Partnership Disputes

Partnerships are an effective way to conduct businesses involving a small number of people where the need for limited liability is not considered necessary. Many partnerships are family businesses, as the cost of set up and on-going reporting is low, and the informal, flexible structure suits the parties. Partnerships are also common for professionals such as Accountants, Doctors, and Lawyers.

Disputes between partners are common and can relate to breaches of the partnership agreement, acting without authority, future direction of the business, capitalisation, relationship issues, and division of assets on termination.

Case Study Partnership/ Family

Background

The partnership involved two brothers, John & Jim Martin, and their respective families. The business commenced as a retail clothing shop with John & Jim entering the partnership while their children were young. The business proved to be successful and over the years a further two shops were opened. There were five children now actively involved, three from one family and two from the other.

The Dispute

Plans to open a further store had been vetoed by Jim’s family which brought to the surface a range of underlying issues, involving work practices and remuneration, which had been unresolved for several years resulting in a breakdown in communication.

The Facts

The business was a 50/50 partnership between the two brothers. The assets included two owned properties and one retail lease. The three retail shops were located within a 10km radius. The stores were profitable.

The Process

John & Jim had attempted to resolve the dispute through direct negotiation over several months, however both families had different needs and it became clear that the business could not be managed under the circumstances. The families’ accountant realised the impact the dispute was having on the business and suggested mediation. Both families agreed.After a preliminary conference with John & Jim, the mediator recommended that they meet separately with the mediator to help them identify all the issues, their concerns and the needs of the two families. Both families believed they were contributing more to the successful operation of the business and were not receiving the appropriate remuneration. The rivalry between the children was intense and effective communication was minimal.The mediator arranged a joint meeting to discuss the issues and look at what options were available. During this session both families were able to speak freely about their concerns in an environment controlled by the mediator. All the cards were put on the table and although sensitive issues were discussed, for the first time in several years the families were communicating.The preferred options were: divide the asset between the families; one family purchase the entire business; or sell the business and split the returns. John & Jim agreed to an independent valuation to assist in making the final decision.

Both families were keen to continue in the business, however, the valuation exceeded initial expectations. The economies of owning three stores increased the value of the business as a whole and therefore both families agreed not to split the business. Funding the acquisition for either family was a problem, and some time was spent looking at the various financial options available. The role of the mediator throughout this process was to assist the parties to review their options, to keep the communication lines open, and to continue to build trust between the families.

The whole process took several months and required a number of meetings. The major time delays revolved around the preparation of the valuation and investigating the various funding options.

The Mediated Outcome

The business was sold to John’s family with 50% paid up front and the balance over two years. A key outcome of the mediation process was the restoration of the relationship between the families including the children.

Lessons to be learnt

Unresolved issues or problems will surface at some stage- it is better to address the problem when it occurs. They do not get better with age. Mediation is an effective means of dealing with partnership disputes, especially where family or personal relationships issues are involved.