Running a small business is challenging and many entrepreneurs think twice about starting a new business alone. As a result, a high percentage of America’s small businesses are founded or led by more than one individual, whether they are formed as partnerships, “S” corps, “C” corps or LLCs. Whenever a business has more than one owner — especially where multiple owners are actively involved in the day-to-day running of the firm — there is always the possibility of conflict. Of course, any management team (regardless of its makeup) can find itself dealing with internal conflict. However, when the conflict is between two people who possess ownership stakes and approval authority for decisions, the stakes can suddenly become much more severe.
Here are some of the most common reasons for disputes to arise between business partners, and what you can do to avoid them:
1. Disputes over putting the company first.
The owners of the corporation, partners in a partnership or members of a limited liability corporation all possess a “fiduciary duty” to the business. That means that they have a duty to act in the best interests of the business itself. This means that they should not drain the company of funds for personal benefit, siphon business opportunities to themselves that should rightfully go to the business, or develop ‘side deals’ with customers or other partners in the business that undermine its stability. These are serious disputes that are often hard to resolve and could result in a legal dispute if not addressed early on.
2. Disputes over resource allocation.
One major risk in a business with more than one active owner is when they have different visions for how to grow and build the firm. These disputes can be particularly acute when the parties involved are of different generations or have plans to exit at different points. For example, in a multi-generational family business the founding owner may be unwilling to invest company funds in new equipment, since he or she knows the firm will need cash on hand to support his retirement and buy-out. In contrast, the younger owner may feel that investing in new equipment is essential for the firm to stay competitive, and that not doing so will be the first in a series of steps toward eventual business failure, most likely threatening his or hew own future earnings.
3. Disputes over authority.
A longtime employee with a history of boorish behavior finally causes enough office drama that he is fired by one of the firm’s partners. Fifteen minutes later, he’s in a closed-door meeting with another partner with whom he is personal friends and is offered the opportunity to stay and have the firing rescinded. This is just one example of many when it comes to problems with managerial authority. Let’s be clear up-front, the best way to address these issues is to avoid them with a clear partnership and employment agreement, that specifies which responsibilities and areas of authority are in which partners’ hands. If you don’t have clear lines of authority, the business is at risk of breaking down every day. Therefore, authority is one of the most essential priorities to clarify among the partners proactively, before a crisis arises.
4. Disputes over responsibility.
The difference between authority and responsibility is simple: Authority pertains to the decision itself, and responsibility pertains to the work necessary to implement the decision. One serious issue that comes up often in small businesses is that partners or owners who are supposed to be active in the business end up allowing fundamentally uneven workloads to develop between them. This is often exacerbated when authority and responsibility lines are not even with the day-to-day reality. For example, one partner may be busy hiring personnel, training them, managing teams and driving recruiting efforts. However, it’s possible the the other partner — who has little day-to-day involvement in talent issues at all — may actually have veto power over hiring and firing decisions. That’s why it’s essential to follow the longstanding adage that the person who does the work is the one who makes the decisions. And if one partner doesn’t really want to put in the time, then they need to have a mechanism in place for stepping aside and placing a reasonable amount of authority in the hands of the partner who remains active in day-to-day operations.
We’ve already hinted at some solutions for proactively avoiding or effectively addressing partnership disputes within a small business. In addition, these examples demonstrate the essential importance of partnership planning up-front. Every small business leadership team that involves multiple owners needs to be governed by a written agreement, and that agreement needs to consider not only the current state of affairs but also the processes and conditions by which circumstances between the partners can change.
Finally, every small business owner should be familiar with a mediation and arbitration expert whose practice includes business partnership matters and disputes, so that this person can be a familiar and comfortable face to bring to the table when disputes do arise. The more you work today to prepare your business partnership success, the stronger your ability to flexibly respond to shifting market conditions and differing future life circumstances among those who started the business with a shared vision on day one.