|People are too quick to ‘leap into the deep end’ when it comes to starting a business, especially when forming partnerships. Partners tend to enter the relationship far too lightly, without the sufficient planning, paperwork and discussion. Their minds often fogged over with the excitement of the venture and the full trust in their business partner(s) commitment and intentions.
As an Attorney I have seen my fair share of business disputes, and as a result friendships are lost, marriages broken and professional relationships tarnished not to mention the reputation of the business and that of the partners being at risk. This type of litigation is always costly, emotionally charged and highly contentious and in large, totally avoidable! It is much like a divorce really, infact it has been labeled the ‘business divorce’
These are just a few pointers to ensure you and your business are safeguarded against possible partner disputes erupting out of control;
- Have the Terms and legal documentation in place from the outset.
Sadly business partners are often too blasé about the legal documentation when setting up their businesses they believe that all parties will always be fair and that, things will just ‘work out’. Unfortunately this is not always the case. Once there has been a dispute it is too late to try and work out the terms. So the parties should discuss with their attorney and possibly their tax professional what business structure is best suited to them and their business. Generally speaking a limited liability partnership is often the most desirable, but other entities can also be appropriate and it is all relevant to how many parties are involved and what the direction in which those parties wish to take the business.
It is equally important to discuss and take great care in adequately discussing and documenting what roles each partner will undertake in the partnership including; delegating specific management responsibilities (if appropriate), setting expectations or targets, and determining how serious decisions will be made, especially in instances when the issue is of extreme importance and there is no consensus.
- Identify who the capital contributions are and in what form each party contributes to the business.
Identify the sources of capital and the circumstances, identifying clearly, and in writing, where the capital comes from and in what form. For example one partner could contribute capital in Rand’s while the other contributes in sweat equity and this will need to be clearly noted in the agreement set in the early stages of the business set up. The goal is to lay out the expectations on each partner as clearly and precisely as possible.
- Know what the compensation is to investors or partners.
Most partners are too hasty when discussions around partner share arise and are to quick on deciding the percentages of ownership, in most cases they decide on splitting a straight even share. However, important aspects pertaining to things such as, vesting schedules, reservations of stock for investors or future employees, equity adjustments, allocations of profits and losses, allocations of business assets, etc. All of this is particularly important as it pertains to calculations for reinvestment and/ or partner/ director share distributions.
- Consider Exit Strategies and Forced Exits
Partnerships are not always easy or smooth sailing and therefore there is a significant number of disputes that arise when one partner wants to sell out his/her shares within the company and the remaining partners do not. Therefore it is imperative that the contract between partners clearly stipulates the terms and the procedures that should be followed in the event that the business relationship ends and the process of the exit itself and this should ensure that both (or more) parties are on the same terms, willing to cooperate with each other in accordance with the contract and remain reasonable and amicable through the process. This prevents massive legal measures and costly court appearances.
- Dispute resolution within the contract.
The cost and time required for litigation is very costly, and given that most disputes are likely to be in connection the amounts due to a departing partner, therefore, partners should discuss resolutions and alternative means of resolving disputes. For example, the partners should agree on a mediation or early arbitration clauses, should a dispute between them arise. They could even, mutually pre-select an accountant to determine valuation whenever need be, so as to not fight about valuation on the back end and so on.
We have hardly touched the ‘tip of the ice burg’ here but, it highlights the most common issues arising out of partnership disputes and how we can prevent damage down to road. Being prepared for these issues is vital in saving you time, money and unnecessary headaches. It is important, should you want a fair yet air-tight agreement in place, that you seek legal advise and get an experienced Attorney in this field to assist you with the necessary legal and paperwork.