If you've fallen out with your business partner, start by checking your partnership or shareholders agreement and following its dispute resolution steps. Talk to your partner calmly, bring in your accountant if the issue is about money, and keep the business running while you work it out: don't lock your partner out, move money or take client information. If you can't resolve it, the usual options are a buy-out, mediation or winding up the business. Get legal advice early, especially if there's no written agreement.
Going into business with someone is exciting. You share the vision, the workload and the risk. But partnerships, like any relationship, can come under strain, and when they do, it affects everything: the business, your finances and, often, a friendship.
Business partner disputes are some of the most stressful I see. The good news is that most can be resolved without going to court, if you handle them carefully.
Why do business partners fall out?
Common reasons include:
disagreements about money: drawings, salaries, expenses or how profits are shared
one partner feeling they're doing more of the work
different visions for where the business should go
a conflict of interest, or a perceived one
one partner wanting to leave, or to bring in someone new
personality differences, stress and poor communication.
Partnership or company: which rules apply?
What you can do depends on how your business is set up, and what you agreed in writing.
A partnership is governed by your partnership agreement. If you don't have one, your state's Partnership Act sets default rules, which may not suit your situation.
A company is governed by its constitution, any shareholders agreement, and the Corporations Act. If you're both directors, you also each owe duties to the company, including acting in its best interests.
If you're not sure which you have, or what your documents say, that's the first thing to find out.
My top 5 tips when you've fallen out with your business partner
Talk to your partner. Try to understand what the real issues are. Misunderstandings arise easily, especially over email or text, or through third parties. A calm, one-to-one conversation can go a long way.
Check your agreement. Your partnership or shareholders agreement should set out what happens in a dispute. Often written notice is required, and there are time frames for trying to resolve things in good faith.
Follow the steps, in good faith. Ideally things won't escalate to ending the business, or worse, court. But if they do, you need to have complied with the agreement and your obligations. If you're not sure exactly what to do, ask your business lawyer.
Bring in your accountant if it's about money. An independent professional can often clarify the numbers factually and without emotion, which helps move things forward.
Get legal advice if you can't resolve it. Your business lawyer can explain each person's rights, obligations and options, under your agreement and the law.
Protect the business while you work it out
While you're in dispute, keep the business running, and don't do anything you might regret:
don't lock your partner out of the premises, bank accounts or systems
don't move money out of the business, or change how it's paid, without agreement
don't take client lists, files or intellectual property
keep records of conversations and decisions, and put agreements in writing
keep meeting your obligations to clients, staff, suppliers and the ATO.
Acting unilaterally can make the dispute much harder to resolve, and in some cases can expose you to a claim.
What are the ways out?
If you can't repair the relationship, the most common outcomes are:
A buy-out. One partner buys the other's share. Your agreement may set out how the price is worked out. If not, you'll need to agree on a valuation, often with your accountant or an independent valuer.
Mediation. An independent mediator helps you reach an agreement on how to part ways (which may include selling the business), or to carry on.
Winding up. If neither partner wants to continue, the business is closed, its debts are paid and anything left is shared.
If you can't agree and the business can't function, a court can make orders, but that's expensive, slow and stressful, and best avoided if at all possible. For more on the steps to resolve a dispute, see how to resolve a business dispute.
Prevention is better than cure
The best time to plan for a falling out is before you go into business together. A good partnership or shareholders agreement should cover:
who does what, and how decisions are made
how profits are shared, and what each partner can draw
what happens if you can't agree (deadlock)
how a partner can leave, and how their share is valued
what happens if a partner dies, becomes ill or wants to sell
restrictions on competing with the business or poaching clients
a dispute resolution process.
Remember, stay focused on the real issues and try to leave the emotion out of it. In my experience, unnecessary emotion blows things out of proportion and ends up costing everyone more time and money. If you're in a dispute with your business partner, or about to go into business with someone, book an introduction call.
This article provides general information only and does not constitute legal advice. Your options depend on your specific circumstances and documents.
Frequently asked questions
What happens if business partners disagree and there's no written agreement?
For a partnership, your state's Partnership Act sets default rules. For a company, the company's constitution and the Corporations Act apply. These defaults may not reflect what you intended, so get legal advice early.
Can I force my business partner out?
Generally not, unless your partnership or shareholders agreement allows it or you both agree. Most partners part ways through a negotiated buy-out, often with the help of mediation.
How is my share of the business valued if we split?
Your agreement may set out a valuation method. If it doesn't, you'll need to agree on a value, usually with the help of your accountant or an independent valuer.
What should I avoid doing during a dispute with my business partner?
Don't lock your partner out, move money out of the business, or take client lists or files without agreement. Keep the business running, keep records, and get advice before you act.
What should a partnership or shareholders agreement include?
How decisions are made, how profits are shared, what happens in a deadlock, how a partner can leave and how their share is valued, restrictions on competing, and a dispute resolution process.
