Experience teaches us that all relationships have ups and downs, including those existing between business partners. When the relationship becomes strained between partners in a private company, however, the majority owner of the business must decide whether these problems are fixable, or whether the best decision is to remove the partner who holds a minority ownership stake in the company. This is Part 1 of 2 posts, and it focuses on identifying some of the most common characteristics of difficult business partners. When these vexing attributes exist in a business partner with a minority ownership interest in the company, the majority owner needs to consider whether to buy out the partner’s stake, or at least end his/her involvement in the day-to-day operations of the company. In Part 2, we will discuss the process for the company’s majority owner to remove a difficult partner from the business, and we will also look at strategies that enable minority investors to exit the business and secure a buyout of their ownership interest in the company when serious conflicts arise with the majority owner.
Prevent Conflicts Before They Happen
The best way to avoid becoming involved in a dysfunctional business relationship in a private company is not to go into business with a difficult business partner. This may sound like a high bar to overcome because it is hard to accurately predict how a relationship with a new business partner will ultimately pan out. But, there are concrete steps potential business partners can take before they go into business together to determine if they are likely to be a good match when they join forces in managing and building a private company.
First, the potential partners can hire an experienced business coach who can evaluate their value systems, their approach to business issues, and how they handle conflicts that arise in the business. The coach can then provide them with a recommendation as to whether they appear to be compatible or whether there are major differences between them, which may lead to conflicts in the future. Second, the partners can also take available/standardized tests, which will provide an overview of their personality types and traits that help them to assess if they likely to gibe in working together. Finally, the partners can work together on a detailed business plan for the company that covers the following items: (i) their job titles and duties, (ii) how the company will be financed, managed, and marketed and (iii) how they will handle the exit of a partner from the business in the future. The way the partners work through this business plan may confirm that they are compatible or it may highlight significant personality conflicts and/or differences in their values, which raise red flags as to whether they would work well together as partners.
This type of pre-planning requires time and money, but is worth the effort and expense, because it will help avoid a potentially disruptive and public legal fight over a partner’s future exit from the business. Further, and discussed in Part 2, before business partners start, purchase or invest together in a private company, they should negotiate and adopt a buy-sell agreement or other form of a detailed, written partner exit plan.
Red Flags Regarding Partner Conduct
Once partners are in business together and conflicts arise, the majority owner will need to assess whether these are part of the normal give and take between partners who care about the success of the business, or whether these difference reflect fundamental problems that cannot be resolved. The following discussion reviews characteristics in a business partner that will be difficult, if not impossible, to fix, and which suggest that a partner exit is required.
- Major Imbalance Exists in Partner Duties/Work Load
Business partnerships work best when the partners have complementary skills and each contributes to the success of the business. This point was illustrated well in an article last year about the remarkable results flowing from the relationship between Bill Belichick, the NFL Head Coach of the New England Patriots, and his former quarterback, Tom Brady. The author noted:
. . . you need to have a partner with very different skill sets and interests from your own. That’s the best way to cover your weaknesses and maximize your strengths. Too often, people try to form business partnerships or work with a company cofounder where both partners are highly technical or good at the numbers side of the business, but they have a blind spot for customer relationship development. Or maybe you have a business partnership where you’re both really creative, but your business lacks discipline. This presents a problem. Pay attention to the skill sets and interest areas of your prospective partners or your executive team. If one person is great with people, the other should be great at product development. Your business needs a good balance between the skills and passions of the founders and partners, if it’s going to thrive for the long run. Read Here
When the partners are not each contributing meaningfully to the success of the business, problems are likely to arise. Specifically, one partner cannot be doing all, of even most, of the work for the company, which often leads to resentment, unless the partner doing most of the work is also receiving the lion’s share of the financial benefits. Particularly in cases in which a minority partner holds a 30% stake or more in the business, but is not doing his/her fair share of the work and refuses to take up the slack after repeated discussions, it is clear that this level of under-performance is a feature and not a bug. A partner who refuses to meet the performance expectations of other partners will create resentment throughout the management team. If this type of behavior is not corrected and/or the difficult partner is not removed, it may have a serious negative effect on the morale of executives and other employees throughout the company.
- Lack of Flexibility/Creativity
The ability to adapt promptly to a rapidly changing business environment is essential for businesses to succeed in today’s economy. As a result, a business partner who strongly resists change is likely to be a stumbling block, and source of frustration at the company. This type of partner who is stuck in old ways of thinking may prevent necessary changes from being made by the company to respond to changes in the marketplace. In an article in Entrepreneur Magazine titled 6 Red Flags Warning Your Business Partner Will Drag You Down, the author summarized this concept:
In our digital age, businesses must act quickly to take advantage of new business tools and marketing channels that drive real growth. There’s a reason ”that’s the way we’ve always done it” is one of the worst things to hear in a work setting. Business landscapes constantly are changing. The most resilient entrepreneurs make it a priority to adapt to the landscape. You shouldn’t continually have to convince your business partner that new skills and technologies can help your business flourish. Read Here
- Lack of Integrity/Truthfulness
One of the biggest red flags regarding a business partner is a lack of integrity and/or truthfulness. This type of character flaw is so toxic that it may not matter if the conduct is not connected to the partner’s work for or at the company. For example, a business partner who is convicted of criminal conduct for fraud or for issuing bribes to third parties in international markets in an unrelated business is probably not someone who should remain connected to the company. The fact that the bad conduct did not involve the company may not matter as the taint of the misconduct may impact the company because of its affiliation with this partner.
When the conduct is not criminal, but consists of false statements or conduct that is covered up with deceitful actions and/or attempts to scapegoat others, this sort of behavior destroys the trust among partners that is essential in a successful business. Giving people a second chance is laudable, but if a business partner engages in dishonesty and/or deceitful conduct on a repeated basis, this is not someone who should remain active in the company’s management. This type of bad behavior is hard to keep under wraps, and if it is condoned or even tolerated, it will send a negative message to employees, vendors and clients about the company and its values.
In a publication for business startups, the author of an article titled, 6 Traits to Look for When Choosing a Business Partner, the author states that he considers integrity the most important quality for a business partner, who is an equal in the company. “Being honest partners requires honest, clear communication,” says Capala. “Accountability added to honesty is integrity.” “A partner must be accountable for their actions without blaming employees, or outside influences,” says Capala. “Without integrity, you risk triangulating other members of your team, creating disharmony and eventual fissures.” Read Here
The best plan for majority owners is to take proactive steps to avoid bringing a difficult partner into the company. When these plans go awry, and a partner holding a minority stake in the company demonstrates that he/she is not compatible with the business, the majority owner will compound the problem by remaining tethered to someone who cannot or will not change negative behaviors. Partners who do not carry their weight, who refuse to adapt to change, or who lack basic integrity should not remain active in the business as the problems they create will only grow more challenging over time. The solution here is for the majority owner to purchase the difficult partner’s ownership interest, or at a minimum, to remove the partner from involvement in the company’s daily operations. In Part 2, we will discuss how majority owners can remove problem partners from the company, and we will also review legal strategies available to minority investors to depart from the business and monetize their ownership interest in the company at the time of their exit.