5 Lessons for Entrepreneurial Survival in a Partnership Dispute

R. Patrick McCraney

Willoughby Law Group, PLLC

December 1, 2010

 

Part 1:  5 lessons for entrepreneurial survival in the context of a business dispute.

 

It is an unfortunate, yet undeniable, truth that most small businesses fail.   For those that do make it through, there will be inevitable periods of discord among the owners, especially in a small, privately held company with a “horizontal” management structure.   At some point in the life of a business, there will be philosophical differences between the owners who share management responsibility.

 

A business partnership, though perhaps less sacred, is in many ways similar to any other long-term personal relationships.  In fact, a common analogy often compares the business partnership to a marriage relationship.  We have all heard the saying, “choose your spouse carefully, and your business partners more carefully.”

 

There are very few things that are more rewarding that partnering with like-minded people to transform an idea into a thriving commercial enterprise.   It is indeed a worthwhile and powerful endeavor.  Conversely, there are very things more painful or emotionally taxing that experiencing a “falling-out” with a business partner.  As the relationship once founded on trust and respect begins to unravel, emotions tend to run very high.

 

As lawyers specializing in business matters, we are often called upon to represent one party in a business divorce or dissolution.   The purpose of this article to try to share some insights that we have learned for navigating a business separation in the most cost-effective and practical manner possible – before lawyers get involved.   Indeed, once the “gloves are off” (and the dispute has gone “nuclear”) it is very hard to reconcile the personal relationships and tensions (and legal bills) begin to escalate – in many cases unnecessarily.

 

So, with that backdrop in mind, I offer five (5) lessons for entrepreneurial survival in the context of a difficult business relationship.    In the follow-up to this article (part 2), I will discuss some of the practical steps to navigating a business dispute if the impasse cannot be reconciled and you find yourself either in (or at the doorstep of) a formal legal dispute.

 

Lesson No. 1:

 

Keep open lines of communication.  Like any other disagreement, the biggest impediment to working through a business impasse is the lack of communication among the partners.  Often, the parties will move away from each other in a stonewalling effort as lines are drawn, and each party begins to entrench themselves in their respective position.    In terms of the “form” of communication, we strongly urge the parties to avoid “emails” or “texts” if at all possible.  People tend to say things electronically that they would never say in a face-to-face dialogue.   If you don’t have the courage to make the point in a face to face discussion, perhaps that should shed some credibility on your comments, or the motivation behind them.    Further, emails are often taken out of context, because they are devoid of tone and inflection.   In addition to drawing the parties away from personal interaction (which is important), emails often create a record that can often be damaging in a formal legal dispute.   Once it is out there in print, you cannot reel it back in.

 

Lesson No. 2:

 

Check your ego and emotions at the door.  The need for both parties to be right (or to be vindicated in their position as a “matter of principal”) is often the biggest impasse to reconciliation in the context of a business dispute.   I once heard a wise lawyer say that, “you can follow principal right off a cliff.”   Please understand that I am not saying that you should always compromise or be a “doormat” in the business world.    As lawyers, we are strong advocates for our clients interests and take this duty very seriously.   However, one of the hallmarks of a good businessperson is the ability to see the forest through the trees.  That involves being pragmatic and practical person, who places the goodwill and commercial viability of the business enterprise over his or her personal need to be right.

 

Business relationships, like all personal relationships, require compromise from time to time.   We have had the unfortunate experience of watching this play out with many of our clients.   We often see the ugliness of a watching the carnage of a once promising and viable business get washed out in personal controversy.    A term of art in the business world to describe this type of personal behavior is the “grenade launcher.”  That is, if I can’t have my way, I am taking down the business and all who are a part of it.    This behavior is contrary to the mindset of a practical and  “socially responsible” entrepreneur.   People often lose sight of the fact that employees tend to lose jobs and viable products and services get taken of the market (in both cases unnecessarily) when businesses are folded on sole the basis of personal controversy.

 

Lesson No. 3:

 

Seek Out “Business Advisors” before “Legal Advisors.” Involving lawyers prematurely can set a polarizing tone to the discussions.  In fact, once lawyers are hired, lines tend to get drawn and the parties instinctively mobilize for battle and withdraw to “their corners.”   As a lawyer, I truly do not want to be involved unless the situation is beyond reconciliation and the legal process is needed to separate property or liquidate the business in an orderly fashion.   At that point, you need a lawyer to protect your interests and your livelihood (especially, if you are confronting someone with a grenade-launcher mentality).   However, I would submit that neither party should hire a lawyer prior to exploring all options for reconciliation with a business advisor or mediator (see Point No. 4).    In fact, most business disputes do not involve fraud or similar breach of trust.   Rather, the dispute stems from a philosophical difference on “how to run the company.”   That could range from which products lines to launch, which people to hire and fire, which marketing efforts have merit, whether to go “up-market” or “down-market” with a certain product or strategy, or whether to diversify products or services, and the list goes on an on….  These are “business” issues, not legal issues.   If the parties have a difference of opinion on course business directives and strategies, perhaps they should consult a trustworthy and seasoned business advisor.  There is simply no substitute for the wisdom that comes from experience, and seasoned business professionals are often very accommodating in helping people avoid the mistakes that they have made.   Again, if the parties are willing to listen to the counsel of a third-party (and dispense with the need to be right), then perhaps they can find some common ground through discussions with a business advisor.

 

Lesson No. 4:

 

Submit the matter to informal mediation.    If the above measures are not bearing fruit, then the next step to consider is submitting the dispute to an impartial mediator who can impart some objectivity into the process.   Again, we suggest that this be done without lawyers at this point.   Typically, the parties hire lawyers early on because they are concerned that they may do or say something that could be used against them later.  While that is certainly a valid concern, you should also know that statements or offers made for settlement purposes are generally not admissible in court.   Further, you can always enter into a stipulation that all discussions are for settlement purposes only, which can facilitate more candor and openness in the discussions.    Again, the parties will only benefit from a mediation if they are willing to listen to objective advice and check their ego and emotions at the door (otherwise, it can and often will be a worthless exercise).

 

Often, one of the benefits of a mediation is that it forces the parties to sit in the same room, look at each other from across the table, and defend their positions.   Simply bringing the parties together to discuss the issues openly and candidly (i.e. “to hear each other out”) is often the biggest milestone towards advancing a resolution.

 

Lesson No. 5.

 

If it becomes necessary to involve lawyers, be very careful whom you choose.

 

This may sound counter-intuitive, but if you have reached the stage where the parties need or want to involve lawyers, then you should always choose a level-headed and objective attorney.   Most people search out the “bull-dog” and, as I mentioned earlier, you certainly need and deserve an advocate when your livelihood is at stake.  But there is a big difference between an advocate and irresponsible hothead.  A lawyer can do more harm than good if he or she personally absorbs your emotions and blindly accepts your position.  A good lawyer lets you know the strengths and weaknesses or your case and does not inflate your expectations or animosity.     A good lawyer is one that would prefer to close his file by settling the matter quickly and efficiently, rather than advancing his or her own economic interests by perpetuating an unnecessary and costly dispute.

 

 

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About Patrick McCraney

Seasoned Business Attorney representing business owners, entrepreneurs, real estate investors and health care practitioners. Our firm handles every facet of the business life cycle from start up, to emerging growth, private equity, mergers and acquisitions, with an increased emphasis on distressed investing/transactions, work-outs, insolvency and bankruptcy.
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