Put Your Plan on Paper – Avoid Partnership Disputes Later

What are the most important things to know before starting a partnership?

by Justin M. Brandt

Business partnerships, like marriages, can be a lifetime commitment, so choosing the right partner is an extremely important decision and should take significant vetting. Entering into business with someone who does not share the same vision, goals and strategic alignment can lead to unwanted issues in the future. It can, unfortunately, become costly and time consuming. There are a number of reasons why partnerships fail, but the most common reason is a falling out from poor planning — meaning not doing the due diligence prior to creating the partnership. 

First and foremost, it’s important to establish a strong and reliable relationship prior to creating a formal business partnership. Finding someone who has similar core values is key to forming a partnership for long-term success. Ensuring a partnership that is more aligned in the beginning will create a more unified front when dealing with outside parties. Also, understanding that people will sometimes take different paths toward the same objective is important as well — a different perspective can challenge participants in the right ways toward a better outcome for the company. Without being able to view an opposing perspective, creativity and innovation is thwarted and ultimately stalls the growth of the business. 

Next, investing in outside general counsel who will represent the newly formed company (as opposed to the individual principals) is important to keep the interests of the business at the forefront. Hiring counsel to memorialize the partnership should be viewed as an investment. Indeed, interests should be protected at the outset, and having an experienced lawyer prepare a comprehensive agreement that outlines each party’s rights and obligations will help mitigate potential partnership disputes down the road. At a minimum, the agreement should articulate a clear framework and iron out the details on responsibilities and who’s doing what within the company. 

Memorializing a partnership is not a one-size-fits-all endeavor. Template agreements should be avoided as they almost always fail to address matters unique to the business. For example, template agreements generally do not have a framework for how issues should be addressed as the company grows and evolves — a topic often overlooked when a partnership is first formed. 

Another important component of any viable business partnership is communication. That might sound cliché, but the power of effective communication should not be overlooked. Most disputes (if not all) can be avoided or significantly mitigated if partners communicated better. Disputes often occur when partners keep their feelings bottled up and let differences fester. Partners who are able to check their egos at the door and foster transparency with each other are far more likely to succeed, so it’s important to not make the mistake of putting effective communication on the back-burner. 

So what’s the quickest way to end a dispute? Not shying away from conversations and being sure to take the time to have the discussions face-to-face, especially when tough decisions need to be made. In-person discussions will be more effective. It is important to keep the interests of the company at the forefront and not to make it personal, or it can go sideways fast. If things start to turn, partners should consider engaging the company’s lawyer to serve as a mediator between the parties — especially if the partners are not communicating well. If partners find they are at a stalemate and unable to advance the values and the mission of the company, it might be time to look for an exit strategy.

One thing to always remember is that the business is the number one priority and should always come first. Everything should be put in writing and tailored to the company. Potential partners should take the time to get to know one another before creating an alliance. They should keep an eye out for any red flags, including any financial history issues or prior disputes with former partnerships. And partners should always keep an honest and open relationship that fosters respect and transparency. Most disputes can be worked out through conversation if caught early.  

Award-winning business attorney and legal pioneer Justin M. Brandt is partner and shareholder of Bianchi & Brandt, a cannabis-specific law firm. He represents clients throughout all stages of litigation, handling a variety of business and corporate transactions, and advising clients on various day-to-day issues surrounding their business operations and compliance. Brandt also routinely serves as outside general counsel for various businesses throughout the country, leveraging his accounting and business economics background to guide clients through a variety of business issues with legal implications.

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