What Happens When Business Partners Disagree?

An unhappy business partner may determine if there was wrongdoing by the other partner and initiate a lawsuit to gain control of the company and negotiate a buy-out. Alternatively, the partner who initiated the lawsuit can seek a judicial dissolution of the business.

Bad Business Partnership Example

Pippi and Bernard run a furniture store in California City, California. The two entrepreneurs are co-owners and partners in Where’s My Chair, and the business has been on a steady rise since they opened a few years ago.

With input from Bernard, Pippi created a comprehensive partnership agreement well before the two partners sold their first custom-made futon. The partners’ agreement ensures that both partners work the same amount of hours—45 per week—and take the same pa, equity, and stock options.

Bernard spends more time in the back office crunching numbers and working on the website, while Pippi spends more time on the floor speaking with customers, and the arrangement achieves an excellent sense of balance. Both partners have always felt that Where’s my Chair is truly a shared company, and that trait is one of the secrets of their success.

However, recently Pippi has noticed that Bernard has been arriving to work later and later each day. When he gets there, he goes straight into the office to “work on the website,” but Pippi has twice found him cruising the web aimlessly. In addition, Bernard takes longer lunches now and always uses the company card, though he rarely invites clients or suppliers. When Pippi asks about his behavior change, Bernard says that he enjoys their success and tells Pippi to do the same.

However, Pippi knows that several furniture stores are opening up in the area soon and realizes that both partners must work harder, not less. She also grows resentful that she works harder and longer than Bernard. Pippi often works 10-hour days to make up for her partner’s late arrivals and wasted work hours.

Pippi tries to speak with Bernard about it, but his response is to “lighten up a little.” He also suggests hiring more employees, which Pippi knows they cannot afford. To make matters worse, the negative energy between the two partners fills the store, and customers have noticed. Over the last few weeks, Where’s My Chair’s once-steady rate of business has drastically dropped.

Pippi and Bernard are amid a business disagreement, and there does not appear to be an easy way out. While all company partners sometimes disagree, persistent disputes damage companies. When partners run into unsolvable disagreements, the partners suffer, and so do the companies they worked so hard to build.

Pippi isn’t sure what to do about Bernard, but she knows she must take action. Should she deal with the disagreement head-on and keep trying to speak with her partner in hopes that he might change his ways? Should Pippi contact an attorney? What are her other options?

Pippi isn’t sure what direction to take, but she knows something needs to change, or she and Bernard will lose the business.

Settling disagreements between business partners is challenging, but it is not impossible. The most difficult aspect of overcoming disputes is figuring out the best strategy.

Some partners deal with the problem informally and save money and time. However, informal solutions do not hold much weight when a disagreement is deeply rooted. In this case, multiple options are available, including contacting an experienced attorney, hiring a mediator, taking legal action, and more.

When business partners join together to start a business, they must be able to rely on each other, and they must be able to communicate effectively. A business partnership is similar to marriage: two individuals become a team and are forced to work together.

Just as marriages can be challenging and even end in divorce, business partnerships can become strained, unworkable, and unbearable. However, when a partnership becomes problematic, one must remember that there are many options for settling the matter.

In this article, we will go over what happens when company partners disagree. The options for remedy depend on many factors, including the structure of the company and the gravity of the dispute, so we will briefly examine various situations and conditions. The goal here is to show business partners that regardless of the nature of the problem, there is hope for solving the disagreement and continuing a successful, profitable business career.

Conflicts among business partners stem from varying issues, from minor disagreements to major offenses, such as embezzlement and stealing. However, many workplace disputes have similar origins, including:

Unequal duties or payment
A lack of business goodwill
Inappropriate use of company funds or assets
In-house competition
Violations of fiduciary duty

Partners breach their fiduciary duties when they do what is best for themselves instead of doing what is best for the business.

When business partners come together to form a company, they agree that the business comes first, and the founding document—operating agreement or partnership agreement, usually— reflects this idea.

Sometimes, business partners choose to place themselves first due to narcissism, ego, greed, or other factors. Unfortunately, when partners do so, their actions are bad for the company.

Just like breaching a contract, violating one’s fiduciary duty when involved in a contract is a grave offense and can be grounds for company dismissal. In addition, violating fiduciary duty also usually damages partner relationships.

For example, Jeff and Gabby run a wine bar in Mountain View, California, called Fizzy Sips. Both partners normally work the same amount of hours in an equal partnership. However, Jeff has started spending much of his work time on the phone, selling off the extra wine orders the bar receives from time to time.

Jeff is not only neglecting his employees when he is in the office selling wine, and he is neglecting the customers, his partner, and the entire business. Even worse, Jeff is selling company wine for his gain because he is not giving the money back to the company.

In this example, Jeff violates his fiduciary duty. If Gabby wants to, she can document his actions and show that Jeff is in breach of the partnership agreement he initially signed. Typically, partnership agreements include provisions of fiduciary duty.

How do you handle partnership disputes?

Instead, take the time to conduct some research. Read the company handbook, the shareholders’ agreement, and the company’s formation documents.

Why is it helpful to read these forms over? These different documents can tell us the following:

How is the company currently managed
Who owns the business
How the partners divide ownership
Who has the rights to specific profits and shares

Some operating agreements contain rules and regulations, specifically business disputes, which can also be useful.

When business partners disagree, it can be difficult to clear one’s mind, especially if the partners continue working together daily. When partners strongly disagree, there is no doubt that they must schedule a meeting and try to work things out. However, before speaking with the partner, it helps to ask yourself these questions about the dispute. We can separate these questions into two categories: those that focus on the business entity itself and questions that focus on the partners.

In regards to the dispute among the business partners:

What actions have created the dispute?
What are both parties’ main concerns?
What actions has the individual taken to deal with the problem?
Does the individual want to keep working with the current business partner, or do they think it is best to separate?
Does the individual want to minimize conflict to preserve the relationship with their partner, or is conflict ongoing or inevitable?
What would dispute resolution be optimal?
Does the individual see hope for the future, or is the situation beyond resolve?

In regards to the company itself:

Has the way the business is funded been compromised?
Has any important company information been compromised?
Is the partner’s offense serious enough to consider selling the company?
Is a buyout an option?
Is a buy-sell agreement included in the partnership agreement?
How can present or future companies be prevented?

The answers to these questions will hopefully clarify the situation and make it easier to move forward confidently. Then, depending on the nature of the dispute now is a good time to contact a skilled business dispute lawyer for help with the problem.

For example, Jenna and Ruth run a dry cleaning business, but lately, they have disagreed about everything, from how much to pay employees to how much vacation time they can afford. The two partners are now at the point where they barely speak to each other, and their customers and employees have noticed the tension. Plus, neither woman can focus or work as hard.

After Jenna thinks, however, and asks herself some of the key questions explained above, she realizes there is hope. Even though Ruth and Jenna are not getting along, they still care about the business. Each woman wants the dry cleaning company to improve and be more cost-effective.

Ruth decides to set up a meeting with Jenna and tell her how she feels. Ruth brings a list of questions and notes, and the two entrepreneurs can enjoy a calm, productive discussion. Finally, they compromise about employee pay and agree to move on together. Whenever there is a problem, Jenna reminds Ruth, let’s not let it build up and damage the business. Instead, let’s talk it out immediately. Ruth agrees with Jenna, and their dry cleaning business is performing impressively in a year.

How do you approach a conflict with your partner?

We suggest that before the meeting, individuals also:

Preserve, do not delete, records (emails, texts, documents)
If the dispute involves the collection of proof or evidence, bring that to the meeting
Continue to work normally before and after the meeting
Keep meeting legal duties and obligations
Document the meeting, and let the business partner know you will be documenting the encounter
Schedule a consultation with a lawyer so that the individual can report on the meeting’s results
If the partners have discussed mediation, now is a good time to have a third party join the meeting

When two business partners are involved in a dispute, it can quickly become a sensitive issue. Often, we invest a lot of emotion in our businesses, not to mention many hours of hard work. When a partner disagrees with us or tells us what we are doing is wrong, it is easy to become frustrated and resentful. However, the goal should be to act thoughtfully rather than reactively.

It is important to continue with normal daily tasks instead of becoming caught up in the highs and lows of the situation. Disputes among partners are a normal part of running a business, and it may be helpful to know that everyone goes through them sometimes.

For example, Jason and David run a taco stand in Encinitas, California, JD Fajita. The two partners have been arguing about money, responsibilities, work hours, etc. So Jason schedules a meeting for the following so the two partners can sit down and sort things out, and Patrick agrees.

Over the next week, Jason completes all his normal work. He meets with suppliers, stocks the shelves, and does his shift at the register handing out delicious tacos and burritos. However, in his extra time, he prepares for the meeting. One of his issues with David is that David takes long, indulgent lunches nearly every day on the company credit account. Jason prints out the credit card balance to show David how much money they are losing as a business each month.

On the other hand, David does not prepare for the meeting. When the two meet, David accuses Jason of spending too much money on new equipment. When Jason asks for David’s proof, he has not prepared any. Jason informs David that the only new equipment he purchased was a new oven when the old oven broke, and both men signed off on the new oven.

Jason then shows David a “map” of his spending at lunch over the last few months. Jason presents his evidence calmly and is not accusatory—he admits that he has also used the company card for dinner a few times. David sees that Jason is right: his spending hurts the business they both worked so hard to build. Nevertheless, David and Jason can find new common ground, and both entrepreneurs pledge to move forward together and give JD Fajita another chance. Plus, Jason decides to start packing his lunch.

When involved in a dispute with a business partner, one must schedule an official meeting with them to discuss the matter and then prepare for the meeting. While one meeting will not settle all disputes, it is a step in the right direction.

How do you resolve conflict in a partnership business?

Before trying mediation or litigation, it makes sense to sit with one’s business partner and discuss the problem. Communication is usually the key to solving the problem, so speak clearly and honestly. Describe the problem as you see it and, better yet, offer solutions regarding how the partners can join together to fix the situation. Face-to-face confrontations can be emotional, but they are the first step in resolving the problem so the partners can get back to business.

When partners meet to discuss their disagreements, their conversation should build off of this list:

Identify what the problem is
Do both or all partners view the problem in the same way?
Who is negatively impacted by the problem?
How it the topic of the disagreement negatively impact the company?
What are a few different proposals for change?

When a business dispute arises, sometimes the partner who behaves poorly is unaware of the consequences of their actions. Once they learn, for example, that when they come to the office later, someone else must fill in for them, they understand they must change their actions.

In some situations, the meeting between two partners reveals that the blame does not fall solely on one party. In this case, both individuals need to make changes to benefit their relationships and the business.

For example, Marsha, a partner at a small law firm in Carlsbad, California, is usually a hard worker. However, Marsha likes to go out with friends on Thursday nights, so she always comes in late on Friday and misses the morning meeting. So Marsha figured that she could normally get the notes from the meeting, and if anything important happened, the other partners would call her.

However, when Marsha comes in late, a paralegal must fill in for her and take notes. That paralegal, named Danny, usually spends the mornings typing up important briefs for the partners. So when Marsha is late, she sets off a chain reaction that sometimes leads to stress for Danny and problems for the partners, who do not have the documents they need for court.

When the other partners tell Marsha about the consequences of her actions, she gets it. She understands the impact of her being late and makes the necessary changes to avoid being late again.

Communication is one of the most important aspects of any business and partner relationship. Business partners should embrace dialogue and work diligently to resolve disputes through open conversation and listening. Why is trying this strategy so important? Busy business partners can save time and money in handling their issues through negotiation with each other, as opposed to employing third parties.

Business partnerships are about flexibility and teamwork. Unfortunately, many business partners forget their original intentions as the years pass, and conversation can bring the original company goals back into focus. However, conversation and listening are very different than “tuning people out” and arguing about petty differences.

Informal solutions do not always work, and more complicated disputes often necessitate more complex remedies. Yet it is an intelligent choice to try informal solutions, such as in-person meetings, before moving on to solutions that can prove more costly and time-consuming.

Is Mediation an Option When Business Partners Disagree?

Mediation involves using an unbiased third party to help with the decision-making process. One of the keys of mediation is ensuring that the third party is unbiased and has no interest in or opinions regarding the case.

Mediation, when done right, also encourages honest dialogue and helps create effective solutions when the partners are out of options. Mediation also helps to get to the core of the problem and identify the source of the issue.

Mediators also typically try to guide the parties toward a viable solution. Instead of partners leaving the meeting saying, “But, what’s next?” mediators seek to encourage practical solutions and will help draw up terms and conditions. For example, let’s say Dave and Dan are fighting over a company parking spot. Perhaps the key to resolving their differences is to figure out how the spot can be shared and draw up appropriate rules.

Mediation does not always work; if the partners cannot solve the problem, they usually move on to a hearing or trial. However, mediation has proved effective in various situations in the past and with partners at large corporations and small companies.

Where are Mediators Found, and is the Process Free?

If partners want to pursue mediation, many nonprofit organizations and private firms offer mediation services for a fee. While mediators are sometimes formally trained in resolution techniques, mediators can also be friends or colleagues. The most important quality for mediators is to be unbiased.

Mediators usually will not propose new ideas or detailed solutions. Instead, their role in the meeting is to help the partners organize and improve their ideas and proposals. A mediator will also provide their opinion regarding the veracity of a certain solution.

When mediation is not free, it is a logical strategy for partners to try out. If it works and a productive discussion flows, the partners can move forward on better terms.

For example, Mick and Kelly are partners in a real-estate firm in Carmel-by-the-Sea, California. Unfortunately, over the past few months, Mick and Kelly have clashed over every issue imaginable, and neither agent is sure if their partnership—or the business—can survive.

Kelly and Mick tried to meet twice, but both meetings ended in loud, stressful arguments that disrupted the entire office. Once, a client even observed one of these arguments and promptly found another realtor.

Kelly suggests mediation, and Mick agrees. The two partners agree to choose Sandy, a first-rate realtor who has a degree from Columbia and is known to be a reasonable and even-keeled person. Sandy also is known for her willingness to defend her rights and opinions and not back down, so Mick and Kelly know she will speak her mind while staying unbiased.

During the meeting, Mick explains that he feels that Kelly has stolen some of his clients. But, on the other hand, Kelly doesn’t think Mick works hard enough. Kelly’s attitude is that if he works harder and spends more time at the office than Mick, he should be able to take all the clients he wants.

Last time, the partners’ conversation devolved into accusations and “he said, she said,” but the presence of Sandy changed the dynamic. As a result, the conversation is clear and productive instead of being accusatory, and Mick and Kelly find a solution. Both partners agree to be more dedicated to the business, and each other, and Sandy helps them hammer out the terms of a signed agreement.

The goal of a mediation meeting is not only to resolve the conflict but to set a precedent and help prevent future disputes. Mick and Kelly print out their agreement and hang it on their office walls to show everyone how important the compromise is and remind them.

Sometimes, the partners decide to change office policies, business regulations, or the partnership agreement they signed. When partners improve and update these forms as they go along, they are open to change and committed to whatever is best for the business.

Overall, if individuals can view disputes as something that can make the business stronger and more productive in the long run, they are on the right track. However, this idea does not change the fact that disagreements with partners can be difficult and often require the help of a professional attorney.

When is Arbitration An Option for Partner Disputes?

Arbitration is similar to mediation in that it takes place outside of court. Business partners who seek arbitration think they can still settle their issues without an official judge but also desire a third party to play the role of the decision-maker.

Therefore, the biggest difference between arbitration and mediation is that in mediation, the third party does not make the final judgment. Instead, the mediator helps the partners discuss and decide on a solution.

The arbitrator, a single individual or a panel of people, makes the final decision regarding the case. Arbitration is similar to a court proceeding but less formal, and there is no jury.

Arbitration is an effective choice because it employs the same techniques used in court but a low-pressure situation. Often, partners can view their concerns in a new light and find some mental clarity.

Alternatives to lawsuits not only exist, but they can also be effective. Sometimes, finding a solution is as simple as examining the company’s founding documents.

Dispute resolution through partnership agreement

Many entrepreneurs run different businesses as their careers go on and learn new things from each experience. Skilled entrepreneurs learn that one can plan for business disputes before they occur. When partners include provisions about disputes in the company’s founding documents, they set themselves up to deal with inevitable problems.

For example, partners can place specific terms and provisions in the company’s operating agreement, partnership agreement, or bylaws that explain what happens if the partners disagree. The document might instruct the partners to use mediation or give authority to one partner as opposed to the other.

Additionally, some partnership agreements include buy-sell provisions with the appropriate terms. For example, Hugo and Vinny are business partners in a small investment firm who simply cannot get along anymore. They’ve tried mediation, and the problem has only grown worse.

Now, both partners are concerned that they may lose the business. Reviewing the partnership agreement they signed five years ago, they realize they agreed on a buyout deal if they ever needed to break up the business. Since Vinny desperately wants to start his own company without Hugo, he agrees to a buyout deal that leaves the investment firm to Hugo, and everybody wins. The partners did not haggle over the buyout price or the process itself because the buyout was spelled out in the partnership agreement.

Can I sue my business partner?

When partners cannot settle their differences, they may find they must turn to a court of law. While this may seem like a drastic step, relying on the traditional court process can signal the turning point for a dispute that threatens to bring down the business.

Business partners often pursue legal action when a business partner’s immoral or criminal behavior. For example, if a partner steals money from their other business partners, the partners may sue the wrongful partner for damages. If one partner commits fraud, embezzlement, larceny, or violates their fiduciary duty, sometimes the other partner decides the issue is best settled in court.

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.

What Options Are Available When Partners Decide to Pursue Litigation?

When mediation and negotiation do not produce helpful outcomes, business partners turn to an official judge to decide who is in the wrong. Typically, business partners who cannot get past their differences bring civil suits against each other and do so by first contacting an experienced attorney.

In some situations, partners can force each other out of business or force a buyout. The judge’s role may be to set the buyout price, or, in some cases, the judge decides to terminate the business based on state law.

While partner-to-partner litigation can become contentious, it can result in clear outcomes and allow all parties to move on. If partners cannot settle the dispute through negotiation or mediation, it makes sense for partners to seek legal action. Here are a few quick tips to prepare for litigation if this is the case.

Contact an experienced business dispute attorney, and schedule a consultation. Fill them in on the details of the case, and get some preliminary feedback.
Inform the other partner or party that you are pursuing legal action and feel there is no other choice. If you have not yet tried or discussed other options, try mediation or negotiation at this point.
Speak with your lawyer about the correct strategy and desired outcomes. For example, if you plan to file a lawsuit, what is the goal? What damages are you seeking, and what do you see as a favorable outcome?
When speaking to your lawyer, make sure you are clear about the company’s future goals as well. Dissolution, a buyout, and other options may be available but require different tactics.

What Are Additional Options for Dispute Resolution Among Business Partners?

Buyout

A company buyout is viable if partners must terminate the partnership but the business is still profitable. For example, if the partners cannot get along, but estimates say the company is growing in size and profitability, it may not make sense to dissolve the business. In this case, one or more partners may seek to buy out another partner’s share.

Some partnership agreements include buy-sell provisions, so the buyout process is already mapped out. However, if no agreement exists, the partners must negotiate a buyout agreement. The negotiation process, however, can be difficult amid a partnership dispute. In this scenario, the partners must:

-Evaluate the price of the company through independent valuation

-Agree on the terms of the buyout

-Contact a licensed attorney for guidance

Buyouts work best when all parties are satisfied with the outcome, but that can be tricky to achieve. A lawyer with buyout experience can help ensure that all parties are satisfied with the resulting deal.

Cash-out Merger:

In a cash-out merger (also known as a squeeze-out or freeze-out merger), majority owners force out the minority owners. This solution makes sense for companies where the business partners’ interests are disproportionate.

When a cash-out merger occurs, most partners construct a merger with a new business they already own. The majority owners pay the minority owners a fair market price for their shares in the company, and the merger is completed.

Preexisting court opinions and statutes govern the rules of freeze-out mergers. Therefore, we strongly 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 impossible, the partners agree to dissolve it and move on with their lives and careers.

Dissolution can happen in two ways:

Voluntary dissolution: the partners agree to dissolve
Judicial dissolution: the partners rely on the court to dissolve the business

The partners must file the appropriate documents, sell assets, follow partnership guidelines for distributing shares, and pay off any liabilities.

If the company partners cannot agree on dissolving the company, typically, 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 inviting option for partners ready to move on.

When owners seek buyers, they usually want an individual or entity to buy all the shares. This strategy leaves the other partners free to move on to other ventures. Existing workers, competitors, and friends can all become buyers. Some owners, however, decide to use a broker to find a willing and qualified buyer. Brokers can help ensure that the buyer has the funding and is serious about the venture.

When partners decide that selling the business is the correct move, they must:

Hire an attorney to ensure that the sale is fair
Get a professional valuation of the business
Decide if they know buyers themselves or would like to use a sales broker

Bankruptcy:

Often, business partners are forced apart because of financial concerns. When a company fails, blame is cast, and owners often have different theories regarding the company’s problems or collapse.

When a business becomes insolvent, the partners may find one thing to agree on: it is time to file for bankruptcy and move on to a new business venture.

While it can be difficult to give up on a business that held promise, filing for bankruptcy sometimes allows the company to restructure its debts and move on. However, most commonly, filing for bankruptcy creates a situation where the partners liquidate the entire business.

The bankruptcy outcome depends on the company’s overall financial health when filing. While partners often view defaulting on their company as a loss, sometimes it is the only option and a chance to put bad memories behind them.

When Should Individuals Call a California Business Litigation Attorney?

At Nakase Wade, our California corporate attorneys and business lawyers help company partners quickly identify and remedy problematic situations.

If a partner dispute plagues your business, you need an attorney who has been through the process. Our lawyers are skilled professionals, and we deal with business disputes with a mix of compassion and realism. Our first concern is to ensure that our team protects you and the company from your partner’s actions. Whether you are considering a lawsuit, mediation, arbitration, a buyout, dissolution, or another option, we can guide you through the process and will end the dispute on your terms, not your partner’s.

When partners disagree, it is essential to get to the heart of the problem and identify the cause of the argument. If your company partner violates your rights or endangers the business, we will work quickly to reduce any further offenses or damages.

Nakase Wade provides unparalleled assistance to partners locked in disagreements. We know that disputes can be time-consuming, costly, and even worse: they can damage the company into which you have put so much time and effort. Our business litigation lawyers and corporate attorneys will help you understand when it makes sense to take legal action and when it makes sense to try alternatives. In any case, the goal is to resolve the dispute quickly so you can get back to pursuing your business goals.

Contact Nakase Wade today for a free consultation. We understand business disputes, and we want you to understand your rights. We will ensure that we help end your business dispute on your terms and with the best possible outcome.

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