The statistics are grim on relationships remaining intact between business partners. This month’s edition of Inc. magazine cites Noam Wasserman, entrepreneurship professor at USC’s Marshall School of Business, reporting that 10% of co-founders end their business relationship in less than one year and 45% break-up within four years. While these statistics are focused on two-person owned companies, break-ups are at least as common among businesses with multiple owners. Faced with these distressing figures, this post focuses on concrete actions that business partners can take at the outset when their company is formed or when an investment is made, which our experience teaches will improve their prospects for maintaining long-term business relationships.
Operational issues and the vision for the company can definitely lead to disputes, but in many (if not most) cases, the crux of the conflict between business partners comes down to a disagreement over money—how the financial pie will be split. Our suggestions therefore key on how the company’s finances are handled. The starting place is to put an exit plan in place at the outset of the relationship —a Buy-Sell agreement that governs any future Business Divorce. This “corporate pre-nup” will help avoid litigation and a huge distraction for the company when a partner departs. We have written extensively on this topic in previous posts (see links below), and adopting a partner exit plan is essential.
- The Perfect Buy Sell Provision
- A Win-Win Buy Sell Agreement
- Hope for Minority Investors Who Failed to Obtain a Buy-Sell Agreement Before Acquiring Their Interest
- Buy-Sell Agreements: Don’t Leave Home (Or Invest) in a Private Company Without One
But the Buy-Sell Agreement only comes into play when business partners are separating. There are three specific steps that partners can take when their relationship begins, which will help limit their conflicts and, perhaps, avoid the need for a Business Divorce in the future. These steps are: (1) adopt a dividend/distribution plan, (2) implement an executive compensation plan or formula and require annual valuations of the company prepared by an independent business valuation firm. Each of these actions is discussed below.