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5 Ways to Handle Partnership Disputes

COVID-19 is causing massive disruptions to local, regional and national economies.  Layoffs, salary cuts and cost trimming are now the norm.

The situation is exacerbating existing tensions between business owners.  This is especially the case if the partners are not the same age and have different goals and visions about the business.  These could include ideas about:

  1. whether or not to sell
  2. overall business strategy
  3. pricing
  4. cost cutting
  5. hiring consultants
  6. taking on debt
  7. vendor relationships

The following are some options that help owners resolve their differences:

Discussions

The fastest and simplest solution is for the parties to reach an agreement themselves by having discussions.  This will save an enormous amount of time and money if successful.

Even if a valuation is required to determine the FMV of the business this can usually be performed in about one month.

Besides speed and cost another advantage of this approach is that it can generate some of the most creative solutions if the parties are able to remain somewhat objective and problem solve collaboratively.

Mediation

Mediation is a voluntary process where a third party facilitates discussions between two or more parties.  The mediator is not a decider but a catalyst to a more productive dialogue between the sides.  So long as both parties agree to it mediation is a low risk and informal option for reaching a solution.

Mediation is the cheapest and potentially fastest dispute resolution mechanism involving a third party.

Arbitration

Mediation can be voluntary, or binding if there is an agreement that requires parties to arbitrate disputes.  Unlike a mediation an arbitration has an arbitrator who decides an issue on behalf of the parties.

Arbitration can be formal so that the process is similar to that of lawsuits in court or informal based on the wishes of the parties or contractual requirements.

Arbitrators are often retired judges or experienced litigators.  Arbitration tends to be costlier than mediation.

Buy-Sell Agreement

In instances where there is a buy-sell agreement in place, then the agreement could be used to evaluate the viability of a buy-out.  Either the company or the other owners may be able to buy out the departing owner.

The viability of this depends on the financial condition of the business and the willingness of the departing owner to be flexible on payment terms.

Installment payments could also provide the departing partner with tax advantages.

Company counsel may be able to explain the basic requirements where an owner wants to sell and leave.  Company counsel cannot, however, represent one owner against another or the company.  Therefore, business partners may need to hire attorneys to represent them as individuals in this context.

Litigation

As a final option there is always filing a lawsuit in a court that has jurisdiction over the parties.  In this case a state or federal judge will decide the case based on the facts presented by the parties through their lawyers.

This is the most expensive and slowest of all third party resolution mechanisms.  It is not unusual to wait two years from the date of filing a complaint to a trial date.  Given the coronavirus crisis this time-frame is likely to be even longer.