Scenario: John Anderson slammed down the phone and sat there fuming. A year ago, he had entered into a partnership with Pete Brice to build a new community on the west side of town. John was responsible for the conceptual and management part of the work—he had developed the land plan and had decided what house plans they were going to build. He had been responsible for the financial and marketing plans, and had shepherded the project to its grand opening. He acted as the overall manager, trying to keep the project moving forward. Pete was supposed to be responsible for the construction side—using his crews to build the homes according to plan. From the beginning of the project there had been conflict. Pete didn’t like being told what to do or how to do it, and turned every conversation into a running battle. John was getting tired of trying to steer Pete into doing what he felt needed to be done to make the project a success.
If Pete had been an employee, the answer would be simple: John could just fire him and find a new construction manager. But Pete’s partnership meant that John could only get rid of him by buying him out. John couldn’t just walk away; he had too much money invested in the outcome to be indifferent.
How should John handle this situation? Should he just grit his teeth and put up with the frustration, or have a knock-down, drag-out fight to compel Pete to follow his direction? If he won that battle, would he gain anything in the long run, or would Pete simply drag his heels throughout the life of the project? Would it be better to end the partnership, and if so, how could he do that?
Solution: Partnerships are a lot like marriage. They’re wonderful when they work, but painful to dissolve when they don’t. They work best when they bring two or more people with complementary skills, assets, and attitudes together to work toward a common goal. When partners do not see eye to eye it can lead to bitterness and rancor. The first line of defense, of course, is to pick your partners carefully. But even the best relationships can sometimes go astray, and when that happens, you need a way to reconcile the differences. The partners should sit down and try to talk through the difficulties without becoming emotional. If that fails, “marriage counseling” may be in order. The partners can submit their grievances to third-party conciliation or arbitration agreeable to all sides.
If arbitration fails you’d best have an exit strategy. Like a pre-nuptial agreement, exit strategies are best devised at the beginning of the relationship when things are going well. But even when partners get along, it’s sometimes necessary to end a legal relationship due to death, incapacity, or financial difficulties. When that happens, the partners can agree either to dissolve the company and divide the assets or to permit one of the partners to buy out the interest of the other. How the value of the company is determined is important. Even if one of the partners owns a majority of the stock, or if two partners agree about the non-performance of a third, the majority can’t just ride roughshod over the rights of the minority. The agreement must be fair and impartial, or you are guaranteed to wind up in court.
If one of the partners dies, for example, what happens to the company? Would it simply cease to exist and the assets be divided? Or would a mechanism be in place to determine how the company is valued and how the surviving partners would recompense the heirs of the deceased? The most workable and equitable formulas seem to be ones that not only recognize liquid assets but also the present value of ongoing work, and then provide for payment over time to distribute those assets.
Alternatively, one of the parties can agree to buy out the share of the other. One method of buyout is called “Russian Roulette.” One of the partners makes an offer to the other. That partner can either accept the offer or agree to buy out the first partner at the price named. The partner has to name a fair price, since it may be the amount he receives for his shares.
Without some prior agreement, ending a partnership can be a difficult proposition. If you don’t have such a clause, you should agree on one now, while the partners are on good terms. I’ve worked with the same partner now for 36 years, and I’ve developed a sure-fire test to determine whether someone will be a good partner or not. A bad partner always wonders if the others are doing their share. The good partner asks, “Am I doing enough for the partnership?”
Al Trellis, a co-founder of Home Builders Network, has more than 25 years of experience as a custom builder, speaker, and consultant. He can be reached at altrellis@hbnnet.com.
