Business partnerships are not always meant to last.
And that includes the successful ones.
Countless reports pin the fail rate at around 70% in the first year. A lack of a detailed partnership agreement upfront usually plays a role. Some partners want to work on the business, while others may want to work in the business. For a couple of months, that arrangement may work. But once it’s clear the other partners are working 25 hours a week, and you’re grinding more than 60 hours, things will change.
Communications may become strained or end.
Regarding the “successful” business partnerships, life tends to get in the way, and some partners may want to retire at some point.
Like any business transaction, always begin at the end. Before you spend so much energy on the entry point, invest the time in your exit strategy.
The odds make it clear that your business partnership will end in some type of dispute.
But what are your options?
Here are six possibilities to consider:
Business Attorney Insight: Mediation
Discussing the disputed matter(s) with your partner should yield results, but it may take a trained mediator to get the job done. Mediators help open the lines of communication and characterize each stance in less provocative ways.
Bringing each partner back to the overall mission—the good of the company—should help create a path forward since it’s the reason each partner signed on in the first place. Focusing on the project as opposed to personalities will increase your odds of resolution.
Business Attorney Insight: Buy Out
You should have included a buyout provision in your partnership agreement. However, if that is not the case, then leverage your buy-sell agreement, which generally is included in partnership agreements.
A buyout agreement should be drawn up by your attorney and given to the exiting partner. You should also work with a financial advisor who can help put dollar amounts on assets. Please do not use a boilerplate template that you found online. Every partnership, not to mention the situation, is unique, and this type of transaction typically involves too much value to leave to a form letter.
Business Attorney Insight: Sell
Like many of the other options, selling can be relatively easy or difficult.
If your partnership agreement addresses what happens when partners sell their interests, this matter should be over quickly. Some agreements provide the existing partners with first dibs on the exiting partner’s equity.
However, if the partners are only given the right of first refusal, then this adventure could take time if it’s shopped around. And then, the question becomes about how the daily operations of your company will be impacted with a potentially disgruntled partner looming around the office and representing the company with A-list clients.
Business Attorney Insight: Freeze-Out
A freeze-out merger happens with a majority stakeholder in a company with another company that they own and control. Then, the majority shareholder submits a tender offer to the original company to force out the minority shareholders. If it’s successful, all the assets from the original company may be moved over to the newly created company.
The courts prefer a merger to another case, so they tend to rule in favor of these mergers, especially if the majority stakeholder makes a strong connection to a corporate purpose backed by sound business judgment.
This is another reason you have an attorney on your team.
Business Attorney Insight: Dissolution
Refer to your partnership agreement for this one. Most agreements include how the assets will be divided and distributed when the relationship is dissolved.
If your partnership agreement doesn’t include this provision, then you may be subject to the Uniform Partnership Act of 1997, which was proposed by the National Conference of Commissioners on Uniform State Laws to govern business partnerships in the United States. To date, 37 states, including Connecticut, have ratified the agreement (check with your lawyer for details).
Dissolution may end a partnership, but not the operations of a company, which shifts its activities to closing accounts, as well as selling and disposing of assets. This part could take many months, depending on the size and complexity of your company.
Business Attorney Insight: Litigation
Business partnerships include more than one agreement.
There’s one for the partnership and another for operations. There are agreements for employment and non-compete terms. Typically, there are also non-disclosure agreements to protect company investments.
If any of these contracts are breached, then that could trigger litigation for resolution.
Examples could include misuse of company assets, failure to disclose potential conflicts of interests and sharing copyrights or trade secrets.
One day, your business partnership will end. Consult with your business attorney for a favorable outcome to your hard work.
(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or email@example.com.)