A question of patience

At the heart of every business, there are relationships that depend on trust.

Your clients must trust you to deliver on time. Your suppliers and staff must trust you to treat them with respect and pay them in reasonable time.

Perhaps the most important relationship is the one that exists between the business owners or, in a bigger business, the board. When those relationships break down and there is no trust, the business invariably suffers too.

But the same is also true for disputes with third parties. I have seen many businesses fail because of a long running dispute with a supplier or a client,
which ends up becoming all-consuming for the owner.

There are many, and often simple ways, of avoiding impasses. But remember that for any dispute to be settled, there must first be a recognition and willingness to compromise.

Furthermore an element of collective responsibility needs to be accepted by the partners or directors.

Below are some issues that I have seen time and time again leading to business relationships becoming strained; there are some simple steps which can be to taken to avoid or overcome these issues.

Typical wars

A good example that springs to mind of a relationship ruining a business is when spouses are involved. This would be where a husband and wife embark on a business together, then fall out of love.

As their relationship gets increasingly distant and often confrontational, the business moves toward the bottom on a list of priorities; below the kids and the house, but just above the dog or record collection. This occurs in the middle of what can be difficult and acrimonious proceedings.

Surprisingly I have found that on many occasions, these are the easiest
to settle.

Although I have seen instances where the business continues and both parties carry on working together, more often than not, one party will ultimately buy the other out. It may be that because there are so many areas in dispute, neither party has the energy or capacity to argue about the business, which simply becomes just yet another issue.

When two parties are at a complete impasse, this will destroy the business. Such disputes tend to drag on for the longest time as both parties are incapable of settling. More often than not, this will be two equal partners or shareholders. Alternatively it could just be two factions of a board, or two sides of a family.

These disputes are by and large fuelled by a sense of inequality, either real or perceived. Whether this inequality is due to succession planning, unequal risk or profit shares, one side perceives that they are 'working harder' than the other.

The all-consuming dispute

Unfortunately such feelings are always deep rooted. Consequently without an arbiter, they are more often than not incapable of settlement, financial or otherwise.

Even in large sophisticated businesses, disputes can tear things apart. Such disputes tend to rumble on and develop to the point where indecision reigns and the business stagnates.

Furthermore both parties become completely focused on the dispute itself and are unable to redirect their energies elsewhere. This can not only have a damaging effect on the business, but also on the individuals themselves.

I have been involved in many such situations, while acting as a court appointed receiver. It has not been uncommon for the respective parties to agree at the end of the process, that the court appointed receiver is wrong, especially where neither party has been able to agree on the time of day for many months before my appointment.

It is inevitable that in reaching a compromise, both parties need to give a little more than they would like. 'Winning' should be seen as reaching a conclusion so everyone can move on, and not about 'beating' the other party, nor about further prolonging your war of attrition.

Solutions

As far as avoiding the disputes and thereby the pain is concerned, there are many methods available. First and foremost is 'mending the roof when the sun is shining'. Have clear arrangements on how future disputes will be settled in the deed when starting your partnership (and in the shareholders agreement for a limited company).

Partnerships are often compared
with marriages; a deed is the
partnership equivalent of a pre-nup.
It can arguably be even more important within a partnership as there are other ramifications on the partnership. If a deed does not exist, the partnership will be deemed to be governed by the Partnership Act 1890 (not the most current piece of legislation).

For example if a partnership does not have a deed and one of the partners resigns or dies, then that partnership will be deemed to be dissolved. As a guide, the deed or agreement should cover the following issues at the very least:

1. Constitution - Who are the parties/partners? Is there room for more to enter the partnership and how will they be elected/invited to join?

2. Remuneration and profit share - How will this be handled?

3. Locus/authority - Which decisions require majority or absolute consent? This could drill down into authority to commit funds (spending power). In larger organisations where power may be devolved down to a board or committee, the operation, constitution and powers of the committee will be dealt with.

It is imperative that there is a clear process as to how any deadlocks are broken.
In larger organisations, this could be done by giving a casting vote to a particular individual, or by creating a certain criteria which needs to be passed before the resolution can be accepted, or a hybrid
of both.

Deeds and agreements have evolved over time and can now be very complex documents. It is my view that wherever possible, a deed should be kept as simple as possible.

I have recently seen many instances where boards have been hamstrung by a badly drafted shareholder agreement. There is nothing more frustrating than having to take a solicitor's advice on
the clauses in a deed, before making
a decision.

The major difficulty arises when it
is a clear 50/50 partnership. Obviously when two people enter into business,
the intention is often to act both jointly and severally and, have an equal share of the profits.

Consequently it is difficult to draft a deed that deals successfully with every issue that may arise when both parties are at loggerheads; I do not believe that there is an easy answer to this problem.

Unless there is some clear demarcation about responsibilities, which would be difficult to implement, then ultimately
the matter will need to be settled either by arbitration or by the appointment of an independent expert to make
a determination.

While this may appear unnecessary and possibly a little officious and cumbersome, I can assure you that from my experience, many months of anguish and many thousands of pounds of legal fees will be saved if there is a clear and indisputable path to resolve disputes. While the business may not survive in every case, value is inevitably preserved.

Too many conflicts have been ignited by partners regarding the value of their business and how this is split; six months later they take a step back only to realise that there is nothing left to argue about.

Unfortunately when embarking on a business venture founded on a partnership and not on mutual love and affection, you should keep a wary eye on what happens when there is a dispute.

The all for one and one for all philosophy can quickly degenerate into every man for himself, as soon as the chips are down. 

John Dickinson is head of the corporate recovery & insolvency department at chartered accountancy firm Carter Backer Winter

---