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7 common types of partnership disputes and how to prevent them

On Behalf of | May 12, 2022 | Partnership Disputes |

Business partnerships often start out happily enough. Two or more like-minded people with similar backgrounds and experience decide to build a company. Some contribute money while others contribute expertise and hard work. As things develop, they hire employees and build out products. Profits are had and wealth is made.

Unfortunately, many partnerships do not continue in this happy direction. The partners may find that they have different visions for the company after all. Common things partners disagree about include:

  • Each partner’s relative contribution to the partnership
  • How to divide the work among the active partners
  • Each partner’s tolerance for risk
  • Each partner’s management style
  • Questions of succession or winding down the business
  • Personal grievances that have developed over the years
  • Each partner’s view of how to proceed with a major project, product or strategy

In any of these types of disputes, it is often difficult to reach a resolution, especially when the partners have equal power within the company. Employees may become aware of the dispute. Factions may arise. Accusations are common. A serious dispute among business partners can even lead to litigation.

The structure of your partnership may contribute to the problem

Most people begin with the default assumption that all the partners should have equal power, especially if they contributed equal investments at the beginning. However, equal authority can make it more difficult to prevent and resolve disputes. One way to prevent disputes and resolve them if they do arise is to create a power structure with an imbalance.

That could be putting one partner in charge from the beginning. Or, consider giving one partner the power to break a stalemate among partners with equal votes. If you have an odd number of equal partners, a simple vote may bring a resolution.

Another way to deal with the possibility of partnership disputes is to include a method for dispute resolution in your partnership agreement. This could include several steps, so that the agreement encourages resolution earlier in the process rather than later.

For example, you might simply draw straws if the partners disagree. If that seems too informal, identify a neutral third party who could mediate your dispute confidentially and internally. Only if this mediation fails would you go on to the next step, which would be more binding. You might choose arbitration for this step.

Finally, spell out in your partnership agreement what will happen if one partner simply can’t go along with a decision. There should be a way to buy that partner out at a fair price. Ideally, you should decide in advance how the company would be valued and divided in the event of a buyout.

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