When Partnerships Go Sour

The road to a successful business is full of obstacles and often sprinkled with unexpected situations. When owning a small business, hardships can be even tougher to get through.

Being a partner in a successful business is every entrepreneur’s dream. When several people decide to put together their diverse array of skills, ideas and strategies, chances are they end up building a profitable company. Partnerships founded on common values and visions, along with different know-how and resources usually result in long-term prosperity.

But the ever-changing business environment, the opportunity of seeking new grounds in the real estate industry or the lack of experience will most certainly interfere with the partners’ initial plans. There are lots of things that can go wrong in an investment partnership—from a minor disagreement, mistake or misunderstanding to misalignment of personalities, dysfunctional arrangements or critique coming from outside or within the partnership.

Bad partnerships are preventable with the proper due diligence. The first thing you should do is make sure that you’re going into business with a partner you can rely on, who is reasonable, has good business acumen and is 100 percent committed to the business in the long term. Then, you should clearly set your expectations and establish how each of you will benefit from the partnership.

One of the most common failures in small businesses is the absence of an exit agreement that outlines all the details of the partnership structure. This document—often referred to as a Buy-Sell Agreement—mirrors a prenuptial arrangement in a marriage since it specifies all the necessary actions in case the partnership fails. The agreement should be completed before any profits are made and it should include at least the following:

  • how the partners will run the business
  • how business decisions will be made
  • how disagreements will be settled
  • exit strategies of the partners
  • how to sell or trade one partner’s position
  • roles and responsibilities
  • a dissolution strategy
  • division of profits and losses

Read the signs

In many cases, people just don’t want to take on the full responsibility of running a business on their own, so they reach out to someone who is willing to work with them and take the same risks. But what happens when not everything is sunshine and roses? What are the first signs that a partnership is about to part separate ways?

Warning signs such as frequent disputes, turmoil or lack of interest should be seen as indicators of a deeper hidden problem that needs to be addressed. Trouble is afoot in a partnership when feeble communication, poor teamwork and lack of interest toward each other’s input are involved. Every time a business is underperforming, it can lead to partners’ doubting each other and questioning how much effort, time and funds the other one is contributing to the business. The situation might be even more serious in a business partnership between spouses since the consequences of continuous distress at work might have deeper implications. According to consulting firm Family Business USA, roughly 65 percent of family businesses fail before reaching a next generation, regardless of which generation it is.

Find the best solution

Financial and/or operational struggles, stiff competition, lack of financing, imbalance in tasks and duties or a partner no longer fulfilling their duties are just a few of the most frequent situations a partnership stumbles upon. The first thing that business partners should do is talk. Keep your employees and clients in mind and try to come up with solutions rather than determine who is to blame. Sometimes, even arguing might help as long as it’s productive. A difference in opinion should be asserted, acknowledged and solved irrespective of the communication style.

Another solution is involving a third party—such as a consultant—that can offer a different perspective to a known issue or even help identify a problem. This person should have extensive experience and act as a mediator. If you cannot come to terms, or if one partner does not keep their agreement, a change in business status is inevitable. One of the partners can buy out the other one and ensure a clean break. However, if there is no dissolution strategy in the partnership agreement, a specialized law firm should help. Ideally, partners should mediate and come to an agreement that doesn’t involve a court of law. If this doesn’t happen, the final resort is a court-dictated decision, but expect this to be pricey and not provide the result you were hoping for. Courts often split assets and liabilities in half, regardless of disputes.