Experience teaches us that all relationships have ups and downs, including those existing between business partners. When the relationship becomes strained between partners in a private company, however, the majority owner of the business must decide whether these problems are fixable, or whether the best decision is to remove the partner who holds a minority ownership stake in the company. This is Part 1 of 2 posts, and it focuses on identifying some of the most common characteristics of difficult business partners. When these vexing attributes exist in a business partner with a minority ownership interest in the company, the majority owner needs to consider whether to buy out the partner’s stake, or at least end his/her involvement in the day-to-day operations of the company. In Part 2, we will discuss the process for the company’s majority owner to remove a difficult partner from the business, and we will also look at strategies that enable minority investors to exit the business and secure a buyout of their ownership interest in the company when serious conflicts arise with the majority owner.
Prevent Conflicts Before They Happen
The best way to avoid becoming involved in a dysfunctional business relationship in a private company is not to go into business with a difficult business partner. This may sound like a high bar to overcome because it is hard to accurately predict how a relationship with a new business partner will ultimately pan out. But, there are concrete steps potential business partners can take before they go into business together to determine if they are likely to be a good match when they join forces in managing and building a private company.
First, the potential partners can hire an experienced business coach who can evaluate their value systems, their approach to business issues, and how they handle conflicts that arise in the business. The coach can then provide them with a recommendation as to whether they appear to be compatible or whether there are major differences between them, which may lead to conflicts in the future. Second, the partners can also take available/standardized tests, which will provide an overview of their personality types and traits that help them to assess if they likely to gibe in working together. Finally, the partners can work together on a detailed business plan for the company that covers the following items: (i) their job titles and duties, (ii) how the company will be financed, managed, and marketed and (iii) how they will handle the exit of a partner from the business in the future. The way the partners work through this business plan may confirm that they are compatible or it may highlight significant personality conflicts and/or differences in their values, which raise red flags as to whether they would work well together as partners.
This type of pre-planning requires time and money, but is worth the effort and expense, because it will help avoid a potentially disruptive and public legal fight over a partner’s future exit from the business. Further, and discussed in Part 2, before business partners start, purchase or invest together in a private company, they should negotiate and adopt a buy-sell agreement or other form of a detailed, written partner exit plan.
Continue Reading When to Pull The Plug: Is It Time to Say Goodbye to Your Business Partner? (Part 1)