Business Divorce

When Partner Disputes Arise, Business Divorce Results

“Business divorce” is a term commonly used to describe what happens when a business partnership breaks down and the partner decide to part ways. Business divorce is much like marriage divorce in that both meet at the intersection of money and emotions.

Unlike marriage divorce, which usually only happens when things are going poorly, business divorce can happen when things are poorly or when they are going great. This is because business partner disputes usually occur when two things happen:

  1. one or more partners feel they are putting in more than they are getting out of the business; and
  2. the loss of trust and respect between one or more partners.

Thoughts of entitlement arise both when one partner thinks the success is due to them or that the failure is due to other partners. Trust and respect break down both when one partner is doing better than another even if both are doing well and when all partners are trying to salvage whatever they can from the sinking ship.

Causes of Business Partner Disputes

  1. unfair compensation system
  2. family issues between business partners
  3. life changes for one partner (such as having a baby)
  4. fighting over control and decision making
  5. personal funding of the business by one partner but not others
  6. partner associations with other businesses
  7. partner associations with certain organizations
  8. social factors between business partners
  9. disparity in hours worked between partners
  10. where one partner takes funds from the business without notifying other partners
  11. a loss of perspective as to why one needs partners

Does Business Divorce Have To Happen When Partner Disputes Arise?

While it may seem inevitable that disputes between business partners will eventually lead to business divorce and a loss of the business, this is not a fact. The main reason that disputes lead to divorce between business partners is that there is no mechanism for coping with these disputes.

A properly drafted business founder agreement such as a partnership agreement (for partnerships), operating agreement (for llc’s) or bylaws (for corporations) can provide the proper systems for managing disputes and avoiding breakdown of partner relationships.

If the compensation system is based on the number of hours one puts in or the number of clients one brings in, it might not seem so unjust. If a partner is allotted a number of maternity or paternity leave days, but is penalized financially if they go over the allowed amount, family and life changes will not have such an affect on the business. If the founders agreement makes one partner in charge of marketing, one partner in charge of employees, one partner in charge of general business operations and another in charge of oversight, there may never arise a dispute about who has control over which decisions.

Sometimes Divorce is Unavoidable, Lets Deal With It

No matter how well your founding documents are drafted towards maintain the health of the relationship, sometimes business divorce is unavoidable. Trying to contract around family issues and social problems between partners is impossible. Failure to follow the agreements usually also lead to business divorce.

That is why the founding agreements must also contain terms for how the business divorce will be handled. That way, court can be avoided in many circumstances. Where a dispute over the terms of the business divorce continues, business partner dispute mediation should be considered.