How to ditch bad business partners
Planning ahead is your best bet for a successful resolution if a business deal turns toxic.
Amy, Wheeling, W.V.
I formed an LLC with two other partners. They are a couple. One owns 33%, the other 34% and I own 33%. We do not have any legal documents drawn up. I want to take the business and get them out. One partner does nothing and still works a full-time job and the other is a control freak making poor choices. This is a new venture, and they funded it with credit cards. The debt is small and I can easily take it over financially, but they will not sell the business to me. The response has been fantastic, and I want to have the business before they ruin it. Do I have any options at all?
By Kathleen Ryan O'Connor, CNNMoney.com contributing writer
Starting a business with partners is a lot like embarking on a marriage. Attending to details like what happens if it all falls apart can seem silly and unromantic. After all, you’re in love. What could possibly go wrong?
But as any seasoned business owner can tell you, things go wrong all the time. The most successful entrepreneurs always plan for the worst from the very beginning.
The first mistake came when you started the business without a detailed and written-down operating framework.
“This was just not smart,” says Francie Dalton, founder of a Columbia, Md.-based consulting firm that specializes in communication, management and behavioral sciences. Dalton is also the author of Versatility: How to Optimize Interactions When 7 Workplace Behaviors Are at Their Worst.
The time to have hashed this all out was when the limited liability corporation was first formed, she says. An LLC operating agreement should spell out all the rights and responsibilities of the partnership, from profit distribution to exactly how a partner can exit.
Drafting such an agreement doesn’t have to cost a mint, Dalton says. Boilerplate legal language covers many of the details.
But since this didn’t happen in your case, you now have two choices: Stick it out and draw up a solid agreement with the help of a lawyer, or get out.
“If she wants to stay, she needs to get a little bit of humility,” Dalton says. If you want your partners to work with you on drafting bylaws for your company, you’ll need to offer them something they want in return.
“Start or stop doing something that to make [the other partners] happy," Dalton advises. "Once she has given those things, then she can request what she wants them to start and stop.”
If communication has become truly toxic, calling in a professional facilitator to manage the conversation might be money well spent.
Danielle Luffey, a marketing and public relations consultant in Minneapolis, founded DVA Brand Communications after a failed partnership – like you, she didn’t insist on having the key details worked out in writing before she jumped in.
Looking back, Luffey wishes she and her partner had consulted a facilitator. The two had been longtime friends, which added another layer of difficulty when tensions arose over responsibilities and expectations. They eventually went their separate ways, but not before they had to work out some fairly painful details, like how clients would be divided and who got to keep the domain name and logo.
“I really felt like we were going through a divorce,” Luffey says. And without a legal safety net set up in advance, there was little a lawyer could do at that point. "The attorneys said at the time, ‘Since you don’t have any paperwork, it’s sort of up to you.’"
It's also very easy in the first blush of a new business venture to forget some basic rules of human dynamics. The fact the other two partners are a couple should have been a red flag to consider, Dalton says: "They are motivated to be a unified front."
Say you decide to cut your losses and move on. Now what?
They may not be willing to sell the business to you, but will they agree to buy you out? As Dalton put: “’Hey guys, here’s my number and I’m out of your hair.’”
If not, it might be worth it to leave your chips on the table and walk away. There's at least one upside of having no operating paperwork: There is likely nothing in writing that says you can't turn around tomorrow and start your own rival business doing the exact same thing.
“This kind of thing can eat you up inside,” Dalton says. “You have to decide if it’s worth it.”
This column provides general information only and is not intended to replace the services or legal advice of an attorney. Always consult a lawyer regarding any specific legal concerns, as laws vary from state to state.
Give us your advice: Check out recent “Ask & Answer” questions.
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Divorcing your business partner
From Sammy, Chicago, IL Amy,
Are you the one who thought of this business idea and are the one making it work? If so, and you have no shareholders agreement, no non-compete agreement, then ask to be bought out.
As a minority shareholder you are basically SOL. If they will not buy you out, walk away. Start your own business and compete. Find a financial backing that does not require an equity partner, a banker, a friend, an investor who is not interested in an operational role.
Stay away from key man insurance on each other unless you REALLY KNOW YOUR PARTNER. It literally could mean a death sentence. Watch the Sapranos and you will understand, it happens in real life. You may want insurance on your life and your family as beneficiary, thats OK.
So many shareholders are either trapped or are released by their shareholder agreements. It is key you understand what you are signing. It is well worth getting a lawyer to explain it to you.
I met a small business owner who had put all of his money into his business, and he was facing personal bankruptcy. There was a clause in his shareholder agreement, that as soon as he filed personal bankruptcy, his partners could buy him out for just a nominal sum. That's what they were waiting for.
Not everyone is shark, but you better prepare as if they are. I have seen final agreements, contracts gone through by lawyers for each side, and at the supposed final signing, both sides had slipped in items not agreed to, hoping to catch the other side out.
I can be that bad.
From David Phoenix, Az Do you have a non compete or any intellectual property? Because if you don't maybe you should just sell out to them and then compete against them. Or you could ally with the control freak and start billing the company for time you put in going forward. Then the lazy partner will be forced to make a capital contribution and if he/she doesn't then you can dilute that person. Most businesses are not worth fighting over. I mean, what kind of business is it?
From Krish, S. Plainfield NJ I do not have answer to Amy's problem but my story has a lot in common with her. I started a company in 2004 with a friend of mine. Unlike Amy, we thought of many contingencies. Before we started, we wrote each other's strengths and weaknesses and compared notes. I can honestly say that my opinion about him is the same what it was in 2004. He was the wrong guy to be a business partner, and I dropped my objectivity because my friendship with him. I still have copies of those papers. I look at those papers these days and ask myself, what was I thinking? We had a contract in place. We purchased life insurances on each other etc. Our contingency plan was solid and was designed only for two years. The idea was if the business lasted two years, there is very good chance that it will survive a lot longer. We were wrong. By the end of the third year, my relationship with my partner deteriorated to all time low. We blamed each other for business being bad and lack of direction. We blamed each other for incurring unnecessary expenses. Every little thing became an argument. It was obvious that both of us wanted out. However, our business being in the service industry, it was very hard for anyone to assess the true value of the company. Buying each other out was out of the question because both of us did not have much money. Luckily, a buyer offered us a fair price. Since both of us wanted out so bad, we gladly agreed. Even this closure did not proceed without a hitch. During the transition period, some variables came up. Buyer used this as an excuse to not pay us the last installment of the sale price. Buyer, acutely aware of our (my partner and I) differences, took complete advantage the situation.
If I was to turn the clock back, my actions would have been quite different.
In these four plus years of partnership I learnt some valuable lessons.
1. Do not go in business with friends unless you are 99.99% sure that it will work. Even if you are very sure, get a second opinion from people who know you both.
2. A lawyer told me once, don't take partners, if you don't have to. Many will disagree with him. But I see it very clearly now.
3. If you decide to take partner(s), retain control of the business by owning a greater percentage. A bad 50-50 partnership will lead to stalemate.
4. Of course, have a contract drawn etc. However, no amount of contingency or contracts will be of help, when things go south.
5. When the things are bad, you will experience tremendous amount of stress. Learn to deal with it. You will age at an accelerated rate during the stressful times. I kept us with my exercise and tried my best to avoid stress at all cost. These days, you can give me the worst news there is, and I will not even blink.
From kent fargo, nd If you don't have a legal document and you haven't signed anything, do you have a legal obligation to anything? Pick up your marbles and play elsewhere. You may lose a friendship, but its business.
From Noble Ackerson, Alexandria, Virginia One partner has 34%, the other 33%. In a partnership I believe both partners 67% trumps your 33% stake in ownership. Try pulling one partner on your side to agree with the breakup.
From Cherie' Seattle, WA. Get out now. Have a neutral party be the "interventionist" Write down all of your questions & concerns. You can also speak to an attorney free of charge in your state in partnership business law (check your Better Business Bureau or Small Business Administration) I had a business partner that had filed bankruptcy (which I didn't know) in the past. She had the books. What a mess. I took over the books & straightened them out. Best to do a background check & credit report on potential business partners! CAR Seattle
From Magnum Steele, San Diego, CA Partnerships are the worst type of business entity. It's hard enough to succeed in business without the drama of partnerships. You should have made yourself the managing partner in the llc and the others just passive partners with no say.
From Don, Franklin, TN Have them buy you out of your ownership. It looks like there is no non-compete, so leave and start your own business. If the response is fantastic as you say it is, and you're the one generating all of the business, the clients will follow you. You're all set!!!
From W. G. Wells bill@wgw I have just experienced the same problem but with children of my partner of 30 years without any disagreements and a solid written partnership agrement that ended up in cout. Do not put any confidence in lawyers or courts. Get out now and insist on a written release if you pay anything buuut get out and operate the business in your own name. But get out NOW. You neglect to mention that as a partner you are personally liable for business debts and contracts they create.
From Jon, Marietta, GA My business partner had the idea that being a business owner meant only working when you wanted to (which was rarely), partying all the time, and sleeping in late. Remember – no one works as hard as you do, or has the passion you have.
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The only real way to keep the business to yourself is to WALK OUT and start the business new. If intellectual property or trademark laws are holding you back there is essentially nothing that you can do without a nasty legal battle.