In the United States, on average, over 70% of business partnerships fail. This statistic is so staggering that some in the business world have resorted to referring to the partnership model as “the kiss of death” for businesses. The reason for such pessimism surrounding business partnerships is the same as those that surround marriage between two individuals who have not communicated properly or planned for potential pitfalls in their relationship. Most business partnership failures have much less to do with actual business realities and much more to do with personal disputes between individuals.
Some of the biggest causes of a partnership dispute are:
- Unequal Commitment Among Partners
- Lack of Success and Blame
- Differing Values
- Differing Personalities
- Failure of Trust
- Different Visions for Growth
- Different Appetites for Risk
- Partners with Similar Skills Sets and Similar Weaknesses
- Differing Motivations for the Business
- Power Struggles
- Lack of Representation by Professionals and Advisors
There are many factors to having a successful business partnership. One way to ensure success is for all potential partners to be represented by qualified business law attorneys during the formation of the partnership agreement and business model. By retaining individual counsel for each individual partner, the partners can formulate their partnership agreement, negotiate terms and conditions of the partnership, and ensure that their individual needs are addressed and protected.
The best way to enter a partnership is not to shake hands and “trust” each other completely, hoping everything will work out in the long run. The best way to enter into a partnership is through a pragmatic and practical approach that seeks to first acknowledge that things could go wrong in the partnership, and then to put into place safeguards against all of the possibilities that could cause a breakdown of the partnership relationship in the future. It is also important to create mechanisms to deal with disputes that may inevitably arise.
It is imperative to realize that you need a partnership law lawyer on your side, specifically looking out for your individual interests, during the formation of your partnership agreement. As an attorney, I cannot tell you the horror stories I have seen regarding partnership disputes. Like marriages that end in divorce, all partnerships start with great optimism, trust, and enthusiasm. After all, when you enter a partnership to do business, most people are excited for the prospects and feel confident of success. Every one of my clients who I have represented in court for partnership disputes liked and trusted their partners when they first got into business with them.
It is at the stage of forming the partnership and drafting your partnership agreement that you ensure the partnership’s success through clear terms and obligations. It is imperative that at the time of joy and excitement when everyone is feeling good, that you plan for rainy days and possible pitfalls. It is important to do this through qualified business advisors and attorneys.
Individuals who are planning on entering into partnerships should consult with qualified partnership attorneys to review their partnership agreements, work out the terms of the partnership, and negotiate on their behalf.
Solving problems before they arise is the best way to ensure that partnership disputes do not occur, and that if they do, that there is a mechanism to handle such disputes internally and not in court. Let a professional represent you through the process of making the deal with your future partner(s). A partnership lawyer can review the deal, negotiate on your behalf, and draft the partnership agreement with an objective view to ensure that you are protected, while also making sure that the deal is made and that you and your partner(s) are set up for success.
Business partnerships in the 2020s
It is estimated that over 80% of business partnerships are entered into between family members and close friends. This makes common sense. After all, you would want to conduct business with people that you know and trust. The difference though is that although you may know and trust an individual in your personal life, the business world is completely different. Money, survival, greed, resentment, and jealousy all rear their ugly heads during poorly planned partnerships. Any successful partnership should not be made on how much you like the other person or people, but rather, should be strategically entered into based on the resources, strengths, talents, personalities, experiences, and perspectives of each partner. It is important to note that a business partnership is a business partnership and not a friendship. Having the appropriate legal paperwork in place is imperative to potentially saving you hundreds of thousands of dollars or more in future litigation.
Some things to consider before entering into a business partnership are:
- Partner Roles and Responsibilities
- Signing and Authorization
- Membership interest in the Partnership
- Contributions of Capital
- Rights to Distribution, Profits, Compensation, and Losses
- Voting Requirements and Procedures
- Transferability or Assignability of your Partnership interest
- Buy-Sell Provisions
- Expulsion Provisions
- Non-Compete Provisions
- Structure of the entity you will use for the Partnership
- Tax classification and Tax ramifications of conducting business
- Operations, marketing, and other business functionalities and responsibilities regarding the same
At a gut level, you should really evaluate your potential partner(s) and dissect their true strengths and weaknesses. You should also do the same analysis on yourself. You should then consider the worst-case scenario and let that play out in your mind. How will you deal with the partnership failing? Worse, how will you deal with the legal ramifications? Will you have the correct legal contracts in place to protect you and your personal interests? How will you protect yourself to ensure that you are reducing your downside risk but maintain the upside potential? These are all questions that are best mulled over in the office of your business lawyer. The perspective of a professional who has helped hundreds of partnerships start and flourish and has seen hundreds of partnerships crash and burn is invaluable to your future enterprise.
At Parikh Law, P.A. we advise businesses, draft contracts and agreements, and litigate business and partnership disputes. With this full-spectrum view comes experience that we can offer your individual and business needs.
Partnership lawsuits are similar in many ways to all other commercial or other business litigation (link to Commercial and Business Litigation authority page). The difference in partnership disputes is usually that the interpersonal dealings and relationships between the parties cause for higher emotional responses. Although technically a partnership dispute is much like any other business dispute, the emotional toll is more akin to a divorce. Most partners have common experiences of both good and bad times together. They trusted each other at one point. And their personal relationships intertwine their business relationships. In fact, sometimes, it is often hard to tell where one ends and one starts.
Furthermore, partnership disputes are notorious for lack of well-documented contracts, agreements, documents, and communications. For some reason, people in partnerships forget that their partner is their business partner first and their friend second. They drop their guard and do not document exchanges, promises, and other important events in the same manner that they would do so if working with a non-partner. During litigation, Courts want to see legally binding documents, real communications, actual business activity, and hear from expert and fact witnesses. The Courts do not give much weight to a “hand-shake agreement” or to implied promises made between partners. Sophisticated businessmen and women should enter partnerships as true, legally significant, acts of business and commerce and not as acts of friendship in business.
It is very important to always hope for the best but plan for the worst. Partners should document everything, and to be ready for disputes or problems to arise. When they do, a competent partnership lawyer or business law attorney can help you settle the disputes and keep your business on track. When partnership disputes blow up into full-blown litigation, it will be the partner with the best attorneys who has the better chance of prevailing.
My name is Rahul Parikh and I am a business law and trial lawyer located in Orlando, Florida. I am the founding partner of Parikh Law, P.A. If you or a loved one is thinking of starting a partnership, has a partnership dispute, or is involved in a lawsuit, give us a call at 321-558-2704. You will sit down in our offices, discuss your unique situation, and come up with the best solution for you.