Business partnership disputes are one of the most destructive forces a growing company will face.
Regardless of how good the product/service is, how loyal the customers are, or how impressive the revenue stream is looking… If partners stop agreeing on key issues, it can spell disaster for the business.
Here’s why:
Statistics show that 65% of startups fail because of founder conflicts or disputes. That seems like a really high number. That means that most partnerships are at risk of imploding before they reach their goals.
The good news is that with enough business succession planning and the right processes in place, these types of disputes can be avoided. Business owners who work with commercial litigation law services early on are far better positioned to protect what they’ve built when disagreements arise.
Let’s take a closer look at what causes partnership disputes and what can be done to prevent them from destroying a business.
What You’re Going To Learn:
- Why Partnership Disputes Happen In The First Place
- How Disputes Can Destroy Business Succession Planning
- 5 Ways To Protect A Business From Partnership Disputes
Why Partnership Disputes Happen In The First Place
The beginning of a business partnership is always fun.
Partnering with the right person can allow founders to complement each others strengths and work toward a common goal. Everybody has fun being optimistic and planning for success in the beginning stages of a business.
The problems arise as the business grows.
Arguments over money, control, and the future direction of the company are some of the biggest causes of partnership disputes. One partner might feel like they are contributing more to the company than the other. Minor disagreements can turn into much bigger issues quickly if they aren’t kept in check.
Money issues:
When it comes to partnerships, financial disagreements are by far the most common source of conflict. Partners will argue over everything from how profits should be split, to how expenses should be allocated, to what the company should invest in.
If these things aren’t clearly defined in a partnership agreement, they can destroy the business.
Misaligned visions of the company:
Uneven distributions of work:
Similar to uneven contributions of money, partners may quickly grow to resent each other if they feel like the workload is not evenly distributed. Again, this is something that should be defined in a partnership agreement.
Imagine two people started a business together. One set everything up and secured all of the clients, but the other partner is responsible for the day-to-day operations. Who ends up doing the majority of the work? Exactly.
When there’s no formal agreement as to who does what in a business, it’ll constantly be a point of contention between partners.
If partners don’t have each other’s backs regarding responsibilities, who will?
How Disputes Can Destroy Business Succession Planning
Alright, so maybe partnership disputes aren’t the end of the world.
Relationships between business partners can be damaged beyond repair, but as long as both parties still care about the business, they can work things out.
Wrong!
If a business partnership is dysfunctional, it can ruin even the best-laid plans for business succession.
Business succession planning is when a current business owner decides what’s going to happen to their business when they leave. Whether that’s selling to a third party, gifting to their children, or transferring leadership to existing employees.
Both partners need to be on the same page for any of this to work.
According to a Gallup poll, about 1 in 3 business owners have no long-term plan for their business, or aren’t sure what will happen to their business if they were no longer able to run it.
So not only are there partnership disputes to deal with, but now there’s also no idea what to do about them if an owner wanted to leave the business tomorrow.
Partner disputes can hinder any plans for selling a business, transitioning leadership, or even just day-to-day operations.
It’s always advisable to have a succession plan in place for a business (even if there are no plans to go anywhere for a long time). Without one, partners better hope they see eye to eye on everything. Otherwise, the business could be sold under unfair terms, forced into dissolution, or spent fighting each other in court.
5 Ways To Protect A Business From Partnership Disputes
Okay, so partnership disputes are bad… But they can be prevented!
Imagine how much more successful a business could be if the partners saw eye to eye on every decision?
Here are five ways to prevent partnership disputes from impacting a business:
Draft A Solid Partnership Agreement
This seems like a no brainer, but it’s surprising how many businesses skip this step.
When partners first decide to go into business together, they should draft a detailed partnership agreement. This agreement should outline each partner’s ownership percentage, their roles within the company, decision-making authority, how profits will be distributed, and what happens if one partner wants to leave the business.
Get everything in writing.
Have A Buy-Sell Agreement
A buy-sell agreement is another aspect of a partnership agreement that will help protect partners if things go south.
A buy-sell agreement outlines what happens if one partner wants to leave the business, or is no longer able to work. Without one, it’s basically taking a shot in the dark when it comes to buying out a partner’s ownership stake.
A solid buy-sell agreement will spell out how a partner’s stake in the company will be valued if they wish to leave at any time.
Have A Process For Handling Disputes
As mentioned earlier, most partnership disputes are settled before they even go to trial. This is because both parties would rather come to an agreement than drag things out in court.
Every partnership agreement should include a defined process for handling disputes.
This will typically involve internal mediation, arbitration, and only litigating as a last resort. Having this built into an agreement will force partners to handle any disputes quickly and efficiently.
Hold Regular Business Reviews
This one is simple. If disputes aren’t caught early, they can escalate into much larger problems.
By holding regular business reviews, partners can identify potential problems before they become actual problems. These don’t have to be formal, sit-down meetings. Simply touching base every month to see how things are going can do wonders.
Get Professional Legal Advice
Finally, one of the best things business owners can do to prevent partner disputes is to get professional legal advice. This doesn’t just apply to when a dispute is already happening. By having a lawyer on retainer, or at least someone available to answer questions, many disputes can be prevented from happening in the first place.
An experienced business lawyer can help draft a partnership agreement, define roles and responsibilities, and advise on any other legal matters.
The Takeaway
Partnership disputes can be devastating to a business. Not only can they ruin the relationship between partners, but they can completely derail any plans for the company’s future.
Planning ahead can mean the difference between a business surviving a dispute and a business being dissolved by one.
Remember…
- Get a solid partnership agreement in place.
- Have a buy-sell agreement to protect partners if someone wants out.
- Create a process for handling disputes between partners.
- Hold regular business reviews to catch disputes early.
- Seek professional legal advice when needed.
Planning for the future of a business should start the day the doors open, not years down the road. Businesses that survive partnership disputes have already planned for them long before they happened.
