By Austin K. Sweet
An age-old adage states: “Friends and business don’t mix.” The problem is that many people look for the same attributes in a business partner that they look for in a friend. Friendships and partnerships are both built on trust, common interests, and common goals, and both tend to fail when any of those three factors diverge. Going into business with your friends is natural and has led to some very successful enterprises as well as some epic implosions. Properly organizing your business from the outset will help you successfully address partnership disputes in the future and avoid a scorched-earth dissolution of your business and friendship.
Formalize Your Business Relationship. Many of the worst partnership disputes started with a handshake. “Handshake deals” are a trial lawyer’s dream because they inevitably lead to some confusion or discrepancy. We’ve all had that moment when we’re positive we’re right, and our spouse / friend / sibling is positive (s)he’s right. Neither person is trying to deceive the other but someone is simply wrong. The same thing happens in business and sometimes the stakes are much higher. These disputes can be avoided simply by formalizing your agreements in writing. “Handshake deals” may have been the Way of the West, but so were duels. Avoid duels.
Another important reason to formalize your partnership is that, if you don’t, the law might do it for you. In Nevada, legal partnerships can be created unintentionally: if two or more persons carry-on as co-owners of a business for profit, they have created a legal partnership. Something as simple as pooling your money to buy and flip houses can create a legal partnership with a wide range of legal implications. Formalizing your business relationship will ensure that you remain in control of your partnership without unknown and unintended legal consequences.
Address the Tough Questions Early. Entrepreneurs are inherently optimistic people who sometimes have difficulty considering the possibility of getting into a major dispute with their friend and partner. This can lead to some partners never discussing the uncomfortable topic of what to do when something goes wrong.
A common problem arises when a mentor offers his/her apprentice a great partnership opportunity. Often the apprentice feels awkward addressing the mechanics of the arrangement or formalizing the relationship, fearing the mentor will take offense and withdraw the offer. This concern is often misplaced – a good mentor will appreciate your business savvy and be encouraged that you can handle the responsibility you’ve been given.
If your partner still resists, it may be time to reconsider the business relationship. Partners with fundamentally different views on how a business should operate cannot run a successful business. Addressing and understanding these differences before it’s too late may save you both substantial frustration and money.
Decide How to Resolve Disputes Before they Happen. Most business partners get along when the business starts and friends like to form 50/50 partnerships to give both partners equal rights and authority. However, 50/50 arrangements lead to stalemates: for example, your partner wants to sell now, but you want to hold for six more months. Absent some method to break the deadlock, this type of dispute can destroy an otherwise successful business.
Ideally, business partners should avoid 50/50 relationships altogether. However, if you’re adamant about maintaining equal interests, establish a procedure early on for how disputes will be resolved. It is much easier to formulate a dispute resolution plan while all parties get along than to wait for a dispute to arise. Consider agreeing upon a mutually respected third-party (or group of people) whom is willing to informally hear both sides of your dispute and act as the tiebreaker.
No partnership begins with disagreeable, untrusting partners, but some end with them. Planning for disputes before they happen will save substantial grief and money. If you don’t plan ahead, someone else (possible a judge) might end up making your decisions for you.
Formulate Multiple Exit Strategies. All good business plans begin with an exit strategy, but things get much more complicated when partners are involved. What if your partner wants out before you do? Will you buy him out, or can he sell his interest to someone else? What if you don’t have the cash to buy him out? What if your partner dies? Will his children inherit his interest? If so, do you want to be partners with his children?
Including clear and detailed buy-out provisions will help you prepare for unexpected contingencies, allowing one partner to smoothly exit the partnership without ending a longtime personal friendship. Create a “right of first refusal” to ensure that your partner’s share of the company does not get transferred to someone you do not want to do business with. Establish a payment plan in the event that you do not have the cash available to buy-out your partner’s interest. Be very clear about how the business will be valued and how payments will be made.
Always have a primary exit strategy and operate your business with that goal in mind. However, preparing for the unexpected contingencies that come with adding partners to your business might save your business and your friendship down the road.
Know When Enough Is Enough. Ugly partnership dissolutions are like bitter divorces: both parties get emotional and take unreasonably stubborn positions on objectively silly issues. Like divorces, many of these disputes arise from minor disagreements that fester, grow, and eventually consume both sides. If you feel this downward spiral begin, simply utilize your well-planned exit strategy and get out before irreparable damage is done, either to your business or your friendship.
Austin Sweet is an attorney at Gunderson Law Firm, practicing business law directed at helping business owners stay protected and prosper. He can be contacted at (775) 829-1222 or firstname.lastname@example.org.