When partners fall out, the ownership, control, and even survival of their company are threatened. I’m not talking about routine differences in judgment, which are common between partners and usually resolved through mutual recognition of each other’s contributions. I’m referring to deeper disagreements where partners grow to dislike, distrust, and even hate each other. Initially, concerns about a partner’s performance may be paramount, but in deep disagreements, bad personal relationships overshadow these concerns. The partners have truly fallen out.
Case Studies of Partner Disputes
To illustrate the difficulties partners can encounter, consider these anonymized cases:
Case 1: Electronic Product Company
Two partners owned a company that assembled and marketed an electronic product. One managed design, marketing, and sales, while the other handled procurement, assembly, and finances. Initially, they disagreed about their customers’ needs and their product’s features. One partner claimed, “You have overdesigned the product! We can’t compete in that market!” The other retorted, “The market demands an upgraded product! The trouble lies with your failure to assemble to specs!” As the company began to lose money, their antagonism and mutual recrimination sapped energy that might have resolved their market-position and quality concerns. Within a year, they stopped talking to each other, and their hostility became so dysfunctional that even a close friend’s offer to mediate was refused. The company ultimately failed due to their inability to communicate.
Case 2: Software Partnership
A shared interest in computers led to a software partnership that weathered a rocky startup, secured outside financing, and appeared to be making progress toward sustainable growth. However, the partners clashed over contribution and control. The wife of one partner questioned, “Why must you do all the real work in a 50-50 partnership?” The other wife asked, “Why do you let your partner push you around as if he were the only boss?” The partnership was saved only when an outsider helped one partner recognize his token contributions and resign, acknowledging his unwillingness to contribute equally.
Case 3: Family Business
Two brothers built a $15 million company over 20 years and achieved financial independence. However, as sales and their wealth doubled over the next 10 years, things began to go wrong. They brought their children into the firm, leading to haggling over contributions, salaries, roles, and future ownership. Hostility simmered beneath the surface, ultimately leading the founders to sell the company.
Staying Out of Trouble
The best remedy is preventive medicine. Avoid partnerships where two or more people have equal ownership and decision-making power. If partners are to work together, establish who is in charge from the outset. A signed statement of control should specify what will happen if a lesser partner disagrees with the controlling partner, such as the right to leave and have equity bought out at a predetermined price.
Inequality can be key to satisfactory relationships. For example, a $40 million family company used inequality to weather two generations of family employment and ownership. The founder’s ironclad document gave major powers to his eldest son, who later chose a nephew to pass operating control to, retaining the prerogative to designate future CEOs. This structure offered family members jobs for which they qualified while ensuring leadership was determined by merit.
Implementing Escape Routes
If you must have a 50-50 partnership, agree on an escape route while still within the window of venture enthusiasm and working friendship. Put in writing what you will do if you cannot resolve differences, such as a buy-sell agreement or third-party mediation. The existence of an escape route can be a force for reaching an agreement short of that remedy.
Finding Resolutions
If partners are already in deep disagreement, they need to find a way out. Simply going along with hard feelings is the worst choice, as unresolved disagreements can harm both the business and personal lives. Here are some possible resolutions:
1. Define Roles and Responsibilities
To save a partnership, redefine and separate roles, reducing equality in day-to-day management. One partner should focus on a specialization, while the other takes on the chief operating executive role, possibly reporting to an augmented executive committee that includes an outside third person.
2. Bring in a CEO
In cases of irreconcilable differences, bringing in an outside CEO can be a solution. This requires all partners to step back and give the CEO control through a voting trust. Although difficult to find and agree upon, a good CEO can manage the business effectively and possibly lead to the eventual sale of the company.
3. Buy-Sell Arrangements
Buy-sell arrangements allow one partner to take over the business, with the other receiving compensation. If partners cannot agree, an auction process with sealed bids can determine who buys out whom. Emphasize a win-win solution to avoid greed and vindictiveness.
4. Divide the Business
If the business owns multiple entities, partners can divide them, with compensation for the partner taking the less valuable part.
5. Sell the Business
Selling the business to a third party can resolve conflicts and avoid passing them to the next generation. Engaging a specialist to facilitate the sale ensures the business is presented well, buyers are found, and legal matters are handled properly.
6. Liquidate the Business
If the company owns easily sellable assets, liquidate and distribute the proceeds. Alternatively, partners can each take assets of comparable worth and dissolve the corporation.
Conclusion
No one solution fits all cases of partner disagreements. Business and personal considerations must be carefully weighed to work toward a fitting resolution. Constructive solutions are not easy, but partners should not suffer along with the status quo. The most costly choice is to leave serious disagreements unresolved, risking both business success and personal well-being.
