Just when you thought your business couldn’t be any better, or maybe it couldn’t get any worse, your business partner tells you they want to leave. Statistics show that nearly 70% of business partnerships break up! Being prepared for a breakup, when you’re on good terms with your business partner(s), can actually reduce the odds of ending the partnership in (business) divorce! Sparks Law has seen hundreds of business partnership disputes, and below we dive into what we believe to be the best strategies, every step of the way!
As you might imagine, communication is important at every stage of a business partnership–if you’re not regularly communicating your concerns, things will very likely fester and grow into problems that seem insurmountable.
When you first enter into a partnership, chances are that everyone’s filled with excitement and enthusiasm, and (probably) interpreting everything in the best of lights or giving each other the benefit of the doubt. And why not? You have no reason to believe otherwise; maybe your partner really is a saint! Regardless, this is the very best time to negotiate what you’d like to see happen if, God forbid, the partners have a falling out, because this is the point at which all partners are the most flexible and reasonable.
Think about it: Changing terms in your partnership agreement is easy when there’s no money behind it. You’re talking about contingencies, not reality (yet), so everyone is incentivized to come up with a set of rules and processes to give the company the best chance to succeed, even if the owners don’t see eye to eye.
Phase 2 is the time when you learn about things like cash flow, cash crunches, and have to grapple with the reality that you (and hopefully your partners) are working yourselves into the ground, but the business’s bank account hits zero way too often for you to get comfortable! We’ve written a couple articles on these issues, ourselves–speaking from experience. During this time, it’s still good to negotiate partnership terms, if you haven’t already, but that’s normally difficult to do because everyone is so busy working “in” the business that they can’t work “on” the business, so to speak.
Sadly, this is the phase when you’ve gotten into a solid rhythm, cash isn’t so tight that you’re constantly anxious about it, but the business still needs you to work around 50 hours per week. If you did not get a solid partnership agreement written at an earlier phase, now is when it starts to bite you in the behind. Why? How? Let me tell you a little about “wealth maximizers” and the “Tragedy of the Commons!”
In Economics, good old Coase came up with his theory of the Tragedy of the Commons. This occurred when there was a small community of people, and a communal property area, “the Commons,” where people could hang out or allow livestock to graze and so on. If one of these townsfolk, however, owns a LOT of livestock, like 10 goats, and the most goats/livestock that anyone else owns is 1, it sets up an unfair advantage for the 10 goat-owner. That owner can allow ALL their goats to take advantage of the communal property of the Commons, at no expense to the owner, and the community as a whole has to, effectively, pay for the use of the commons (the goats eat all the grass, or poop everywhere, or run around so much that children can’t play in that area, or they push out other people’s goats, you get the idea).
Sadly, the same thing happens with a lot of partnerships, and that’s when people start thinking about breaking up: one partner sees a lot of money coming in and decides to stop working for the business. But wait! They can’t do that! That’s not fair!
While it’s certainly true that it’s NOT fair, if you never hired a lawyer to write a great partnership agreement in phases 1 or 2, your business partner probably CAN be lazy, and still take money out of the business even if you’re the only one doing all of the work! Which brings us to Phase 4.
This is the make-or-break stage of a partnership. If the partners can get past the wealth maximizing that happens around Phase 3, it’s typically smooth sailing from here. Unfortunately, the vast majority (nearly 70%) of businesses don’t make it here, though.
Obviously, it’s best if you had a great partnership agreement written up in Phase 1, and you negotiated it at length with your partner(s) and considered these contingencies. That reduces the “tragedy of the commons” and a partner’s ability to “wealth maximize” without disincentives that you’ve installed. However, even if you did not write an awesome agreement with an attorney, there are still plenty of options here.
Whether you downloaded a partnership agreement online and never read the thing, or didn’t even think to get one at all, you’ve got options. Those options depend an enormous amount, though, on your unique circumstances, though, so you will need to hire a good attorney to go over everything with you and come up with a strategy.
At Sparks Law, we’re here to help! We’ve helped out hundreds of business partners navigate each and every phase!
Business breakups are hard and not going to be solved in a Dear Abby article entry. Reach out to Sparks Law; we will help navigate these uncharted territories. Just like that first relationship that ended in Junior High, but this time you do not have to go through it alone. Sparks Law has seen it all, and we are here with the guidance you need to get through this time and move on successfully.
