Business Partnership Advisor
Together, we can fix your business and partnership problems
Chris Reich, Business Luminary
Business Partnership Problems with Someone You Were Dating
Chris, I just broke up with a guy who is also my business partner. Now he won’t pay his half of the rent because we broke up. I want to keep the business. Can I just lock him out? He’s being a real jerk.
My First Rule when Working with Business Partners
Conversations about problems with business partners that were in relationships almost always begin with, “I know I was stupid, but I got into business with this guy I was dating…”
Let’s start this post with understanding my first rule of working to help business partners. I don’t judge. Fact is, it hurts when people come to me for help and start by expressing feelings of being dumb. I understand. The heart is in control of our decisions as often as our head. Shouldn’t you be able to trust someone you love?
So, relax. It’s all part of being human.
How to Handle the Business After the Breakup
If the business is going to continue beyond the relationship, the first question is: What does your partnership agreement say? The partnership agreement governs everything that happens in these circumstances. That document protects you when things go wrong.
Chances are, you haven’t got a partnership agreement. Very few people who get into a partnership bother to have an agreement drafted. People in emotional relationships rarely do. As humans, we’re not just short-sighted, we’re blinded by our own optimism. I wouldn’t want it any other way. If we made all of our decisions assuming the worst, the world would be bleak, But, we should cover the basics when we put our future at risk.
If There Is No Partnership Agreement
When there is no written agreement, we have to make some assumptions. The first is that the partners are equal. Equal may not mean exactly what you think so be careful. We’ll get into that in a second. First, you have to decide if the business is going to continue.
If the Business Will Not Continue Operating
If you’ve both agreed to close the business, before you decide who gets what, all the liabilities have to be settled. That means paying off the debts and settling the obligations. Credit cards and loans in the name of the business have to be settled. If there is a lease, it has to be paid up or something needs to be negotiated with the landlord.
Here’s that part about “equal”. Lawyers call it joint and several. That means that if the business owes the landlord $5,000 and your partner has no money, you owe it all. It means you are both equally responsible for all the debt, not just half.
Money you put into the business to get it started isn’t owed to you. If you put up $10,000 and your ex put in his charm, you aren’t owed $10,000. That’s a painful reality of going into business. If you buy a second home as an investment and the value goes down, you are not owed your money back. (There are some exceptions we can discuss if you call me)
Once all the debts are paid, what’s left is divided equally between the partners. That means if you put in $10,000 and your partner promised to use his charm to make sales, those contributions are equal if you are equal partners. Thus, the assets are divided equally.
Finally, you must close all accounts associated with the business. Cancel credit cards, bank accounts, E-Bay accounts, and anything else you can think of that has the business name on it. You don’t want to get a collection letter 2 years later that says you owe because Johnny skipped on an E-Bay transaction and your name is on that account.
If you’ve lost a lot of money because you were the banker and she was the charm, get advice on your options. There may be some ways to help recover some of your loss.
The hardest thing to accept is that after starting a business and if that business fails, you are not owed anything. The money you borrowed from rich uncle Joe is not a business debt. It’s your personal debt and does not have to be satisfied at the close of the business.
If You Have Contracts, Everything Changes
If you put up the money to start the business under terms that specify that you are making a loan to the business, then that loan needs to be paid if there are assets to cover it. No documents, no loan. A partnership agreement should define the financial terms around the founding of the business including percentages of ownership. If there are no documents but your business partner agrees that you should get some money back if the business closes, take it!
What happens to the business if you break up? Chris Reich gives you this advice.
If the Business Will Continue Operations After You Break Up
Under these circumstances, there are many ways this can go. One partner can buy out the other if agreement can be reached on a fair valuation. This is the ideal situation because everyone wins. Without an agreement defining the terms, this rarely happens. Most often the partners cannot or will not agree to anything and the situation gets worse and worse.
If the business will continue but you cannot quickly reach agreement on terms, get outside help right away.
There are two ways to go once you deadlock and arrive at court or mediation. You can negotiate to agreement or force the closure of the business.
Avoid court.. Court is very expensive and only the lawyers win. Courts won’t usually set a price. The courts will usually just order the business closed.
If I mediate your case, I will work as long as it takes to help you find something agreeable to both parties. I don’t say that lightly. It’s just what I do. A good mediator can offer ideas that you might not have considered. Perhaps the business can be divided. Maybe there is a price that can be accepted. Maybe there are acceptable payment terms. Maybe there is a way, under defined terms, that you can work together. I’ve found that if people are willing to give a little, a lot can be accomplished. Mediated discussions are the cheapest and best solution.
And if No Agreement Can Be Reached?
The business will be closed. Technically, when a partnership ends, so does the business. If the partners cannot find agreement, the only alternative is to close the business. It’s much better to work it out. There is one more possibility. You can sell the business and split the proceeds. Good luck convincing a buyer when the partners are deep in dispute.
There are 2 big take-aways. If you’ve broken up with your business partner and don’t have a partnership agreement, get an outside party to help immediately. Tension goes up and the cost to untangle goes up too. Inventory disappears. Bills go unpaid. Feelings get hurt. Don’t wait until you’re at war.
And, if you’re in a business partnership without a good written agreement, don’t wait another day to get one. Call me please. I can help you put a good agreement together for a very reasonable amount. You’ll have peace of mind.
“If you are going into business with your romantic partner, please get a partnership agreement. PLEASE PLEASE PLEASE.” —Chris Reich
Buyouts between partners are usually mired in things that people think are legal entitlements. Let’s look at the most common misconceptions around buyouts.