What Do You Do If You Have a Bad Business Partner?

If you have a bad business partner and speaking to the partner does not help, your options are: a) shut the business, b) buy out the partner, c) sell your ownership or d) sue the partner.

Bad Business Partner Example

Toby is a mechanic who runs an auto shop with his partner Julius. The shop is located in Newport Beach, California, and is called Surf & Tires. Although Surf & Tires was profitable for a decade, the business has plummeted due to a surge of car mechanics in the area.

However, another reason is that the auto shop struggles financially and with day-to-day operations. Toby’s partner Julius is simply not working hard anymore. When Toby tries to explain to Julius that Surf & Tires is in trouble, he does not seem to grasp the idea that the two partners could lose the company. As Toby pushes himself to work harder and harder to try to save the shop, Julius loses all motivation. He comes in late, barely works on cars and engines, and then leaves early for drinks after work.

Toby’s attempts to straighten things out with Julius haven’t worked, and Toby is considering liquidating the business. However, he helped build Surf and Tires, and he has dedicated most of his career in the industry to the shop. Faced with a business partner turned bad, Toby is at a loss.

Toby spoke to his mentor, an old business partner whose opinion he valued. The advisor helped Toby realize that it was up to him to take control of the situation and turn it around. First, Toby wrote down a list of goals for the next few months, both financial and operational. He also noted the timeframes for each goal. Then, based on their ten years together, Toby also decided to give Julius one more chance until he forced Julius out or took more extreme measures.

Toby scheduled two meetings: a meeting with Julius one-on-one and a meeting with their employees. The employee meeting went well, and Toby informed them there would be changes as the company played catch-up and established more productive routines. Among these were:

Different working hours with earlier starts and 2-3 later nights
New tiered job roles with different structures
New policies when dealing with customers

Toby then met with Julius. Both partners had agreed that it was acceptable for Toby’s mentor to be at the meeting. Toby told Julius that changes were desperately needed. Julius did not react poorly, but he did not seem to agree with Toby’s assessments of the business. When Toby gave Julius a list of changes he wanted Julius to make, Julius seemed skeptical. On the way out of the meeting, Toby sees Julius toss the list of new business changes in the trash.

Toby wasn’t sure if Julius would believe in the changes to the company, so he gave the business two months to make it work. At the end of two months, Toby and the employees had turned the business around in many ways. However, Julius had not been directly involved. However, Julius could see the momentum that the company had and was able to read the writing on the wall. He confessed to Toby that he was no longer passionate about repairing cars and didn’t feel invested in the business. Julius agreed to a buyout, and Toby is now the sole owner of Surf & Tires. The shop continues to do well, and Toby has hired two new employees. He is also looking for a motivated partner who wants to buy into the business, but Toby is in no rush. He might decide to continue by himself, too.

Thanks to Julius’ negative actions, Toby realized that the business had been “his” for years; he simply had not realized it. Toby’s story could have ended in failure or conflict, but once he realized that he had the power to change things, he found success. First, Toby needed to find faith in himself and take ownership of his business. Toby’s mentor was also instrumental in providing unbiased, helpful suggestions.

Toby’s consultation with his mentor, take-charge attitude, and setting timelines and goals saved his business. Dealing with difficult business partners, however, is different for everyone.

In this article, we will split our suggestions into two different categories:

How to deal with a business partner when attempting to continue with the partnership
How to deal with a business partner when terminating the partnership

It is never easy to know when a business partnership is not redeemable, and every partnership is different. Sometimes, a partner’s behavior is so toxic or damaging to the business that the other partners must abandon them. Sometimes, this problem means the partners must abandon the company, too. However, we suggest trying some of these methods to deal with the problem before pursuing the other options.

How Can Business Partners Deal with Bad Business Partners if They Want to Continue the Partnership?

When business partners’ relationships fall apart, keeping the business on track isn’t easy. Partners often grow angry, resentful, or intimidated, forfeit the company and lose money and time. In taking a step back from the conflict, however, many company partners realize that the partnership, and the business, are worth saving.

Before changing or terminating the partnership, take a deep breath and try out these strategies for change. Similar to friendships or romantic relationships, business partnerships sometimes need help along the way to prosperity.

Review the Company’s “Big Picture” Goals

Business owners must make new decisions daily, and maintaining perspective can be difficult. When partnerships are comprised of diverse personalities, decisions can quickly become overwhelming, and relationships can suffer due to blame and second-guessing.

Much of running a business depends on important choices. For example, should we keep that client? Should we take that meeting? Is the offer we made the correct one?

When partners disagree on an important issue, these disputes can halt the company’s progress, alienate the partners, and even turn clients and customers off. However, sometimes these disagreements occur because the partners care about the company and want what is best for it. Therefore, when they grow frustrated by disagreements, business partners should ask themselves: is what I want best for the company? What about what my partner wants?

Business partners cannot always fix their problems, but viewing them with a sense of “big picture” perspective allows both sides to understand each other’s views. Take the time to discuss the dispute with your partner, regardless of the reason for the hold-up.

While it is true that business partners must make some decisions quickly, there is usually at least enough time for at least a quick meeting. So here are some helpful questions for widening one’s perspective.

What is the reasoning behind my decision?
What is the reasoning behind my partner’s decision?
Are we both putting the company first, or are we placing ourselves first?
Is there a middle ground where we can meet?
Do we disagree often, or is this a rare occurrence?
Are we considering each other’s opinions or not listening?
Do we still have a shared vision for the company?
Is one of us willing to sacrifice anything?
What is the timetable for this decision?
How important is this decision for the business?
Is this disagreement based on the decision, or is it based on the behavior of a toxic partner or a prior dispute we never dealt with?

Do not let the stress of important decisions damage the company. While most partners accept that a certain amount of stress comes with running the business, too much pressure can damage the company and fragment relationships. Practice open communication, and do not view one dispute as overly influential.

For example, Josie and Craig run a breakfast diner in Los Angeles, CA. During the first year, the small business struggles, and both partners stress about being able to pay their employees and their bills. Then, Craig gets an offer from Amazon. The giant corporation wants to buy the diner, franchise it, and deliver its breakfast offerings to web customers.

Josie is all for the deal, but Craig is against it. While Josie explains that the terms of the deal would mean high profits and stock options, Craig calls Josie a “sell-out.” The clock is ticking on the offer, and the partners resort to anger and insults.

However, then Craig takes a deep breath and meets with Josie. The two partners open up about their motivations. It is obvious that both hardworking partners just want what is best for the business they helped create. So, with some restructuring of the terms, they signed off on the deal and formed several additional companies, all successful.

Business partners must see each other’s perspective and understand the overall goals of the company; the big picture. There is usually a reason why the partners started the company in the first place, so try to return to that sense of motivation and speak honestly with each other. When partners value each other’s opinions instead of focusing only on themselves, there is usually a path forward.

Understand the Bad Partner’s Through Active Listening

We have all been through difficult periods and have all made choices we regret in business and otherwise. Additionally, many partners take it personally when the business is floundering, and their behavior reflects this. Ask yourself: do you understand why your partner is behaving poorly? If you do not, finding out is the first step. Understanding their motivation is the second.

Try meeting with your partner and agreeing not to speak for a set time. During these three to five minutes—or whatever amount of time the partners choose—just listen to the person’s view. Sometimes, the partners progress when a “bad” partner opens up about the cause of their actions without the other partner interjecting.

This popular exercise, and variations of it, can prevent resentment and anger from perpetuating. The simple act of listening is one of the best tools for resolving conflict, as opposed to simply saying, “that person is toxic,” and shutting down.

For example, Dez and Christy run a pool hall in Truckee, California. After a particularly busy season, Christy begins showing up late, making uncharacteristic errors, and reacting angrily to customers.

Since her livelihood is at stake, Dez’s first reaction is to accuse Christy of sabotaging the business. The two partners become locked in a dispute and stop speaking to each other. The regular pool players notice the tension, and the once-busy pool hall and bar are empty.

Dez tells her mentor about her problems with her business partner, and Dez’s mentor suggests a listening exercise. When Dez provides Christy with ten uninterrupted minutes of venting, Christy admits that her father is ill and she is struggling mentally. Dez understands, and the two partners agree that Christy can take some time off but remains a vital part of the business.

Active listening might not end your dispute, but it is an effective tool that has helped many partners figure out a way forward.

Anticipate Business Partner Conflict to Prevent it

When business partners struggle with their partners, conflict is usually inevitable. However, if one partner continually behaves poorly, anticipating conflict and trying to prevent it can be helpful.

On the one hand, conflict among partners can be helpful. We learn from conflict, and voicing our concerns is normally much better than bottling up our emotions. On the other hand, dialogue and discussion are much more productive than insults and anger, and unfortunately, conflict among partners can quickly become damaging and unproductive.

When partners know each other well and understand their personalities, flaws, and all, they can coexist and work together more productively.

Jillian and Troy run a surf shop in Carlsbad, CA. The two partners have known each other for six years, enough time to comprehend each other’s personality quirks. Jillian knows, for example, that Troy is a hard worker but a shy, private person who dislikes media attention. So when Carlsbad Magazine wants to put the pair’s picture on the cover, Jillian anticipates a coming conflict.

Jillian intervenes and ensures that the cover picture is of the surf shop, not the two partners. Jillian liked having her face on the cover, but she sacrificed for her partner since she knew they would fight about the magazine cover. Plus, Jillian could get her picture included in the feature itself. Troy ultimately tells Jillian he appreciates her actions and knows he has found an excellent partner.

Not all business partners know each other as well as Troy and Jillian, especially if the business venture is brand-new. However, most entrepreneurs can sense when an issue might trigger a disagreement and then attempt to avoid it.

Contact Outside Parties for Help

Many entrepreneurs view “asking for help” as a sign of weakness. However, when one company partner is involved in a toxic dispute with another, maintaining perspective and listening may not be enough to remedy the situation.

However, bringing in a neutral third party can change the dispute’s trajectory. As a result, many company partners recommend working with professionally trained mediators to solve disagreements constructively and avoid drama.

A mediator often facilitates rapid resolutions by providing an unbiased view. Also, both partners will typically listen to an individual who has no stake in the disagreement and holds no interest in the company.

In addition to helping partners come to a compromise, mediators also review the terms of the deal and provide unbiased input. As a result, mediators can often improve negotiations and help eliminate the emotional baggage dragging the negotiations down.

Generally, when choosing a mediator, there are many options. Sometimes, a professional mediator is the best bet, but mediators can be colleagues or friends. However, remember that the mediator’s most important qualifications are neutral and unbiased.

Schedule a Time to Speak with the Bad Partner

A conversation may be the key to figuring out why a business partner is suddenly:

Neglecting the business
Neglecting the partnership
Exhibiting poor or toxic behavior
Violating their fiduciary duty
Behaving selfishly
Trying to control the business

Try not to get wrapped up in animosity or anger; instead, find an appropriate location and schedule a meeting. If the partner agrees to the meeting, that is the first step and shows that they want to make an effort.

Avoid preconceived notions and expectations and try to get to the heart of what is happening. Business partners should remember to listen and be prepared to speak.

Instead of approaching the meeting casually, it makes sense to go into the meeting with a list of goals. For example, partners can set a goal for the meeting, such as figuring out if both partners still care about the company they formed.

Bringing questions to the meeting can also inspire productive dialogue. Remember, this meeting is a tool for remedying the situation. While it may not fix everything, it can provide a start. Partners should be prepared to dig deep and view this meeting not as a chance to chat but as an extension of the workday.

For example, partners might ask:

Do one or both partners seek to dissolve the partnership?
What are the partners’ obligations?
Is a buyout an option?
Will the partnership continue if one partner leaves?
How will the company cope with its debts?
How will the company handle future liabilities?
What is the process for “winding up” the company?

Again, do not be afraid to bring a written list of goals and questions to the meeting. While the questions may differ based on the situation, being prepared for the meeting shows the other partner how important the dialogue is.

Know When it is Time to End the Business Partnership

Not all business partnerships can be saved, and not all companies should continue. Sometimes, business partners’ relationships cannot be saved. Attempting to remedy the situation and give the partnership one last chance is vital, but it is just as important to understand when it is time to move on. Sometimes, the best business venture is right around the corner, and one story must end for a new one to begin.

If the partners seek to terminate the partnership, there are additional questions to consider, for example:

Will the partners sell the business?
Will one partner sell their shares to the other?
Will one partner buy out the other?
Will the partners dissolve the partnership?

In the next section, we’ll discuss the actions partners should take when they know it is time to end the partnership.

How to dissolve a business partnership?

When it becomes evident that it is time for a business partner to end the partnership and move on, there are various options to choose from. Some options, such as dissolving the partnership, ensure that the company has run its course and it is time to close the book.

However, a buyout agreement, if approved, means that one partner leaves with money while the other stays to run the business without them.

Therefore, the best option depends on how the partners view the company’s future and if they can agree on the best course to take. For example, if the business is viable and profits still come in, many partners choose to sell the business or agree on a buyout. On the other hand, it often doesn’t make sense to terminate a viable business concept since a similar company usually steps into the space to corner the market.

Usually, dissolution involves litigation, which can prove costly and time-consuming. However, dissolving a partnership has legal ramifications that partners cannot ignore. Additionally, sometimes the troublesome partner lets their emotions get in the way and stalls the process.

The situation depends on whether the partners agree to terminate the partnership or execute a buyout. However, there are specific protocols to follow in each situation. First, regardless of the partners, they should review the partnership agreement they signed before doing anything else.

Next, let’s look at suggestions for what partners should do when they realize that they cannot continue with the current partnership.

Review the Partnership Agreement

A company’s partnership agreement is its number one founding document, and the agreement commonly includes information regarding partners’ roles and responsibilities. Whether the business is a corporation or a partnership, the partnership agreement is a legal document that binds the partners to their duties and the company.

Depending on how long ago the partners started the company, some partners may not remember exactly what they signed up for. However, now is the time to remind all partners that they agreed on specific provisions and rules. Often the rules the partners agreed on the act as a roadmap to get rid of a bad partner or dissolve the partnership. For example, in some cases, the company partners decided that a certified majority was required to remove a partner.

When a bad business partner threatens to spoil the business, ask a licensed attorney to review the partnership agreement with the other partners. An experienced lawyer can help the partners decide:

- What their legal position is regarding the bad partner
- The ways the agreement can help the situation
- The limitations of the agreement
- If the partnership agreement should be updated

Set New Goals and Form a Plan

When a business partner with a negative presence threatens to ruin the business, it often motivates the other partner or partners to act. If the partners want to save the business, for example, they should develop specific goals for the future.

Use productive, honest discussions to create concrete goals for the company’s future. Goals might include:

- Dissolving the company
- Removing the problematic partner
- Overcoming the problems with the partner and keeping them in the business
- Restructuring the business
- Updating the partnership agreement

Before setting goals, consider the outcomes of meeting those goals. Then, the partners should form a plan to make those goals happen. Sometimes, it may prove difficult to agree on achieving these goals, but the company will not succeed if all partners cannot agree on a way forward.

Notify Parties Close to the Business

Whatever the partners agree, it is time for the company to get the word out. For example, if the partners wish to dissolve the company, they should notify multiple parties immediately. The company should agree on a formal media statement, and some businesses have an individual in charge of the press. If no such person exists, simply divide these duties among partners. The partner should contact the parties close to the business, including:

- Government entities
- Clients
- Employees
- Landlords
- Suppliers
- Clients
File for Dissolution of the Company

If the partners agree to dissolve the company, they must do so legally. The legal dissolution process requires filing a form of dissolution with the state.

The dissolution document officially announces the partnership’s end. This formal document is easy to forget, especially at a busy time, but it is essential. The dissolution of partnership document explains that the partners are freed from the partnership and not responsible for the company’s debts. If partners forget to file this document, the dissolution process can stall, and the partners’ finances can become complicated.

Close Company Financial Accounts

It is now time for partners to shut down bank accounts and credit accounts and inform creditors that the company is no more. Partners also must follow the partnership agreement’s provisions in distributing assets.

All partnerships are structured differently, and therefore all companies shut down in different ways. The distribution of assets can quickly become complicated, so make sure to contact a skilled corporate lawyer to help with payouts, accounts closing, and assets collection.

Refer to the Buyout Agreement

For some companies, dissolution is not the answer to removing a toxic partner, and a buyout is a goal. If the partners choose to buy out a partner, the first thing to do is to refer to the partnership agreement. Often, the agreement includes the terms of a buy-sell agreement. Usually, the first step is to estimate the value of the business. An independent valuation is a necessity to establish a baseline company value.

However, some partnership agreements do not include buyout terms. In this case, the partners need to negotiate a buyout of the bad partner, which can prove challenging. Find a business attorney who has experience with buy-sell agreements, and be prepared to go back and forth regarding the payout amount.

Buy-Sell Agreements typically include:

- The value of the business
- The terms of the buyout
- Instructions for how the partner who is leaving can keep their ownership interest
- The buyout price

For example, Bob, Bill, and Brian run an exercise club in San Bruno, CA. When the three workout enthusiasts formed Lift & Run, they negotiated a partnership agreement and a buy-sell agreement. Unfortunately, after three productive years, the business fell apart. Bill became the “bad partner” because he lost all passion for the business and ultimately wanted to leave. However, Bill was worried about losing his ownership interest and suffering financially while he looked for a job he was passionate about.

Bob and Brian consulted the partnership agreement and reviewed the buy-sell agreement they created years ago. Since the agreement featured specific terms that the three partners had agreed to, Bob and Brian could buy out Bill in such a way that satisfied all of the partners.

If the partnership agreement does not include a buy-sell provision, that does not mean a buyout is impossible. The process will, however, take more time and effort, depending on the relationship between the partners.

Take Legal Action

Not every business partnership is redeemable, nor is every business relationship. Sometimes, the partners must remove a selfish, controlling, or toxic business partner, and the parties cannot agree on a buyout. So what options do partners have when a buy-sell agreement is not an option?

One of the actions partners can take is to file a lawsuit against the bad partner. For example, if the partner has violated the partnership agreement, forcing them out could be a legal option.

Filing a lawsuit is a serious decision, but sometimes it is the only way for the partnership to thrive again. Partners file lawsuits for:

- Contract violations
- Fiduciary duty violations
- Conflicts of interest

For example, Judy and Lizzy run a wine shop called Vino in Sonoma, California. For six years, the business has been excellent. However, during the seventh year, Lizzy begins behaving poorly and focusing on her business instead of Vino.

Lizzy’s behavior hurts the business, but Judy knows that the two former friends never signed a partnership agreement and did not have a buy-sell clause. Nevertheless, Judy decides to file a lawsuit against Lizzy.

Based on employee testimonials and videos, Judy has evidence that Lizzy has stopped working for Vino, and her lawsuit is successful. As a result, the court awards Judy the damages she sought, and court orders Lizzy to leave the business.

The process might have been different if Lizzy and Judy had signed a partnership agreement with a buyout clause. However, when a partner’s poor behavior is egregious, some partners file lawsuits instead of negotiating buyouts. While both processes can be complex and demanding, contacting a business attorney can make all the difference.

Contact an Experienced Law Firm

The situation presents many challenges when a partnership suffers due to personality conflicts. However, most business partners have worked diligently to build their companies and do not want to abandon their businesses or partners.

If you have a bad business partner, you may be able to settle your differences outside of court. However, some conflicts are unsolvable, and attempting to deal with them only wastes time.

At Nakase Wade, we have seen our share of partnership conflicts, and we understand how important it is to deal with the situation effectively. Of course, many different remedies are available, depending on the nature of the problem. Still, they are key to acting quickly and decisively instead of waiting for the problem to change.

Our California business lawyers and corporate attorneys are ready to help business partners regain command of their companies. We know your business partnership’s importance to you, and we will do everything in our power to help you achieve your business goals. Our team is ready if the partners agree on a buyout, desire to dissolve the business or seek counsel regarding a lawsuit.

Contact Nakase Wade today for a free consultation, and let’s figure out how to handle the issues at hand, so you can get back to running a successful, productive partnership.

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