When Partners Fall Out

When partners fall out, the ownership, control, and even survival of their company are threatened. I’m not talking about differences in judgment, which crop up regularly between partners and just as regularly get resolved through their ongoing recognition of one another’s contributions. I’m talking about far deeper disagreements when partners grow to dislike, distrust, and even hate one another. Initially, concern about a partner’s performance may be paramount, but in deep disagreements it is overshadowed by bad personal relationships. The partners have truly fallen out.

To illustrate the difficulties partners can encounter, consider these cases, which I have heavily disguised:

• Two partners owned a company that assembled and marketed an electronic product. One managed the design, marketing, and sales activities. The other handled the procurement, assembly, and finances. At first they disagreed about their customers’ needs and their product’s features. “You have overdesigned the product! We can’t compete in that market!” one said. “The market demands an upgraded product! The trouble lies with your failure to assemble to specs!” the other replied.

The partners’ pressure on each other mounted when the company began to lose money. Antagonism and mutual recrimination sapped energy that might have helped to resolve their market-position and quality concerns. Within a year the partners stopped talking to one another. Childish? Not to them. Their hostility was so dysfunctional that a close friend, whose offer to mediate they refused, expected the company to fail.

• In another case, a deeply shared interest in computers was the catalyst for a software partnership. The company weathered a rocky startup, got two rounds of outside financing, and appeared to be making progress toward sustainable growth. But by then, partnership was a poor word to describe the men’s relationship. They clashed often, especially over questions of contribution and control. With some merit, the wife of one partner asked her husband, “Why must you do all the real work in a 50–50 partnership?” The other wife asked her spouse, “Why do you let your partner push you around as if he were the only boss?”

This business, but not the friendship, was saved when an outsider helped the second partner see that he was making only token contributions. That partner acknowledged that his personal life had always taken priority and that he was unwilling to make the effort to contribute his share to the partnership. He resigned.

• In 20 years, two brothers, working cooperatively, built a

  $

  15 million company. Each had attained financial independence for life. In the next 10 years, as sales and the brothers’ wealth doubled, things began to go wrong. One brother brought two of his children into the firm; the other brother brought in one. Both generations haggled over relative contributions, salaries, roles, and future ownership. On the surface things seemed calm, but hostility seethed below. It may have been a return to their earlier objectivity that led the founders to sell the company.

If you are familiar with relationships in a few small and midsize companies, it is likely you can cite other examples of serious disagreement among partners. The situation is far from rare. Indeed, disagreement is so prevalent that years ago one anonymous wag said, “In all partnerships partners get the experience and lawyers get the money.”

Stay Out of Trouble

The best remedy is preventive medicine. Don’t set up partnerships in which two or more people have equal ownership and power in decision making. If two or more partners are to work together, establish at the outset who is in charge. A statement of control signed by all partners should specify what will happen if a lesser partner doesn’t agree with the controlling partner. The lesser partner may have the right to leave, for example, and to have his or her equity bought out at a predetermined formula price. Or there may be a formula whereby the company can buy out a lesser partner who doesn’t abide by the controlling partner’s decisions.

This may seem very one-sided. That is exactly what is intended. If partnerships do exist, the very structure should undermine any possibility that the partners could face one another on equal terms. Indeed, inequality can be the key to satisfactory relationships.

One family company with sales of $40 million used inequality to weather two generations of employment and ownership by family members. The founder drew up an ironclad document with a voting trust that gave major powers to his eldest son. Fortunately, that son had abilities to match the responsibility. In time the eldest son chose the most promising member of the next generation, a nephew, to whom he passed operating control. However, the founder’s son retained for the living members of his own generation the prerogative to designate the company’s fourth chief executive and to set a succession date. His hope is that the company’s ongoing leadership can be determined by merit, within a framework that offers members of the extended family the jobs for which they qualify. The plan may continue to work. At least this arrangement has a better chance of working than if the question of leadership were decided between rivals in each passing generation.

If you are determined to have a 50–50 partnership, at least agree to some simple escape route while you are still within the window of venture enthusiasm and working friendship. Put in writing what you will do if you and your partner cannot resolve differences yourselves. That could be a buy-sell agreement or an agreement to abide by the mediation and, if necessary, the decision of a third party. Whatever you choose, the very existence of an escape route, invoked only with some disadvantages, can be a force for reaching agreement short of that remedy. And the ease of making plans during friendship contrasts sharply with the vindictive impasses that occur when partners fall out.

When I stress the risks of disagreement to a group of business owners, someone usually speaks up to describe a satisfactory partnership. I know there are such, and more power to the individuals who sustain them. But after one or two success stories, more owners speak of painful relationships experienced or observed. Whichever way your partnership may work out, it’s very cheap insurance to provide in advance for “what if.” If you can’t agree on “what if” in advance, don’t start the partnership.

An active partner starting out with an inactive, financial partner may wish to consider one “what if” at the outset. What if, over the years, you become the principal creator of a strong business through insight and hard work? Some such successful active partners, by year 10 or so, chafe at carrying an inactive partner who has made no contribution since the original investment yet has recovered many times that sum. With hindsight, these active partners wish they had negotiated a buyout option in the original agreement that would give the financial partner additional handsome returns while increasing their own ownership stakes.

All Tangled Up

Forestalling confrontation is much easier than finding a way out of sticky disagreements. But if you and your partner(s) are in the soup, what can be done? Simply going along with hard feelings is the worst choice since partners who fail to resolve deep disagreements put their businesses as well as the quality of their personal lives at risk. Regrettably, too many partners follow this path by failing to find a way out.

As the years pass, the number of grievances grows. Employees, who know very well what’s going on, may divide into factions. Partners may make both subtle and openly antagonistic moves against one another. One partner may schedule important meetings at times known to be inconvenient for the other. Or a partner may openly countermand the instructions another partner has given to an employee. I call this situation the knot of disagreement. As conflict mounts, it becomes harder and harder to pick it apart. Even the habit of living with ongoing controversy seems to dull the will to break interpersonal impasses.

A falling out among family partners carries an extra dimension of cost. To illustrate, consider the case of a 65-year-old majority owner of an inherited business. Faced with operating losses, he resorted to funneling money from the family’s wealth back into the business while continuing to operate as his father had. Money, he felt, would bring back the past. But a competitor had won virtually unassailable market dominance by revolutionary product design, new process equipment, and wide distribution. The majority owner’s two sons—third-generation minor partners—had fought for countermoves and initiatives to regain market share. But the sons themselves were more often in strong disagreement than agreed on what to do, and that strengthened the father’s hand in running the business without changes. Disagreement had cost the business whatever chance it had to remain competitive, however, and exacted a heavy toll by creating deep hostility among family members.

I have described the high cost of leaving a serious disagreement unresolved to emphasize why it is such a bad choice. Faced squarely, such a worst-case scenario can become a strong motive for trying to work out another option.

The move toward a positive solution doesn’t just happen. Usually there is a trigger. This may be a loud partnership blowup or a quiet recognition that the situation is intolerable. The trigger may be the persuasive words of a respected adviser or a straight-to-the-mark comment of an acquaintance.

Call for Help

Whatever the trigger, partners in conflict will still need someone to foster openness toward change and help sort through the choices available. This agent for change could be one of the partners. But since partners who have fallen out are often beyond self-help, it’s more likely that the successful agent will come from outside the partnership. Typically, partners’ first choices are the company’s lawyer or a close business associate whom they see as unbiased. Such people are apt to be knowledgeable about the situation and readily available as matters develop. Further, if this agent is well respected, it is difficult for the partners to disregard either the process of resolution or the options discussed.

There may be times, however, when partners seek assistance from someone at a distance. In my experience, three considerations often enter into such decisions. First, if disagreeing partners are to tell all that bothers them, as they should, they may want this knowledge to leave the community when the agent departs. Also, the importance of selecting an experienced person may lead to an outsider. A person experienced in reconciliation has a feel for what can and what cannot be done and knows full well that nothing lasting will happen unless the partners themselves participate in the solution.

Finally, an erroneous motive is sometimes present: the close-at-hand candidates are known to have limitations. Who does not? Yet the unknown expert may be perceived as having more-than-life-size skills at finding solutions. Disagreeing partners should recognize that there are no miracle workers at any distance and that in most situations an agent close at hand is probably best.

Some outsiders set their fees at high consulting rates. They do have the advantage of experience in depth. But the high fee has an additional twist. If partners are going to pay all that money, they’re going to take what is said seriously. I don’t like the cause and effect, but it does seem to work in some situations.

An effective agent will not rush the process even if the partners are impatient for a change. A solution arrived at in haste is less likely to stand up well over time. Accordingly, the agent may start by speaking separately with partners who dislike one another to encourage rational thinking. In extreme cases, the partners may never meet together. In most cases, however, the agent will bring the partners together at the appropriate time to work through the choices available to them. Whatever the forum, the agent’s actions and the whole resolution-seeking process should rest on these premises:

• The final choice lies with the partners themselves. Others can facilitate understanding and sorting out of options. Only the partners can decide.

• No partner may get all that he or she wants, but there can be a “win-win” solution. By untangling the knot of disagreement, each partner will be better off than he or she is at present. Beyond that, it is likely each partner will forgo something coveted so that the other can win too.

• A solution on which partners can agree is unlikely to jump out all at once. A good solution—one that will be acceptable in the long run—calls for an upfront commitment of time. In addition, it will take forbearance as ideas go back and forth.

• In many cases the situation has its own logic. Some partners are better at some things; others at other things. The interests and drives of individual partners may point in particular directions. And the needs of the business call for identifiable capabilities best met by specific people. Discussion is needed to bring these things out.

• Open discussion is not the same thing as agreement. During early discussions each partner retains all rights contained in the written or verbal partnership agreement. Each partner can help find possible solutions without compromising his or her position in the final agreement.

Discussing the foregoing points at length with the agent is time well spent. Part of the goal is a mindset in which each partner believes that there can be a meaningful improvement in business and in personal life. As the partners come to accept these ideas, the next steps can begin.

Untying the Knot

Partners at odds can resolve knots of disagreement in a variety of ways:

Find ways to make a go of the partnership. Partnerships often are formed because two people have complementary skills. Such two-person working arrangements can keep the full complexity of a business from falling onto one set of shoulders. Each partner can focus on part of the business with confidence that other parts are in control. This is a powerful arrangement. In deep disagreements, however, something goes wrong. Frequently, one or both of the partners may start to second-guess the other. In another common pattern the partners fail to coordinate their work. Each proceeds as he or she thinks best, but, however worthwhile, the separate contributions don’t mesh.

To save the partnership, the roles of the partners need to be more carefully defined, separated, and respected, and better coordination needs to be established. Part of the redefinition of roles should reduce the partners’ equality in the day-to-day management of the company. The partners may share equally in the rewards, but one partner should be persuaded to focus on an area of specialization—sales or engineering, for example—while the other takes on the responsibility of chief operating executive. It is possible to take a step to enforce the new roles. The operating-executive partner may report to an augmented “executive committee,” “board of directors,” or some such designated body that includes an outside third person. The third person should be more than a tie-breaker, however. He or she should bring skills to the overall direction of the company that will gain the respect of the partners.

Some people inherit their partnership roles. I call these shotgun-marriage partnerships. And here too (though perhaps with less likelihood) a partnership in dispute may be saved by separate and well-defined roles. But since these relationships are seldom built on complementary skills and mutual respect, the need is probably greater for a strong third party to help enforce the roles of partners who have not chosen one another in the first place.

Some partnerships, whether shotgun marriages or not, are so unstable that they are beyond resolution. For example, even if one partner is well qualified and the other is not, as long as the less-qualified partner refuses to face that fact, the situation cannot be mended. In cases like these, continuing to glue the partnership back together is pointless. It will only come unglued again and again. It is probably best to move to one of the other choices.

Agree that all partners will step back. Bringing in a CEO from the outside can be a good solution, as one company with too many chiefs found. In this family business a sister and two brothers with different viewpoints were active in top management. The husband of another sister worked at a lower level but felt he should speak up if he felt decisions were made that went against his wife’s interests. The differences of opinion among the family members were so great that perhaps only their staggered, lengthy vacations allowed the business to bump along. Yet a buyout by a family member had been impossible because the relatives set an unreasonably high price.

With advice, the family identified a first-rate chief executive to work for them. But when approached, the executive stipulated that he would lead the company only if given control through a voting trust and if all family members resigned. The ensuing family discussions were heated, but the outsider got his terms. The sequel: the business was run well and profitably under the new CEO. He eventually bought the company on terms favorable to the family.

Turning to a hired CEO can be appropriate, particularly if partners recognize that the complexity of their jobs exceeds their abilities. No one need be at fault for this to happen. Indeed, to have grown a partnership to a size requiring skilled, experienced management is a measure of success. Likewise, stepping aside from the management of a business you have inherited is preferable to remaining while the business crumbles around you.

The difficulty is finding and agreeing on the right person to take over management. Many of the best-qualified people are running their own businesses. But with a good search and with proper incentives, a chief operating executive may be found. This move, however, may simply elevate the partnership disagreements from the operating level to the board level.

The argument for partners’ stepping back to be replaced by a new chief executive may rest on the expectation that something else will happen thereafter. Perhaps the sale of the business is the most likely long-term solution. But before moving to that irreversible step, the partners may agree to sit back to investigate other paths or to see if time will soften their disagreements. Or one partner may hold out against selling but agree to the halfway step of turning operations over to a skilled outsider. (Voting trusts are sometimes used to prevent intrusions by partners who agree to be sidelined.)

Work out a buy-sell arrangement. With buy-sell arrangements between partners we move to solutions that may be harder to agree on but that are more certain to foreclose future disagreements. In broad outline, one of the partners takes over the business; the other or others get money.

In one situation, two partners disagreed strongly for three years. Off and on they tried to talk out differences but to no avail. One partner offered to buy out the other or, reluctantly, to sell at the same price. The other refused to buy or sell. At this point, the company lawyer, respected by both, took a more active role. Earlier he had counseled: “Work out your differences. You’re both sensible people. Conflicts come up in marriages. Many couples work these out. Try harder.” But with the passage of time the lawyer changed to: “Well, I see you aren’t going to get together. Both of you are suffering. I advise you to submit sealed bids.”

That didn’t happen right away. Eventually, however, the lawyer persuaded the partner who wished neither to buy nor to sell to accept the bidding auction. Perhaps because he was less self-confident about running the business alone, this partner submitted the lower, and losing, bid.

In some situations, one partner may be the logical choice to be the surviving owner. Experience, administrative skill, motivation, energy, and greater knowledge of the business may all point in one direction. An important additional factor, however, is the willingness of the buyer to handle the financial risk a buyout imposes. The buyer may have to commit a large part of his or her funds, agree to fixed or contingent future payments, and also cosign for the increased corporate debt taken on by the company.

For disagreeing partners it is hard to accept one individual over the other as the logical candidate. Particularly at this stage, therefore, the emphasis should be on achieving a win-win solution and on avoiding greed and vindictiveness. The plan is to optimize the gain for both. If one partner can run the business more effectively than the other, the financial return may be greater for both by making part of the purchase price conditional on future performance.

When partners can’t agree on a logical survivor or on negotiated price and terms, they may be able to resolve their differences by some form of auction. The choices are:

• Both partners submit sealed bids of price and terms, with the higher bidder buying out the other. So that bids may be readily compared, the conditions for bidding may specify a minimum down payment and the discount rate for future payments. Further, it may be agreed in advance that the seller will hold partnership shares (stock) in escrow against future payments. Alternatively, the higher bidder may purchase the company at the average of the two bids.

• By preagreement, one partner makes a bid of price and terms to buy out the other. The second partner then chooses to accept the price and terms or may, on the same terms, buy out the original bidder.

• One partner bids for the company at a price and terms, not as an auction but as a straightforward proposal. The other partner may accept, negotiate, or refuse.

Divide the business. Some partnerships own two or more businesses that can be separated. Partners may divide up the total business with compensation for the partner who takes the less valuable part.

Sell the business. Some situations call for an outright sale to a third party. The partners may regard selling the business as a positive step to resolve their conflicts. Or even if the current partners are able to go on living with disagreements, they may consider a sale desirable to avoid passing on conflict to the next generation. (This appears to have been the case for the two brothers described earlier, whose disagreements dated from the time their children entered the business.)

There are other reasons for selling to a third party. The business may have reached a point beyond the management ability of either partner. Or neither partner may be able to finance a purchase on terms acceptable to the other. Or, in cases of extreme disappointment, neither partner may be able to stomach the possibility that the other, as sole owner, might run the business very profitably. It would be intolerable for the seller to meet his wealthy former partner at the country club.

If the business is to be sold to a third party, it is important in most cases to engage the services of someone who specializes in selling businesses. This is not a business broker but rather someone who works for you, the seller. His or her services include help in finding buyers, advice in pricing the business, and skills in negotiating and structuring the purchase agreement. Partners may sell a business only once in a lifetime. The specialist makes a living by knowing how to present a business for sale, how to find buyers, how to negotiate, and how to deal with tax and legal matters. Just be sure to find someone with substantial experience and strong recommendations confirmed directly with former clients.

Liquidate the business. This is a modified form of options covered earlier. If a company owns assets that have a ready market (like real estate), the assets may be sold and the corporation liquidated. That’s akin to selling the business. Or separating partners may each take assets of comparable worth. That differs from dividing the business only in that the corporation folds.

There is no one best solution when partners disagree. Business and personal considerations must be weighed carefully to work toward a resolution that fits each case. But this can happen only if the partners are willing to accept, without strong prejudice, a process of resolution that helps them examine goals and options with care.

Disagreements have been dealt with in other ways. There have been ultimatums, lawsuits, misrepresentations, threats, theft, and more. But actions like these are born of desperation, and they only make matters worse. So although constructive solutions are far from easy to come by, I urge partners who have fallen out not to suffer along with the status quo. I see that as the most costly choice for their personal lives and for their businesses.

A version of this article appeared in the November 1986 issue of Harvard Business Review.