have experience with these types of disputes. Partnership disputes are common. An experienced mediator will be able to draw on other disputes he or she has dealt with and/or helped resolve and suggest helpful and effective strategies or solutions. Conversely, a mediator can also recognize if a dispute cannot be resolved and if the partners are better off with an amicable separation.
If a resolution cannot be reached in the near future, or if the partners remain in a deadlock, it may indeed be worth considering an amicable separation. For example, if you and your partner do not share the same vision for your business any more, you should consider terminating the partnership and going your separate ways. Terminating the relationship may be complicated and require a lot of effort and discussion regarding the division of the assets of the business and other items. However, once both sides recognize and accept the situation is unworkable, you might embrace the process of splitting up. Indeed, operating a business where the partners constantly disagree over most decisions will negatively impact your personal relationship, your personal life in general, and the business itself. Sometimes, it is better to cut your losses and move on.
If The End Is Near, Consult An Attorney
If you cannot resolve your differences, and the dispute appears to be heading towards an ugly outcome, you should contact an attorney. Getting legal help sooner rather than later could be critical. An attorney can help you understand your rights and obligations, and to what extent your partner has similar rights or obligations.
For example, it may not be prudent to terminate the relationship or expel your partner from the business. Instead, you may need to follow a protocol in your agreement stating that mediation is necessary, or that certain other requirements must be met. Alternatively, you may need to offer to buy out your partner. Terminating your partner if your agreement forbids it may expose you to significant liability and litigation costs.
Similarly, if your partner is poaching customers, damaging the goodwill of the business, or stealing assets, you should determine how to stop him or her from carrying out those actions. Often, a court action (known as an injunction or temporary restraining order) may be required. The right attorney can guide you through this process. Seeking an injunction can be a worthwhile investment that stops your partner in his/her tracks and protects your business interests.
Above all, you should never take matters into your own hands. That may create additional problems and difficulties you should avoid. The proper way to prevent what you have built with your business from being destroyed is to allow an attorney to guide you through your available options. An experienced attorney will explain what you can do, the advantages and disadvantages of each option, and the likelihood of success of each path.
Having a dispute with your business partner could have a significant impact on your business and your personal life. You should take proactive measures early on to avoid these disputes. If they do occur, addressing and resolving them as soon as they rear their ugly head is essential if you want to preserve your relationship and the effectiveness of the business.
Meet the author: Robert Fojo
Robert assists clients with business and commercial transactions, civil litigation, and complex dispute resolution. He helps businesses defend themselves when lawsuits are filed against them and prosecute their own lawsuits when they have been wronged. In this regard, Robert handles a wide variety of legal issues, including general commercial disputes, construction matters, class action lawsuits, real estate disputes, disputes concerning the competitive bidding process and government procurement and contracting, employment claims, and appellate litigation. Robert also assists small-to-medium size privately held businesses, venture investors, and entrepreneurs with cost effective legal solutions that address their specific business needs.
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