By Inna Brady of IB Law Firm and NAWBO Greater DC
Did you know that 80 percent of business partnerships end in dissolution? Even well-known businesses like Rockefeller & Andrews, Citigroup and The Beatles began or ended with partnership conflicts. The larger the stakes, the fiercer the disputes tend to be.
Business disputes come down to two things: control and money. And the most common reasons for partnership splits? Mistrust and poor communication.
But don’t be discouraged! Successful partnerships exist, too—Google’s Larry Page and Sergey Brin, Apple’s Steve Jobs and Steve Wozniak and many more. Read on for help in building successful business relationships, and don’t be discouraged from forming them.
Create the Foundation: Personal Integrity
The foundation for every successful business partnership is a reciprocal commitment to listen and trust. A partnership only makes sense when one plus one equals more than two. This requires:
- knowing yourself and knowing your business partner well
- being completely honest about your ability to be vulnerable
- sometimes putting the interest of the partnership above your own
- accepting that not all business ideas require partnerships
Like any relationship, business partnerships are about trust. The business partner you choose will impact the quality of your life, and, in some sense, it will define who you are and affect your reputation.
Practical tips before you form a business partnership:
- Take your time to understand your and your potential business partner’s styles, values and goals.
- Start small with a “trial” partnership before committing to bigger stakes.
- Consider asking for references and be open to providing the same.
- Check who did business with this person.
- Check business associations and directories for reviews.
- Ask about the potential partner’s business history, what businesses he/she has started before, how those businesses did and if the person has had any business partners before.
- Conduct your due diligence by searching, for example, judgment liens, bankruptcies, social media, lawsuits and other sources.
Set Clear Boundaries
Many disputes arise out of the “gray areas” about roles, compensation and decision-making. The challenge is that nobody can foresee all the possible situations, and business operations do not always stay the same. The balance between the fluidity and rigidity of boundaries requires skillful day-to-day adjustment and a solid skeleton of fundamental principles.
Ideally, the boundaries should be discussed upfront and then memorialized in a document, such as a partnership agreement, an operational agreement, Bylaws or the like.
The basic boundaries should include:
| Roles | Who handles what aspects of the business |
| Contributions | What each partner brings to the business |
| Responsibilities | What are the expectations |
| Decision making and voting | Who decides what |
| Profit distribution | How partners are paid |
| Accountability and audit | The checks and balances |
| Exit strategy | How partners can leave |
Establish Enforcement Tools
Boundaries need enforcement mechanisms (“remedies”) to be effective. The remedies determine your “what if’s.” For example, what if you decide to leave the partnership, or what if you notice that another partner is not transparent, or what if you want to start a competing business?
Practical tips for establishing the enforcement tools:
- Establish how each partner’s contribution is valued.
- Identify the company’s assets.
- Define the protection mechanisms for the assets (this will depend on the type of asset).
- Research and allocate common risks associated with the business.
- Obtain proper business liability and errors and omissions insurance coverage.
- Protect your personal assets.
- Draft the contract during negotiations, not after.
- Consider requiring the potential business partner to provide proof of sufficient funds and sufficient insurance coverage.
- Consider asking for personal guarantees.
- Check for any other contractual remedies and damages.
Maintain Healthy Communication
Fear of disputes shouldn’t prevent action. A great business idea requires skillful cooperation and trust. Nourishing a transparent and healthy communication atmosphere through regular checks and mutual balances can pave the path to stellar success.
Practical tips in facilitating communication:
- Refine the partnership’s vision through regular and honest conversations.
- Check pulse through assessments and transparent audits.
- Address disagreements proactively through direct negotiations.
- Consult with an attorney early to understand your options.
- Consider using mediators to facilitate resolution.
- Develop a clear resolution strategy before taking legal action.
While no business is completely dispute-proof, combining integrity with prudence can balance risks with great opportunities. This approach will equip your business partnership for growth and success.
Note: This article does not constitute legal advice. If you need legal guidance, please consult with an attorney.
About the Author…
Inna Brady is a business litigation attorney. She helps small businesses resolve complex partnership issues. Her litigation firm has offices in San Francisco, Washington, DC and Bethesda, MD. Learn more here.