What Can You Do with a Toxic Business Partner?

A bad partnership could lead to profit loss and toxic company culture. The first way of dealing with a toxic business partner is to schedule a meeting to discuss your concerns calmly.

Brad Nakase, Attorney

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What Happens When Partners Fall Out?

A business partnership is a delicate structure composed of two or more personalities who work together to achieve success. When partners having a falling out, the control, ownership, and survival of their company are put at risk. The falling out is normally not due to basic arguments such as differences in judgment. These disagreements happen fairly regularly in partnerships, and they are often easily resolved when either partner recognizes the contributions of the other. The kind of disagreements that cause partners to fall out are often much worse in nature. These type of arguments normally result in partners growing to distrust and hate one another. When performance is overshadowed by a souring personal relationship, then partners have truly fallen out.

To examine the troubles partners may encounter, let us explore the following examples:

  1. Two partners operate a company that puts together and markets an electronic tablet. One partner manages the design, marketing, and sale of the product. The other partner manages the finances and assembly. They begin to disagree over customers’ needs and the tablet’s features. One claims that the other is overdesigning the product, and the other accuses the other of being incapable when it comes to assembly. As the company loses money, the partnership deteriorates. After a few months, the partners have stopped talking to one another. When offered mediation, both refuse, and the company fails.
  1. Two college graduates share an interest in computer software design, and they decide to form a partnership. After a difficult startup period, the company is headed toward profit and stability. However, the two partners are constantly at odds over the issue of control and contribution. One partner accuses the other of making him do all the work, and the other complains that he is being pushed around. When a mutual friend tells the second partner that he is not actually contributing enough, that partner decides to bow out of the business.
  1. Over fifteen years, two brothers, Russell and Damon, run a business together that ends up being worth $10 million. Over the next ten years, as their sales continue to grow, they decide to bring their family into the business for the next generation. Russell brings two of his children into the company, while Damon brings in just one. All the children battle over salaries, roles, and future ownership. As a result, Russell and Damon decide it is best to sell the company to avoid further conflict.

There are many other examples of small to midsize companies suffering similar disagreements among partners. Indeed, the situation is fairly common.

To avoid the threat of partners falling out, one should seek to avoid conflict via prevention. An entrepreneur should not establish a partnership in which two or more people share equal ownership and decision-making power. If two or more individuals are to work together, then it is essential to determine at the beginning who will be in charge. To do this, there should be a statement of control signed by all partners. This should indicate what will occur if a lesser partner has a disagreement with the controlling partner. Perhaps the lesser partner will have the ability to exit or have their equity bought out at a pre-determined price. Or maybe the company can buy out the lesser partner who does not respect the controlling partner’s decisions.

While this arrangement may seem unfair, it is necessary for a partnership to function successfully. The structure of a partnership should prevent any possibility that partners could face off against each other on equal terms. Ironically, inequality is essential to a successful partnership.

If an entrepreneur is determined to maintain a 50-50 partnership, then he or she should at the very least decide on an escape route while the relationship is still healthy. The owner should put into writing what should be done in the event of irreconcilable differences. The solution could be a buy-sell agreement or an agreement to seek mediation. It is much easier to decide on these solutions while the partnership is still fresh and civil, rather than after it has become poisoned and there is no goodwill left.

While there are certainly examples of successful partnerships, there are many more stories of terrible disasters. However a partnership is destined to work out, there is no harm in planning for the “what if.” If two partners cannot agree on “what if,” then it may be best not to pursue the relationship.

Let us say there is an active partner starting out with an inactive, financial partner. The former may wish to consider “what if” at the beginning. Over the years, the active partner may become the driving force behind a successful, profitable company. Some active partners do not like carrying an inactive partner who benefits from their hard work while having contributed very little themselves. These active partners often wish they had negotiated a buyout from the beginning. This way, the financial partner would receive returns while the active partner would increase his or her own ownership percentage.

It may feel easier and more comfortable to ignore or put off confrontation rather than facing the problem. However, once two partners are deep in a disagreement, finding a way out can be difficult. It can be hard to work together when there is bad blood, and the partners’ personal lives as well as the health of the business are put at risk. Unfortunately, many partners fall victim to this situation because they do not seek a solution early enough.

Over the years, as the falling out between partners continues, problems build up. Employees who understand the scenario begin to split into factions. Partners may begin to act against one another openly. Perhaps one partner may schedule important meetings when he or she knows the other partner is busy. Or maybe a partner may contradict instructions given by the other partner. The more a conflict builds, the harder it will be to repair.

Finding a solution does not just happen. There will usually be a trigger, such as an explosive argument or a mutual recognition that the situation is bad. Or, perhaps, the trigger may come from a third party, such as an adviser or mutual friend.

How to settle disputes between business partners?

Whatever triggers the feuding partners to resolve their conflict, they will need to find some kind of mediator to help them sort out the problem. Perhaps this agent will be another partner, though it is more likely that the agent will be a third party outside the company. Usually, partners prefer to choose the company lawyer or a close business associate. They view these individuals as unbiased. Some individuals are experts on this kind of situation and are thus respected. It is difficult, therefore, for partners to disregard their opinions and advice.

Sometimes, partners may choose to seek help from someone outside the business. Generally, there are three reasons for this decision to be made. One, it could be that the feuding partners may want their private information kept so. When the mediator helps them resolve their case, he or she will take away the knowledge of the argument with them, so nothing negative stays behind. The partners may also value the expertise of a professional from outside the company. A professional who is experienced in handling reconciliations instinctively knows what should and should not be done. He or she would also be determined to bring both partners to the table to find a realistic solution.

However, disagreeing partners should realize that professionals can only do so much. They should not, in short, expect miracles to be performed. In most situations, it is best to employ an agent within the company to resolve the dispute. One problem with hiring an outside professional is their high fee – they know what their experience is worth. If partners are willing to pay all that money for a professional, then they should be willing to take the adviser’s opinions seriously. Sometimes, this can act as sufficient motivation, and actually works to the partners’ advantage.

While the partners may be impatient for a solution, a good agent will know not to rush the process of reconciliation. When partners race to find a solution, that solution is less likely to last in the long term. It would be best for the agent to begin by speaking with each partner separately to encourage each to think rationally about the situation. If the feud is extremely toxic, it may be that the partners never meet together in the same room with the mediator. However, most times, the agent will seek to bring the partners together at the right time to discuss the options available to them. Whatever the scenario, the agent’s reconciliation process should be based on the following factors:

  • The partners themselves are allowed to make the final decision regarding what to do. Other parties may help with understanding and going through the available options. However, only partners have the ability to decide.

  • No one partner may get everything that he or she wants. That said, there can be a win-win situation. The goal in resolving the issue is that both parties are better off than they were prior to the intervention. It is therefore likely that both partners will give up something of value so that the other party can gain something from the agreement.

  • It may take time to find a solution that suits both parties. A good solution that will last in the long-term may take a serious commitment of time. It will also take patience as ideas flow back and forth.

  • Often, the situation runs on its own logic. One partner may be better at some things while the other is more skilled at others. In this case, the interests and skills of each partner may direct the resolution. It could be that the business’ needs support the idea that each partner handle different areas. But to identify if this is the case, discussion is needed.

  • Simply discussing possible avenues does not mean an agreement has been reached. During early phases of the reconciliation process, each partner keeps the rights detailed in the written or verbal partnership agreement. This makes it possible for each partner to search for answers without compromising their position.

It is worthwhile discussing the preceding points with an agent. Part of the key to reconciliation is having the mindset that there can be significant improvement in one’s business and personal life. Once partners come to accept this idea, the next steps of the reconciliation can proceed.

There are several ways for feuding partners to resolve their dispute.

One of these methods is finding ways to make the partnership work. After all, partnerships often come into existence because two or more people share a set of skills that complement one another. This kind of two-person working arrangement can keep the business well balanced, without all the complex work of the company falling onto one person. Each partner can take care of one part of the business – their specialty – while trusting that the other part of the business is in good hands. This kind of arrangement is very powerful and effective. However, when there is a deep disagreement, this structure goes horribly wrong. Often, one or both partners begin to question one another’s performance and ability. It is also common for partners to fail to work together or coordinate their duties. Each partner proceeds as he or she believes is best, but the independent contributions do not fit with each other.

To save a failing partnership, it is necessary that the partners’ roles become more defined and separated. Both should be respected for their contributions, and there needs to be a sense of coordination. By redefining each partner’s role, the partners’ equality should be reduced when it come to the day-to-day management of the company. While the partners can share the profits equally, one partner should be focused on a specific area such as engineering or sales. The other, meanwhile, will act as chief operating officer. There are certain steps partners should take to enforce these newly defined roles. The executive operating partner should report to an “executive committee” or “board of directors”, which would include an outside third party. This third person should function not only as a tie-breaker, but also bring their own skills to the running of the company that will earn the respect of the partners.

Some individuals inherit their role as partner. Even in this situation, a troubled partnership may be salvaged by creating separate and well-defined roles within the company. However, because this manner of relationship is often not built on mutual respect and balanced skills, there is usually a greater need for an experienced third party to help create and enforce the roles of the partners who did not choose each other from the beginning.

Occasionally there is a partnership, whether inherited or not, that is so unstable in nature that is may not be rescued through intervention. For instance, perhaps one partner is qualified while the other is not. The less-able partner refuses to accept their inadequacy, and thus the situation cannot be fixed. In this kind of situation, there is no point in trying to salvage the partnership, because it will only come apart again over and over. In this case, it would be best to look for another option.

Another path for resolving a partnership dispute is to agree that all partners step back. A failing partnership can decide to bring in a CEO from the outside. This can be a good option for a company where there are too many chefs in the kitchen. Looking to a hired CEO can be an appropriate choice where the partners recognize that the difficulty of their jobs exceeds their capacities. In this case, no one needs to accept fault. In fact, for a partnership to need the expertise of experienced management can reflect on the success and growth of the company. It is preferable to step aside from a successful company that remain in one while everything falls apart.

The difficulty in this approach is finding the right person to take over the management of the company. Often, the most qualified individuals are already managing their own companies. However, by conducting a thorough search and offering the right incentives, a partnership can find the right candidate. That said, by hiring a CEO, it is possible that the partnership’s disagreements may simply move from the operating level to the board level.

Typically, when partners step back from a business to be replaced by a new chief executive, there is the expectation that another major decision will follow. Perhaps the business will eventually be sold. However, before making this kind of irreversible decision, the partners may wish to wait a moment to explore other options or see if time can resolve their issues. It could also be that a partner is reluctant to sell but agrees to the middle-position of having an outside take over operations for the time being.

Another option for resolution is working out a buy-sell agreement. A buy-sell arrangement can be harder for partners to agree to, but it is a method sure to end future arguments. In this arrangement, one of the partners will take control of the business while the other gets money in exchange for his or her ownership stake.

Sometimes, the answer to who will be the surviving partner is an obvious decision. One partner may have the superior experience, motivation, energy, administrative ability, and knowledge of the company. However, an important factor is how willing the buyer is to accept the financial risk that comes with a buyout. The buying partner may have to pledge a large part of their funds, agree to fixed future payments, or cosign for the increased corporate debt the company takes on.

It can be difficult for feuding partners to choose one person over another as the best candidate for continuing the business. Therefore, at the early stage of negotiations, it is best to focus on finding a win-win resolution, avoiding greed and revenge. Again, the goal is to maximize gain for both partners. If one partner is better suited to running the business than the other, then perhaps the business’ future performance will foster greater financial gain for both partners.

When partners cannot come to an agreement regarding who should continue the business, then it may be best to resolve the feud using a form of auction. The choices are as follows:

  • Both partners would offer sealed bids of terms and price, and the higher bidder buys out the other. The conditions for bidding typically call for a minimum down payment as well as the discount rate for future payments. Also, it may be agreed ahead of time that the seller will hold partnership shares against future payments. An alternative option is that the higher bidder can purchase the company at the two bids’ average.
  • As agreed to in advance, one partner makes a bid of both terms and price to buy out the other. The other partner may choose to either accept the terms and price or, with the same terms, buy out the original bidder.
  • One partner may bid for the company at a price and terms, but as a typical proposal rather than an auction. The other partner has the choice to accept, negotiate, or refuse.

Another option feuding business partners have is to divide the business. Some partners own more than one business, and these can be separated. Partners may choose to divvy up the total business, and the partner who gets the lesser share receives compensation.

Partners may also decide to sell the business. In some situations, it is best to sell to an outside third party. Partners may decide that selling the business is the only way to resolve their dispute. Even if the conflict were to continue, at least it would not pass into the next generation. \

It is also possible that managing the business became too much of a task for both partners. Or perhaps neither partner was able to finance a sale to the other. In some cases, the partnership is so toxic, that one partner refuses to sell to the other out of spite, unwilling to see the other take the business to successful heights.

If the business is sold to a third party, then it is necessary to hire a professional who specializes in selling companies. Rather than a business broker, this should be an individual who works for the partnership. This individual can help find buyers, give advice regarding pricing, and offer skills in creating and negotiating the purchase agreement. The specialist should have a lot of experience and many recommendations that can be confirmed by former clients.

A final option for feuding partners is to liquidate the business. If a company possesses assets that have a market, such as real estate, then assets can be sold and the company liquidated. This is similar to selling the business. It is also possible for partners to each take assets that are worth relatively the same.

When partners disagree, there is no one easy solution. To find a resolution that works for both parties, the partnership must balance business and personal concerns. A resolution is only possible if both partners are willing to participate in the process of finding one.

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