What Happens When Business Partners Disagree?

Before going nuclear, when business partners disagree, the partners should talk about how to move forward. If talking fails, the partners may discuss a buy-out. However, if there is wrongdoing by one business partner, a lawsuit may be an option.

Author: Brad Nakase, Attorney

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Carrie and Hank are partners in a business venture called Puppy Elementary, a dog daycare business that trains puppies and young dogs. While their business has been doing fairly well, Carrie and Hank cannot stop disagreeing about how to share control of the company. Hank wants to be in charge of every aspect of the business, afraid to let Carrie make decisions that affect him. Carrie, meanwhile, hates having to involve herself in the financial operation of the company. However, she is afraid that if she does not participate, Hank will walk all over her. Acknowledging their disagreement, they wonder what happens next. They decide to try negotiating. Hank agrees with Carrie that he cannot reasonably take care of all aspects of running the company, and Carrie admits that she prefers managing day-to-day operations. Together, they agree that Carrie will handle sales and product design, while Hank will manage finances and large-scale contracts. Having successfully settled their disagreement, the partners are back on track.

How to Settle a Dispute Between Business Partners

Forming a business partnership with another individual can be a lot like a marriage. When making such a big decision, a business owner should be sure that he or she can work well with the other person, even if they are not best friends. That said, sometimes, despite one’s best efforts, a conflict can form between partners. If a business owner finds themselves in a major dispute with their partner, then their options for settling the argument depend upon the business’ legal structure and how much planning the owner put into the partnership at the beginning.

All business partnerships have their high and low points. When people are getting along and in good spirits, the business usually does very well. However, when the company is at a low point, tempers can flare, and small arguments can turn into massive disputes that cause the business to suffer. What were previously friendly business partners become enemies. In this situation, what can partners do to end a seemingly unresolvable dispute? Luckily, there are a number of options to choose from, which are described below.

Negotiating with the Other Partner to Resolve a Dispute

One of the key parts of creating a successful business relationship is having good communication strategies. Before a business owner refers to one of the more formal ways of settling a business partnership disagreement, he or she should do all that they can to resolve the issue directly with their partner. If each side is open to compromise, then a reasonable solution may often be reached through negotiation. In fact, the point of a partnership is that neither partner can have everything their way all of the time. Compromise is the name of the game.

So, for example, let’s consider Ned and Ted, who are partners disagreeing over their roles in the company. For a while, they have been arguing over who is in charge of what department. During negotiations, they agree that neither partner can seek to control everything in the company. Ned is passionate about sales, while Ted is passionate about design, so they agree to split up responsibilities accordingly.

Mediation to Resolve a Dispute

By hiring the help of a third-party mediator, business partners can work through their communication problems and compromise over differences of opinion. There are many private and nonprofit firms, including the Better Business Bureau, which offer mediation services for their local business community. These mediators are usually trained in resolution techniques that can help find a middle ground in an argument. An objective mediator can help to foster a healthy dialogue and encourage efficient decision-making between partners. These strategies will help put the partners on a path toward a stronger relationship. With this help, the business partners may continue to work together with a better conception of how their partnership should operate in order to succeed. While mediators typically charge a fee for their service, the cost is well worth the result. Overall, mediation is a relatively cheap way of breaking negative communication patterns and detailing the duties and goals of each partner.

Management Agreements to Resolve a Dispute

The smart business owner plans for disputes before they occur so that they are less damaging. One way to plan ahead is to implement a management agreement at the beginning of the business. This management agreement may be either a partnership agreement, an operating agreement, or bylaws depending on the business structure. These agreements can specify what should happen if a partnership dispute were to take place. The management agreement may require that the partners pursue mediation, or it may indicate which partner has the final say in a matter. If the dispute cannot be easily resolved, then the agreement may give one partner the right to buy the other at an agreed-upon price. A well-designed management agreement can prevent partner disagreements from growing to the point of harming the business.

Buy-Out to Resolve a Dispute

If business partners have come to the conclusion that they can no longer productively work together, but want the business to live on, then it may be possible for one partner to buy out the other. Sometimes, when a partnership is formed, the partners create a buy-sell agreement which lists the procedures to be followed in the event of a future buy-out. If a company lacks a buy-sell agreement, then the partnership should seek to have the company valued so that all parties know what their interests are worth. After, the partners will need to decide who will be bought out and what the terms of the buy-out will be. It will be necessary to bring legal counsel on board to help with the negotiations and execution of the buy-out.

Sell To New Owners to Resolve a Dispute

Sometimes it will be obvious that both business partners want to move on from the business, even when the business is successful and functioning. In this case, it may be wise to seek out a buyer who will buy the partners’ interests in the company. Potential buyers may include current employees or competitors. Business brokers can also help identify potential buyers for a business. However, the partnership should get a current valuation of the business and hire legal counsel to assist with the eventual transaction.

Freeze-Out Merger to Resolve a Dispute

When the business partnership interests are not equal, then majority owners can “freeze-out” minority owners. They may do this by performing a merger with a newly created company that the majority owners control. The minority owners are thereby forced out of the company ownership, though they will receive fair market value in exchange for their interests. Statute and court opinions govern how freeze-out mergers proceed. It would be wise to hire a business attorney who is experienced in conducting freeze-out mergers.

Voluntary or Judicial Dissolution to Resolve a Dispute

It will sometimes be obvious that both the business and partnership are beyond saving. In this situation, the dissolution of the corporate entity would be the only correct way forward. If all parties can mutually agree to the dissolution of the company, then the following steps must then be taken:

  • File the necessary paperwork with the state
  • Pay off creditors
  • Sell remaining assets
  • Distribute proceeds according to partnership interests

However, it may sometimes be difficult to agree on dissolution. In this event, it may be necessary to seek help from the courts. Under statutory law, a company may be dissolved through the filing of a lawsuit. When a judge dissolves a company, all parties lose control over the dissolution process. They must merely follow what the judge decides.

Bankruptcy to Resolve a Dispute

Often, arguments between business partners arise as a result of serious financial problems facing the company. When a company’s liabilities are greater than its assets, the company is declared insolvent. Rather than sinking further into debt, some insolvent businesses choose to file for bankruptcy. On occasion, bankruptcy gives a business the opportunity to restructure its debt and keep operating. Other times, however, a business may need to liquidate. Whatever the case, a partnership is advised to consult an experienced bankruptcy attorney who can provide assistance with the process.

Litigation or Court Action to Resolve a Dispute

Occasionally, arguments between business partners arise from poor behavior or misconduct. This misconduct may include the following problems:

  • Breach of fiduciary duty
  • Misappropriation of assets
  • Fraud
  • Failure to perform obligations and duties

Any of the above scenarios could lead to one partner suing another. By filing a lawsuit against a misbehaving partner, a business owner can receive financial damages. Again, it would be wise to consult experienced business counsel to assess potential claims and file legal actions.

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