How Do You Settle Disputes Between Business Partners?

To settle a business partner’s dispute, call for a meeting, gather documents that show the root of the disagreement, meet with the partner, listen and do not rush to judgment, and propose solutions. Do not hesitate to ask for outside help, such as a business dispute attorney.

Bad Business Partnership Example

Kelly, Mick, and John are business partners in a seltzer company called Crisp & Clean in downtown Los Angeles. For years, the partners have survived their share of minor disagreements and made a tidy profit selling their tasty concoctions to restaurants, stores, and bars. When the three men started the company, they each decided to work the same amount: 50 hours per week. Each partner has different duties, but their hours have remained the same.

Recently, Mick decided to open a side business with his wife, a caterer, and chef. In doing so, Mick dropped his hours to 25 per week.

After a few weeks, John and Kelly requested a meeting with Mick. They told him that he could reduce his hours under three conditions:

Mick accepted that the other partners would hire someone new to work the extra hours
Mick must take a cut to his salary that will be reversed if he goes back to 50 hours
The catering business cannot compete with Crisp & Clean but must sell Crisp & Clean seltzer.

Mick reacted poorly to Kelly’s and John’s ideas. Mick told them that he was the face of the business and the one with the original idea for the seltzer company—both of which are true. Mick claimed that he could work as little or as much as he wanted and would not agree to his partner’s first two terms.

Kelly and John tried to explain that it simply wasn’t fair to work half as much as them and still be paid the same, but Mick refused to see their perspective. So finally, John and Kelly told Mick that they felt unappreciated and taken advantage of, and if they needed to take legal action, they would.

Ultimately, Mick spoke to his wife and had a change of heart. The three men met again and used a mediator to settle their differences and come to a new business agreement. The partners updated their operating agreement, and they continue to make and sell delicious seltzer today.

Partnership disputes are an accepted part of all business partnerships, just as arguments are an accepted part of all human relationships. Often, company partners run into trouble when businesses encounter adversity, but disputes can occur at any time. Sometimes, business disputes become volatile and cause the company to falter. When disputes among partners cause a business to suffer, what paths forward do company partners have? What can business partners do to solve their disagreements and hopefully continue their business ventures?

This article will examine when and why business disputes arise and what partners should do when they cannot settle their disagreements. We will also outline several practical outlines for dispute resolution.

Business disputes can be disruptive and downright painful. However, when business partners know what to do when disagreements occur and understand the options for resolution, they can persevere and return on a successful track.

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How Do Company Disputes Originate?

Many workplace conflicts begin for the same reasons. These include:

Failing to act with fiduciary intent
Using business funds in an inappropriate manner
Creating a conflict of interest
Disagreeing over hours worked
Disagreeing over the intensity of labor

Conflicts can also occur for other reasons, and often disputes depend upon the industry, the type of work, and the partners’ distinct personalities.

When A Business Disagreement Occurs, What Should Partners Do Immediately?

Before jumping into an intense conflict, the best thing any business person can do when faced with adversity is: take a deep breath. Immediate reactions are usually more emotional than rational, and partners must handle disputes practically.

When a disagreement emerges, try doing some research. An individual might return to the:

Company Handbook
Shareholder’s agreement
Formation documents such as the operating agreement or partnership agreement
Other formation documents

Why is looking over these documents helpful? Depending on what the dispute focuses on, these fundamental agreements and documents can show:

How is the company currently managed
Company ownership
How is company ownership divided
Who has the right to what profits

Plus, some operating agreements contain rules and regulations about business disputes, which can also prove useful for those involved in disagreements.

Reviewing the company’s rules and provisions might help partners to take some notes and work through these questions:

Is the offense bad enough to consider selling the company?
What resolution would be favorable?
Is buying out the argumentative partner an option?
How can future losses be prevented?
Are there company resources at stake?
What actions created the dispute?
What are both parties’ main concerns?
What steps has the individual taken to deal with the problem?
Does the individual see hope for the future, or is the situation beyond resolve?
Has any important company information been leaked?
Has company funding been compromised?

Depending on the nature of the dispute, it may be time to contact a licensed lawyer.

For example, Erica and Eric run a grilled cheese food truck in San Diego, California, called Cheddar is Better. The small business is doing well, and they have one company credit card they use to buy food, supplies, and cooking equipment. Erica always pays this card off, and the business receives excellent credit card points for their purchases on the card.

The business grows as the months pass. Finally, Erica notices Eric using the company credit card for new clothes, shoes, and even a new phone. When she confronts him, Eric is defiant and says he doesn’t see anything wrong with using the company account for his gain.

Eric’s actions launched the two partners into a serious business dispute that could end up in a court of law. Erica returns to the partnership agreement and is confident that Eric has committed multiple violations, including violating his fiduciary duty and using the business’ profits for personal—and superficial—gain. Ultimately, Erica will contact a lawyer, but she is confident in her case against Eric based on her research.

How Should Individuals Treat Their Business Partners in the Event of a Dispute?

It can be an awkward time when one business partner suspects the other of poor choices or behavior. Anytime, people who work together daily become locked in a dispute, emotions run high. But, even more importantly, the business the partners worked so hard to build is at stake. So, should partners who cannot get over their disagreement meet, or should they let their attorneys handle the issue?

Business partners should keep the lines of communication open and plan to meet in person with their partners regardless of the current dispute. However, the business partner should prepare for this meeting and schedule it respectfully instead of surprising the other partner. The meeting will be more civilized and productive when both individuals have time to prepare and plan. Additionally, before the meeting, business partners should:

Maintain records (emails, texts, documents) and have some on hand
Continue to work normally before and after the meeting
Continue to meet work obligations and legal duties
Document the meeting, and let the business partner know you will be documenting the encounter
Bring evidence of the problem or cause of the dispute to the meeting—this is very important
Schedule an appointment with an attorney to record and analyze the results of the meeting
Possibly utilize a mediator in the meeting

It is easy for business partners to become caught up in a dispute and neglect their company. However, the partners’ responsibility is to the company first, so the partners must continue with their daily tasks even when involved in a contentious disagreement.

Can Business Partners Try to Resolve the Dispute Informally?

All company disputes are different, but before involving an attorney, it makes sense for everyone involved to attempt to meet and calmly discuss the problem.

Communication is the key to solving arguments, so when business partners meet, they should speak honestly and clear their concerns and goals. Leave emotion out of it, and rationally describe to your partner:

What the problem is
Why is it harmful to the other partners or the business
A proposal for change

It is also important that the business partner who is leading the meeting accepts some responsibility for the problem. It is easy for business partners to have a one-sided or narrow perspective, but they must grasp that:

Their behavior may be problematic
They might be contributing to the problem
They also may need to embrace change

Often, a productive meeting illustrates that the blame falls on more than one party. Therefore, while bringing evidence to the conference is essential, it is important for one partner not to attack the other.

Mediating the conflict is also an option for business partners stuck in a dispute. Allowing another party to join the discussion can encourage meaningful conversation. In addition, mediators can help highlight the main conflict and allow the partners to find an intelligent solution to the problem.

The goal of the meeting is not only to resolve the conflict but to set a precedent and help prevent future disputes. For example, after a productive meeting, the company sometimes changes its founding documents or other policies to welcome new policies and regulations.

For example, Gus and Abby run a bookstore in Long Beach, California, Beachside Books. However, recently the two partners have been arguing about raising book prices. Frustrated that Abby won’t see his point of view, Gus secretly sells books for higher prices when his partner is not at the store. On the other hand, Abby refuses to raise prices for fear of alienating the regulars.

The tension grows when an employee tells Abby about Gus’ behavior, and Abby threatens to contact a lawyer and dissolve the partnership.

Gus arranges a meeting with Abby for the next week and asks a mediator to join. After a tense few minutes, Gus admits his actions were wrong and bad for the business. However, he also shows Abby evidence of inflation. Abby understands that Gus was trying to help Beachside Books survive because he cares about the business; he just went about it wrong. With the mediator’s help, the two partners resolve to raise the prices of their books to a small but significant amount due to economic factors. Yet, they will continue to have “sale books” for the regulars.

The mediator, and both partners’ helpful attitudes, helped keep Beachside Books in business. Plus, Gus and Abby now understand each other more.

When individuals view disputes as something that can make the business stronger and more productive in the long run, their business will survive. In addition, a skilled business lawyer can often help partners see disputes as learning experiences.

Let’s take a closer look at how mediation works and examine a few more options for dispute resolution.

What Are the Options for Dispute Resolution Among Business Partners?

Mediation: As mentioned above, mediation involves a third-party mediator who remains neutral throughout meetings and discussions. The mediator encourages strong, honest communication and helps bring intelligent solutions to the business’s problems. Mediators usually will not bring up new ideas, but they will help partners flesh out their ideas and weigh in on the aptitude of each partner’s suggestions.

When business partners want to repair their relationships and the company to carry on, a mediator can make all the difference. Mediation is also an inexpensive option and can pave the way for a healthier partnership in the future.

Buyout: A buyout is a strong option if the partnership has reached a stopping point but the business is still viable. In this case, one or more partners seek to buy out another partner’s share.

Some partnership agreements include buy-sell provisions, so the buyout process is mapped out. However, if no agreement exists, the partners must negotiate a buyout agreement. They will need to:

-Evaluate the price of the company through valuation

-Negotiate the terms of the buyout

-Contact an attorney for guidance

Buyouts work best when all parties are satisfied, but they can be tricky to achieve. An experienced business attorney can help ensure that all parties are satisfied.

Cash-out Merger: In a cash-out merger (also known as a freeze-out or squeeze-out merger), the majority owners force out the minority owners. Therefore, this solution is only viable for companies where the business partners’ interests are unequal.

When this occurs, most owners construct a merger with a new business they own. The majority owners pay the minority owners a fair market price for their shares in the company.

Preexisting court opinions and statutes govern these mergers, and we recommend finding an attorney with experience with these matters to guide the partners and the successful merger.

Dissolving the Company: When continuing with the business is not possible, the partners can dissolve the business. Dissolution can happen in two ways: the partners can agree to dissolve (voluntary dissolution), or they must have the court dissolve the company (judicial dissolution).

If the partners agree, they must file the appropriate documents, sell assets, follow partnership guidelines for distributing shares, and pay off any debts. When the partners cannot agree on dissolving the company, normally, one partner sues the other, and a judge decides the matter in court.

Sale of the Company to New Owners: When none of the company partners want to stay in business, selling the company is an intelligent option.

When owners seek out buyers, they usually want an individual or entity to buy all of the shares, leaving the former partners free to move on to other ventures. Existing workers, competitors, and friends can all become buyers, or owners can use a broker. If they are serious about selling the business, partners should:

-Get a professional valuation of the business

-Hire an attorney to make sure the sale is fair

Litigation: When a business partner’s behavior becomes wrongful and even criminal, their partners pursue litigation. These offenses may include:

-Fraud

-Violations of fiduciary duty

-Embezzlement

When an individual’s actions are responsible for the business dispute, their partners can file a lawsuit to pursue financial damages and other goals. Partners cannot accomplish these goals without the presence of an experienced business lawyer.

Bankruptcy: Partners’ disagreements often emerge partly because the company is failing financially. When a business becomes insolvent, disagreeing partners may agree on one thing: it is time to file for bankruptcy.

Filing for bankruptcy allows the business to restructure its debts and continue or creates a situation where the entire business is liquidated. The outcome depends on the company’s financial health. While partners often view defaulting on the company as a defeat, sometimes it is the only option.

When Should Contact, a Lawyer Regarding a Business Dispute?

Often, it is difficult for busy business partners to settle on a strategy for company disputes.

On the one hand, if they can handle the problem informally, it will be less expensive and time-consuming. On the other hand, however, it is easy for some offending partners to ignore informal solutions. Sometimes, a more formal solution, such as mediation or a buyout, is necessary.

When you need help with a business dispute at your company, contact the California business lawyers and corporate attorneys at Nakase Wade. Our team provides expert guidance and will help you resolve your issues quickly.

Even if the dispute is just beginning, discussing the problem with an experienced attorney before it gets worse is essential. At Nakase Wade, we understand the nature of business disputes and know how to remedy them quickly. So contact us today and let’s get to the bottom of the issue, so your business can continue rising to the top.

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