Business Partnership Advisor
Together, we can fix your business and partnership problems
Chris Reich, Business Luminary
Negotiating When There is No Incentive to Reach Agreement
The toughest negotiations are when one side has no incentive to reach agreement.
Negotiation Without Motivation
Many people who call me find themselves in the frustrating position of not having any “power” in their failing partnership. Their partner is making big moves unilaterally and refuses to talk about it. If you want something but the other side has no incentive to make a deal, the negotiations will be tough and slow. Often, these situations have many stops and starts. If this happens in a legal fight, the battle can last years and get very expensive. You have two options when facing a situation where the other side has no incentive to reach an agreement. Let’s look at them both.
An Example for Clarity
Let’s say that you are in a partnership that has soured. You want out because your partner is too controlling. There is no Partnership Agreement. The business is worth around $200,000. You want out, so you ask for $70,000 for your half. You think that is reasonable considering the valuation. Your partner rejects your offer. When asked for a counter-offer, he refuses to engage. He says, “I’m not paying you anything. But you are free to leave if you wish.” That’s pretty raw, but it is perfectly legal. Unless there is a Partnership Agreement that specifies a right to redemption upon demand, your partner has no obligation to buy you out. Unfortunately, your partner’s actions aren’t over a legal line either. There is no law against a partner making decisions at his own business. Now that we have a scenario, a pretty typical one, let’s evaluate your 2 options.
If you are trapped in negotiation where is no incentive to reach agreement, Sometimes you must exert your rights.
Chris Reich, Partnership Advice
Option #1 Cave In and Get Out
I hate putting this on the table. You have rights but there is a point where asserting those rights isn’t worth the cost. You, of course, have the option to cave in and bailout. That means to agree to walk away with nothing. Easy.
Not so fast. Even though you’ve decided to take your lumps and walk away from the business, you have a huge liability exposure that needs to be closed. On this point, you must be insistent.
You must be removed from ALL liabilities including leases, loans, credit cards, lines of credit and any other debt or opportunity for debt. After that, you must serve your partner with proper notice that you are leaving the partnership. It is best to send a registered letter. Finally, in the case of an LLC Partnership, you must file the proper form in your state that removes you from the partnership. Make certain that you have all taxes up-to-date! This is very important. I had 3 cases last year where a partner wanted out and discovered that the business owed a lot of money for unpaid Worker’s Compensation. You don’t want to walk away from your interest only find out a year later that the business failed, your partner is bankrupt and you owe $100,000 in taxes. You cannot get out of tax debt through bankruptcy.
Sometimes walking away isn’t a bad option as long as you close your exposure to further liability.
Option #2 Assert Your Rights
This can be tough for a person who has a hard time with conflict. That’s most of us so don’t feel bad if you’re in that category. It’s my business and I still don’t relish tension.
If your partner won’t talk to you, how are you supposed to assert your rights? In the case of an LLC, if you file for the dissolution of the partnership with your state, that’s pretty much it. Unless your partner wants to pick up the pieces, the business is effectively done. Then it’s a matter of splitting the debts and assets. Closed. Should your partner desire to continue, it is possible but he’ll have to do a fair amount of work to clean things up. There’s a difference between dissolving the partnership cooperatively vs. unilaterally on your own. If you let your partner knows that you intend to dissolve the partnership, he might be willing to work with you on a peaceful separation.
There are other steps you can take. You can hire and fire people. Often there are other parties in the middle of partnership disputes. One partner may bring friends into the business. You might feel out-numbered but those friends have no say in the operation of the business. Assuming you are an equal partner, you can fire anyone you wish. If the friends are working as 1099 contractors, you can refuse them further business with your company.
Finally, you can let your partner know that you intend to fully participate in the decisions of the company. If he still refuses, and if you wish to assert your rights, you may need an attorney to notify your partner of your intentions. That letter often changes things in a hurry.
Neither of these options leads to a peaceful resolution though either will get the partnership closed. There are times when a reasonable solution cannot be reached because of an unreasonable or irrational party. If that was different, and I wish it were, the world would be a much better place. We need to accept the reality that some situations cannot be fixed. If you’re in that spot, get advice on how to proceed with the options above.
Chris Reich, TeachU
Buyouts between partners are usually mired in things that people think are legal entitlements. Let’s look at the most common misconceptions around buyouts.