In business, a partnership is two or more individuals who legally share ownership of a business. Partners may perform different roles, but they all work together for the benefit of the company. A partnership can be a valuable tool to achieve the best results for a business by utilizing the talents of multiple people. However, when those people work closely together, the chances for disagreement increase significantly.
Most business owners entering into a partnership understand the possibility of dispute. Partnership disagreements are not always problematic; however, issues may arise that threaten the wellbeing of the business, or call into question the suitability of a partner to remain in their position. Unresolveable disagreements may require arbitration or litigation.
In order to avoid personal or professional damages, following these five methods can establish clear expectations and reduce the challenges that your team may encounter:
1. Create A Detailed Written Agreement
A written agreement documenting in as much detail as possible, the partnership, will be invaluable for all parties to understand their roles, responsibilities, options and expectations. Most partnerships include this as a written agreement, typically called a “partnership agreement.” A comprehensive written agreement should include, at a minimum:
Each Partner’s Responsibilities
Disagreements are less likely to arise if each partner is explicitly aware of their role, responsibilities and required tasks. When it is unclear who is responsible for a specific job, or if two people are competing to accomplish the same task, conflict may occur.
The partnership agreement should clearly delineate who is responsible for which tasks and how progress in those areas will be measured, making expectations as transparent as possible.
When a new partner is added, or a new role is required, partners should meet not only to agree upon how these changes should be reflected in the company, but also how they should be permanently added to the partnership agreement.
An Outline of How Decisions are Made
The partners of a company are typically responsible for making decisions, but this requires agreement on issues. For some companies, holding a forum amongst partners to discuss a proposition for a unanimous decision is most successful. For others, ranked voting or another option may be more appropriate.
Other partnerships may opt for the delegated person of the relevant tasks to make an independent decision. What is most important is that the written partnership agreement clearly outlines how this decision-making process is to be conducted.
Disagreement about an individual’s decisions, or failure to reach a decision that is acceptable to the majority are leading causes of conflict among partners. Creating a comprehensive decision-making guideline ensures partners work together cohesively.
How Compensation Will be Made
As with other employees of a business, partners also receive compensation. The type of business, its overall capital and even the industry can all determine how and when employees are to be paid; the written partnership agreement should include details specifying how partners are compensated.
A partner may receive a salary at regular intervals, while other partners may have the opportunity to earn bonuses or commissions based on performance or other metrics, such as overall profit growth during the year.
A partnership agreement will outline what types of compensation each partner will receive, establish the timing of payment and if applicable, what guarantees of future increase they may be receiving. It will also clarify whether such compensation is variable and, if so, based on what metrics.
Where Additional Capital is Utilized or Saved
As with many relationships, partnerships can also struggle where issues of money are concerned. If one partner believes that extra income should be used to increase the business and another partner supports saving excess income for a downturn, disputes may escalate.
An important purpose of a partnership agreement is to strategize and standardize in advance, how such events will be addressed preventing a spontaneous decision. A partnership agreement should include some consideration of what the company will do with excess capital, such as how it will be utilized.
If it will be placed in savings, it should be clearly outlined where it will be saved and for what period of time, and whether there is a cap on savings before further capital is applied to different uses. The specifics will depend on the partners, industry and business.
Worst-Case Scenario Strategies
Even the most amicable partnerships in low-stress industries will still need to prepare for worst-case scenarios. The COVID-19 pandemic is a prime example of a sudden and unexpected shift in the work environment. Partnership agreements should include as much detail as possible regarding the roles of the partners during times of challenge.
If the business is failing, what are the strategies that each of the partners are responsible for implementing? While it is impossible to fully predict all possible challenges that a business will face, establishing a generalized strategy and task delegation for times of crisis is vital to ensuring the continued success of the partnership under pressure.
Circumstances Allowing for Termination of the Agreement
Not all partners become a suitable match, and some partners cannot or do not stay at a company long term; the agreement should include how the status of a partner will be terminated, both voluntarily or involuntarily. The written agreement should also clarify how their interests are divested as part of termination.
While many partners elect to leave the partnership freely, some disagreements may become severe, or problems may arise forcing a direct termination of a partner. In this situation, further conflict can be avoided by following the steps clearly outlined in the agreement for an understood approach.
This also informs partners from the beginning of what they can expect should they be terminated, which reduces stress during this unexpected change.
2. Take the Agreement to an Attorney
When drafting a partnership agreement, consult an experienced attorney who will understand the most common pitfalls of partnerships. A legal professional can identify problematic areas before the document is signed. Troublesome aspects of a partnership agreement could include areas subject to conflict later, as well as requirements that are either unethical or not enforceable.
Understanding these details early and amending them prior to signing will result in a stronger partnership that faces fewer challenges later. Even the most amicable working partnerships may still risk some level of conflict, which means that the agreement must be legal and enforceable.
3. Address Misunderstandings Early and Thoroughly
Any parties who work together for any length of time will inevitably encounter disagreements. It is vital that misunderstandings or disagreements are resolved immediately, when they are at the lowest level of conflict. A partnership agreement may even include proper practices for airing grievances or clarifying misunderstandings, such as the ability to call a meeting or the requirement to share monthly memos.
What is most important is that any misunderstandings are approached quickly, while they are still easy to remedy and the parties involved have not invested themselves in the outcome or process. The agreement itself should provide a clear path for addressing misunderstandings as soon as possible; ensure that the process is accessible and not excessively arduous to prevent a partner from sitting too long with their grievance.
4. Include Buy Sell Agreements as a Means of Departure
In a partnership, one party who wishes to leave can cause a large disruption if strategies are not put in place ahead of time to mitigate the hardship of a partner leaving. One of the simplest ways to facilitate this transition is to utilize a buy-sell agreement to divest the former partner’s shares.
In this situation, partners may buy out other partners who are leaving. If the departing partner held 20 shares, a buy-sell agreement would allow the remaining partners to purchase some or all of those 20 shares for themselves as that individual leaves.
This redistributes the benefits of the partnership among those who remain so that the departing partner’s former position is not a liability to the company or its distribution of partner benefits.
Exactly how a buy sell agreement is structured will depend upon the type of business and should be looked over by an attorney to ensure that the document is enforceable; while the traditional cross purchase plan is most common, entity redemption and wait and see options are also frequently used and could be a better fit depending upon the business.
5. Create a Process for Airing Grievances Before They Become Disputes
In the partnership agreement or in a separate document as part of the agreement, outline the process by which any disputes or grievances can be shared. This allows partners to honestly communicate their issues and equips them with the tools to be heard before a problem escalates.
Once an issue has intensified, it is more difficult to manage, both in terms of resources and time, but also with respect to personal investment and emotion. If a partner has been working on a project with an issue, they may become embittered about wasting their time. Consider how much less upset a partner may be if they are able to discuss their issue early into the problem, demonstrating a respect for their time.
Trust a Legal Professional to Help You Navigate Disputes in a Partnership
Disputes can be common when belonging to a partnership. Whether you need assistance drafting a partnership agreement with a robust process in place for preventing disputes, or if you are currently experiencing a conflict and need guidance, the attorneys at KPPB LAW will be happy to help.