Resolving Partner Disputes

Resolving Partner Disputes

One of the listserves I belong to recently posted a very interesting question, and it is a question that comes up quite frequently in the small business world:

How do partners resolve disputes? And, most importantly, how do partners resolve disputes when they are fifty-fifty partners?

This is a vital question.

To be clear, the question of resolving partner disputes cannot be something that only gets addressed when a dispute between the partners arises. If the partners do not have a plan going in, you are asking for trouble because when a dispute arises we are now talking about a dispute that is personal, and it’s business. It could be a dispute that divides the partners in a way that would make the continuing of the partnership difficult. The plan is usually presented in a partnership agreement, LLC operating agreement, or shareholder’s agreement, and should discuss this process and have a concrete plan when a partner dispute is a possibility rather than a reality.

It is critical for fifty-fifty partners to have a dispute resolution strategy when they start the business. What do some of the options look like?

There are a couple of different ways that you can approach this. One way is to delegate certain responsibilities and tie-breaking authority to the different partners. Let’s assume for a moment that we have two partners: one is savvy in the areas of finances, so you put that person largely responsible for day-to-day financial decisions. Maybe the other partner is better at dealing with people, employees, and customers. You put that person in charge of employment related matters. Because the two overlap, you have to be certain that they are working together. You can allocate responsibilities differently and you can delegate a tie-breaking authority based on their roles, allowing a partner to have veto authority based on the actions.

Now what are those actions? Partners must imagine what those actions would be before signing the documents to create the partnership. Partners must think about the areas where partner A and partner B have more influence or skill and thus where they should have the tie-breaking authority.

Another mechanism is what I call speedy mediation. This allows the business partners to have outside advisors or a management team (as I always recommend that small business owners have). This team would have a lawyer, an insurance broker, a banker, etc, so that you could get advice from your specialists. The interesting thing about this mechanism is that you can actually approach an expert in this area so you can get some advice and feedback and maybe get another alternative that is appealing to both parties, or at least be a compromise position for both partners. The speedy mediation means that you do not have to wait around. You can get a meeting with your advisor who can walk through that process with you and help you decide.

Because these are advisors that you should be regularly in contact with, they would have the ability to be approached much faster than a formal mediator.

Another option would be to have a trusted employee or an outside agent who can provide a tie breaker vote. With a trusted employee, you should be careful there to make sure that retaliation does not come into the equation. If the dispute is particularly sensitive, the employee may not want to be involved in the decision-making process.  You could also have a temporary third person, for example a member of the board of directors, but they would be familiar enough with the business to be able to render advice on the business.

Lastly there is more formal mediation. Formal mediation usually involves matters that are particularly sensitive, which could be a sale of the business, purchase of other business lines, borrowing large sums of money, etc. These kinds of decisions often create a great deal of tension between the partners if there isn’t a plan, and it might be a situation where having a formal mediation is helpful. Mediators are in the business of finding compromise. They are judged by how well they can find compromise (a mediator with a 96% rate of settlement is an excellent mediator). Mediators are often very creative problem solvers. They are good at listening and breaking down the problem. Formal mediation tends to be more expensive and time consuming, and sometimes the dispute resolution between the partners must be done quickly.

These are the kinds of mechanisms that are available, and there is no one kind of mechanism that is the best. It depends on the nature of people that are involved. While a fifty-fifty partnership it is appealing to the business sense of things, it has the potential for a great deal of risk. The partners need to have a plan going into the partnership about how they are going to resolve issues and concerns.