Partners who go into business together often come from different backgrounds, and they may have strengths in different disciplines. For example, one owner may have a technology background, and they are tech savvy and highly focused on using technological solutions in the business.
The other owner might have a sales background, so for this person, technology is “nice”, but it is not the “end all be all”. Their view is that bringing in new customers and clients through the door is what pays the bills, so this should be where the company directs its primary efforts.
These differing backgrounds and viewpoints can become a major source of contention when running a business. If things are going well and profits are at or above targeted levels, there may not be much conflict around these differences; each partner focuses on their area of expertise, and their complementary skillsets make the business thrive (or so they think).
The disputes usually arise when things are not going so well. During the startup phase, you might be mentally prepared for some lean months, but what if your business has been established for a couple of years, then it suddenly falls on tough times? Sales are down, and difficult decisions need to be made.
How do you get your business back on track? In this scenario, the partner with the technology background might naturally suggest some technological upgrades that will help make things run more smoothly and cost-efficiently. The other partner might take issue with this, however. While saving a few dollars might be helpful in the short term, their view might be that the limited funds available would be put to much better use by hiring some experienced sales reps.
Other disputes may center on fairness and each partner carrying their fair share of the workload. This is a common scenario when there is a significant difference in the ages of the owners. At some point, one of the partners might want to scale back on the time they are spending in the business, while the other one is not ready to do that yet. In such cases, there may be disagreements about how to restructure responsibilities when one partner wants to step back, and how much of the profits each partner should receive going forward.
Why it Makes Sense to Mediate Business Partnership Disputes
When there are conflicts between partners like the ones listed above, the legal system does not provide much opportunity for an amicable resolution. Courts have very little flexibility, and the remedies available after a costly court battle are generally limited to things like the dissolution of the entity, the forced sale of assets, and damage awards. Very seldom does anyone really “win” during these types of proceedings, and going this route is definitely not helpful in preserving the relationship between the partners, relationships that may be important both professionally and personally.
Business partnership mediation uses a different approach. Mediation is a voluntary process in which the partners agree to meet with a neutral, third-party mediator to discuss the issues and guide the conversation toward a win-win resolution. With mediation, there is an inherent understanding that there is no “one-size-fits-all” solution for a business dispute, and that there are unique dynamics at play within each individual partnership.
Mediation seeks to “meet people where they are” and find common ground on which to build on. Both partners want the business to be successful, they just have different ideas about how to get there. Both want an arrangement that is “fair”, they just have different viewpoints about what fairness means within the context of their partnership. This is where an outside mediator can be very helpful.
Someone from the outside can bring a whole new perspective to the conversation. They have no vested interest in the outcome, and they are removed from the day-to-day discussion, interactions, and frustrations within the business. This gives them the ability to offer new ideas that the partners may not have even considered, ideas that could be workable and that both partners might find acceptable.
It is also very helpful to work with a mediator who has plenty of business experience of their own. A mediator with extensive experience not only with mediation, but also with running their own business and/or working with other corporations will be familiar with most of the common scenarios that trigger disputes, and they will know what resolutions have worked well for others who have gone through what the partners are going through.
A business partnership dispute does not have to mean the end of the business. Through mediation, partners can gain a better understanding of where the other is coming from, and they can work cooperatively toward the common goal of building a more prosperous business.
Mediation is becoming widely used in a variety of settings, but it is still not as well-known for resolving partnership issues. With partnerships, the issues that arise are as varied as the individuals involved. Although business partnership issues deal with many of the same themes, every situation is unique, and a mediator can help partners come to agreements on specific matters that will significantly impact the business in numerous ways.
Mediation is one of the best methods of alternative dispute resolution (ADR), and it can be effectively used to resolve business partnership disputes before they escalate into a costly legal battle. A mediator can bring a strong outside perspective to the situation without any pre-set agenda, and without being judgmental. Most people would agree that someone who does not have a vested interest in the outcome will be able to approach a conflict from a far different angle than those who are embroiled in it.
Another way mediation can be helpful is by fostering free and open communication between the participants. An experienced mediator is highly adept at guiding the conversation, uncovering the issues that really matter, and helping participants resolve these issues without getting too emotional. The mediator will keep the communication going, look for common ground, and begin to propose workable solutions that those involved may have had a difficult time arriving at on their own.
Although conflict resolution is one of the major areas of a business that mediators can help with, it is by no means the only one. Partnership mediation can be used to handle many other aspects of a business as well. These include:
- Creating Business Operating Agreements: Every business partnership should have an operating agreement that lays out in writing the responsibilities of each partner, decision-making authorities, percentage of ownership, how money will be handled, and other important matters. It is often highly beneficial to develop this type of agreement with the help of a business mediator. The mediator will again be able to bring an outside perspective, and he/she will most likely bring up critical issues that the partners may not have considered.
- Updating Business Operating Agreements: As a business partnership evolves, the time will come when it might make sense to revisit an operating agreement and make updates to it. For example, maybe you are taking on a new partner, or one of the partners is leaving. Or maybe you have opened a new location or gone into a new area of business. These and other major changes will necessitate changes to the operating agreement.
- Employee Disputes: Conflicts do not only happen among partners and owners; they can happen with employees as well. It could be a dispute between two or more employees, or it could be between an employee and a supervisor or an employee and one of the partners/owners. There are unique dynamics at play with each of these situations, and a skilled mediator can help the parties work through their issues and guide them toward a peaceable resolution.
- Disputes with Outside Parties: A dispute may extend beyond the business to third parties, such as vendors and others you do business with. Conflicts with outsiders are much more likely to end up in court, and this can exact a major toll in terms of both time and resources and cause irreparable damage to the business. Mediating an outside conflict can often help put the dispute to rest in the most practical, effective, and cost-efficient manner.
- Buyouts: There may come a time when one of the partners wants to leave the business. This could be over irreconcilable differences, or it could be due to life circumstances such as retirement or a health issue. Whatever the case, it will be very important to work out reasonable terms and conditions for the buyout that everyone involved is happy with.
- Partnership Dissolutions: Sometimes, partnerships reach the point where it is time to call it quits. As with buyouts, partnership dissolutions need to be handled cleanly and in a way that is fair and equitable for the parties involved. This means filing the proper paperwork, making sure all outstanding debts are paid, and fairly dividing all remaining assets.
Mediation is Good for Business
Business partnership disputes are most common when there are problems within the business and tensions are higher. Mediation not only treats the symptoms (i.e., the surface dispute), but also the core issues that may create these disputes in the first place. A mediator, particularly one who has extensive business experience, can provide valuable insights to help partners operate more efficiently and profitably. This helps prevent damaging conflicts from arising and puts partners in the best possible position for long-term success.
This is a question that business partners and co-owners in limited liability companies (LLCs) often fail to address. You start a business, and everyone is committed to its success. All the partners are healthy and vibrant, and you are working 16-hour days just to get the business off the ground. So, the last thing you need to worry about right now is the death or disability of one of the owners, right?
Actually, this is exactly the time to address issues like these. Things happen over time; people age, health conditions develop, people get in fatal car accidents, and a number of other adverse events invade our lives. And if something were to happen to one of the owners or partners down the road, this could be disastrous for the business – if you are not prepared ahead of time.
If a business partner were to die or become disabled, there are a number of potential scenarios that would ensue:
- A Family Member Takes the Partner’s Place: Maybe you will be fortunate and someone in the partner’s family will be suitable to step up and take their place. This could be a spouse, child, or possibly a sibling. For this to work, however, the new person has to be qualified to take on the duties of the partner they are replacing and be acceptable to the other owners. It is very rare that this type of situation works out, but it is great when it does.
- A New Partner is Brought In: If there is no one in the family that can come in to work for the business, maybe you can find an outside person to buy the partner’s shares from them or their family. Again, the new partner would have to be qualified and acceptable to the current team, and motivated to join the team. This is often a very tall order, and definitely not something you should count on happening.
- The Other Partners Buy Out the Partner who is Gone: One of the most likely scenarios when one of the owners departs is that the other partners will want to buy out their interest in the business. This is often the cleanest way to do it, because you do not have to deal with someone new coming in and not being sure whether or not they will work out. To exercise his option, however, those involved will need to find a way to accurately value the outgoing partner’s shares and be able to raise the funds necessary to buy them out. Both of these issues can cause serious complications if they are not addressed in advance of an event like this happening.
- The Business Dissolves: The worst-case scenario is that there is no one to step in and replace the partner, and the other owners are unable to raise the money needed to buy them out. When this happens, the owners may have no choice but to dissolve the business, sell it to someone else, or sell off its assets. Having to sell or shut down could be devastating for the remaining partners who have put their heart and soul into building the business and want nothing more than to see it continue operating.
The Importance of Creating an Operating Agreement
Rather than being at the mercy of future circumstances, business partners are much better off addressing scenarios like the death or disability of a partner in advance. This is done by crafting a partnership/operating agreement. With this type of agreement, you would be able to set out the terms and conditions by which one of the partners could sell their shares. For example, you could restrict ownership to only the other remaining partners, or require approval of all partners before someone from the outside is allowed to buy in.
For the specific issue of a partner dying or becoming disabled, you could have a predetermined way of valuing their interest in the business, and a buyout clause stating that the other partners have first right to purchase their interest. To finance this purchase, the business could obtain keyman insurance on each partner.
Keyman insurance is life insurance that pays the business a death benefit if one of its owners or key members passes away. Some insurers also offer the option of adding disability coverage to the policy as well. With this type of insurance in place and predetermined terms and conditions regarding a partner buyout, partners never have to wonder what would happen if one of them dies or becomes disabled. They would already have a plan in place and the means by which to carry out that plan.
Operating agreements can be used to address a wide range of other issues related to ownership and operation of the business as well. For example, they can be used to decide how much money each partner is required to put into the business, the responsibilities of each partner and what areas of the business they are in charge of, when and how profits are to be distributed, time off and family leave parameters, the salary each partner is paid, and many others.
Although all the partners are usually working a lot in the beginning, there may come a time when one or more partners decides to take a step back, take time off, or work less. When this is the case, those who are putting in more work will most likely want to be paid extra to compensate for this. And this is another important area that operating agreements can address.
What is the Best Way to Develop an Operating Agreement?
An operating agreement is not something that can be thrown together on the fly. It is important to put a lot of thought into it, and the partners should take the time to discuss the essential areas that they want to have included. You could do this on your own using one of the boilerplate templates that you can get online, but this is probably not the best idea. Your business is unique, and the language in your operating agreement should be tailored to address your specific needs and circumstances.
Business partners often find it helpful to bring in a professional mediator to help them craft their operating agreement. Mediators are outsiders who have no vested interest in what the agreement will ultimately look like, and this gives them a perspective that none of the partners have. A mediator, and particularly one who also has extensive business experience, can also provide insights into areas and issues that the partners may not have considered. This helps them put together a more comprehensive agreement that effectively accounts of for all known eventualities.
Business partners inevitably run into conflicts. Disputes over money, employees you want to hire, products or services to offer, and numerous others are all part of the business landscape. When partners have a major dispute, it is not practical or cost effective to go to litigation. Legal action can cost thousands of dollars, and more importantly, going to court over an issue between the owners can do irreparable damage to the partnership.
A much better alternative that can help resolve conflicts between partners is mediation. Mediation is a voluntary process in which the partners meet with an experienced mediator to discuss the unresolved issues and work toward a win-win resolution. The process is facilitated by the mediator, but the partners are ultimately in control of whatever agreement gets worked out.
Can a Mediator Really help Resolve our Business Dispute?
This is a fair question, and one that is asked by many business partners. After all, if you have a dispute that has reached an impasse, you have probably already spent a lot of time discussing it and trying to figure out a solution. What can a mediator say or do that you have not already tried?
First off, a mediator brings an outside perspective to the situation that is neutral with no vested interest in the outcome of the dispute. This is a perspective that none of the owners have, and one that comes without judgment and without any preset agenda. Bottom line, the mediator will be able to see things from an objective point of view, allowing them to come up with ideas and potential solutions that you may not have considered.
Here are some other ways an experienced business mediator can help you with your dispute:
Allow the Partners to be Heard
A good mediator is a good listener, and this is very important when individuals are trying to work out a dispute. Oftentimes, business partners are so focused on defending their argument that they are not able to listen to what the other partners are saying. During mediation, everyone has a chance to voice their concerns without interruption. And when people feel like they are finally being heard, they tend to calm down and become more open minded to the points of view of others.
Encourage Open Communication between the Partners
Picking up on the previous point, the ability to speak freely and openly without judgment or interruption encourages much stronger communication between participants. This helps foster a friendlier and more cooperative environment; one in which partners often shift their mindset from defending their position toward wanting to help other partners get some of what they want. They may even start seeing value (that they had not seen previously) in what they were saying.
Help Establish an Agreement between Partners
One common issue that causes conflicts between business partners is the failure to put together a written agreement from the outset. It is understandable why this happens. Two or three individuals decide to start a business, and they spend 50, 60, even 80 hours a week in the beginning just to get the business off the ground. With so much going on, it is hard to find time for things like written operating agreements. But an operating agreement is essential for the success of the business, because it lays out, in writing, the important issues the partners decide between themselves regarding how the business will be run.
A business mediator can help partners put together an operating agreement before they begin operations, which is the ideal. But a mediator can help with this any time it is needed; and oftentimes, after dealing with a major dispute, partners begin to see first-hand the need for this type of agreement.
Improve your Business Operations
A good business mediator will most likely have a fair amount of experience in the business world themselves. And as an aside, this is an important attribute you should look for when deciding who should mediate your business partnership issue. During the course of mediation, the mediator can often provide ideas and solutions that have been proven to work in other organizations to help your business run more efficiently. And we all know that when a business is more successful, it significantly reduces the chances of conflicts down the road.
Give your Business a Proper Burial
There are some instances when the best thing for everyone involved is for the partners to go their separate ways. This is just reality. Some businesses are not meant to be, and some partners just cannot work successfully together. Once this has been decided, there are a lot of steps that must be taken to properly dissolve the business, or for partners to sell their interest in it. An experienced business mediator can help the parties negotiate the end of operations, so you can part peacefully and without any costly legal battles.
When partners go into business together, they must understand that occasional disagreements are inevitable. A business partnership is not unlike a marriage, and there are going to be times when the partners do not see eye to eye. Many disputes arise over money, how it should be spent, and other issues related to finances. At other times, there are operational conflicts, such as who is in charge of what areas, who has final decision-making authority, etc.
Fortunately, major business partnership disputes can be avoided, or their affects can be mitigated if the partners take proactive steps from the outset. Before beginning operations, you should create and adopt a written operating agreement that addresses, in advance, the known issues that are likely to arise down the road. It is best to do this ahead of time while everyone is friendly, level-headed, and on good terms.
There are several areas that should be addressed in an operating agreement, here are some of the most important:
- Capital Investment/Ownership Interest: How much is each partner going to put into the business? What percentage of ownership will each partner receive for their initial investment? And what if additional capital is needed in order to maintain operations until the company reaches profitability? Will the current partners commit to providing additional capital down the road? Or will they look for a loan or go to outside investors if more money is needed in the future?
- Decision-Making: As we touched on earlier, who will have decision-making authority over what areas of the company? And what about major decisions? Does there need to be a unanimous consensus before making certain decisions? How you make decisions as a partnership is one of the most consequential areas that will shape the direction of your business.
- Profit Allocation/Distribution: How will the partners be compensated for the work they put into the business? And when the company reaches profitability, how much of that will be paid to the partners, and how much will be reinvested into the company?
- Transitions: You need to cover scenarios such as expanding operations, taking on new partners, and partners who want to leave the business. And although no one likes to bring it up, you need to talk about worst-case scenarios such as the disability or death of one of the business partners.
- Dissolution: Another area no one likes to talk about is the possibility of having to close the business. But the time to figure out an exit strategy is now, while everyone is on the same page.
Dispute Resolution: When the inevitable dispute comes up, how will it be handled? Will one partner have the final say? Will it be resolved by the majority vote? Or will you bring in someone from the outside to help resolve it? Most disputes are minor and can be negotiated between partners. However, when it turns into a major conflict, you need to have a process in place that is designed to help bring the conflict to an amicable resolution without jeopardizing business operations.
Using Mediation to Create a Partnership Agreement
Developing an effective operating agreement that covers all the important aspects of your business is very difficult to accomplish with a “fill in the blank” template. Each business is unique and there is no “one size fits all” solution that applies to everyone. This is why bringing in an outside perspective to sit down with the partners as they craft the agreement can be very helpful.
A qualified business mediator can talk through the issues with the partners, digging deep and covering all known scenarios. The mediator will thoroughly analyze your specific business and operational plan, and they will not be afraid to ask the tough questions.
We cannot emphasize this enough, it is far better to tackle these questions now, before operations have begun. Otherwise, the partners may have too much emotionally invested in their points of view to be open to a rational resolution. This statement is not meant to demean anyone, it is simply human nature.
We are all vulnerable to letting our emotions get the best of us given the wrong set of circumstances. Early mediation is designed to help avoid these circumstances and produce better outcomes. This allows you to rest easy knowing that your business is in the best possible position to be successful.
One final point that is important to cover. When choosing a mediator to help put together your operating agreement, be sure to choose one who not only has extensive experience helping other clients develop these types of agreements, but also one who has “real world” business experience. A mediator needs to understand more than just how to help parties solve problems. They should have an in-depth understanding of the types of problems parties are likely to run into in the first place, so they have a better idea of which solutions are likely to be most effective.