Partnership in Peril: What Would You Do?

A friend shared an unsettling story with me recently that highlights the perils of a poorly negotiated partnership agreement. I am sharing this story with you for two reasons.

One is because it is an important wake up call for anyone who is in or is considering forming a partnership.  I cannot emphasize enough how critical it is to negotiate clear agreements up front, as well as continue to renegotiate over time as things change and evolve.  All too often rigorous negotiation of partnership agreements gets put off for a variety of seemingly very good and compelling reasons at the time.  I can speak from personal experience here – been there, done that and unfortunately learned the hard way.   This is another reminder of just how important it is.

The other is because now, given a worst case scenario has occurred, I am very interested in your advice, insight and perspective regarding how these 4 people could navigate this very difficult territory.  There is an incredible brain trust available among the readers of this blog from around the world.  Your feedback here could make a big difference in how this turns out.

Here’s the situation…

A few years ago four people formed a business partnership.  3 of them kept their day jobs, while one (I’ll call him John) invested himself 100% into getting the business up and running.  Things were going great.  John was able to generate consulting jobs that covered the cost of his salary while they continued to work together to get the other parts of the business to a point where they could generate enough revenue to sustain them all full time.

And then John discovered he had cancer.  A once incredibly vibrant and remarkably healthy man with over the top energy and extraordinary passion for the work he was doing is now fighting for his life.  It all seemed to happen so fast and it will be a very difficult fight.

The handshake agreement has been that they each own 25% of the company.  They have an agreement to pay John a salary.  But now that he cannot generate the revenues that were covering his salary what do they do?  The question of for how long they can and should continue to pay his salary is an urgent one.  How long they can pay his salary can be answered a lot more easily than how long they should continue to pay his salary.

These partners are each struggling with what to do.  How can they balance the competing forces of compassion with the realities of the business situation?

Without going into the details, John’s family cannot survive for long financially without the income from this business.  Yet is that really a problem the other partners should take responsibility for? And what about what happens to the business when this key player is not able to perform and you don’t know how long it will be until he can?

Their very different views when it comes to compassion, the business, and partnership, are becoming apparent.  And these views are  informed by the clear differences in their values, commitments, and personal circumstances, .

If you look beneath the obvious business considerations such as cash flow and the differing interpretations when it comes to compassion and partnership, the fundamental issue seems to comes down to this:  how do you value the contribution of each partner?  It sounds good to say we are equal partners (especially in the beginning), but the actual perceptions of the value of each partner’s contribution to the business is not that simple.

John has arguably taken the biggest risk and has invested more sweat equity and mind share.  Yet John is the only one drawing a salary.  What is his contribution to date to the business really worth and how do you measure the value?  And how do you value the contribution of the other partners?    The others may not have invested the same amount of sweat equity or mind share, but they are not a drain on cash flow and have brought key relationships and skills to the table.  Every one of them could say the business would be nowhere without them.

Below are some specific questions for you to think about and respond to.  And I am of course open to anything you have to say that could contribute to the thinking about how to navigate this situation.

  1. What would you do?
  2. If you were helping these partners, what questions would you ask?
  3. How would you navigate finding that balance between compassion for the individual and the needs of the business?
  4. What do you think needs to be considered to come up with a solution that could serve everyone involved now, as well as given the worst and best case scenarios for the long term?
  5. How could they approach establishing the value of each of their individual contributions in a way that is grounded rather than based on personal opinion and motivations?
  6. What are the more intangible, yet essential contributions partners make to a business and how could you value them?

I am looking forward to the discussion that emerges from the incredible people in the Random Acts of Leadership community.  Thank you for all you provide.


Enter A Comment

Mike Henry Sr.   |   02 July 2010   |   Reply

It sounds like John’s illness will significantly hamper cash flow. So while he’s 25% of the business, everyone else’s 25% becomes considerably less valuable without his involvement. I would hope they would maximize the value of his contribution and their ability to compensate him for it if for no other reason than the fact that he is one of the integral parts. For me, this always comes down to what would I want for my family.

If their value continues when he’s not involved, then this is a conscience issue. Once again, they need to consider what they would like the others to do for them.

And, if the business will continue to prosper, John (and the partners) should make the sale based on a projected future value with some earn out so the value of the business in the long run reflects how his family is compensated.


Katrina   |   02 July 2010   |   Reply

I have less than zero experience with partnerships, but I feel inclined to comment, mostly because that’s the American way and it’s a patriotic weekend.

My question would be, is John expected to recover? If he is, why would they want to alienate him from the business (because that WILL be the outcome)? It seems as though his contribution is measurable and valuable enough to preserve the relationship. That’s from the purely logical, forward thinking standpoint.

My compassionate stance is to pay him whatever salary the business can afford. A pay cut may be hard, but it may also be necessary.

“…this world is a comedy to those that think, a tragedy to those that feel…”

Gwyn Teatro   |   04 July 2010   |   Reply

Given the circumstances you so carefully outline, here are some thoughts, for what they may be worth to you.

First, given the highly emotional aspects of this situation, I would encourage the partners to separate the business details from the emotional ones so that each can be examined in isolation of the other. I would suggest that this be done with a goal of integrating the two, through a collaborative effort, when the realities of each become clearer.

Practically speaking, here’s what it might look like:

1. Get an independent company to evaluate the business; determine its financial worth and its potential for future growth. If possible, come up with a quantitative method of determining what each partner would be entitled to if the company was to be dissolved today and any other tangible considerations they might need to examine. This objective evaluation should assume that all partners are healthy.

2. Once you have some tangible information, then I would advise them to address the softer, more difficult issues. Here are some questions I might ask of the partners.

a. When you started this company what did you want it to be? How did you see yourselves working together in the future?
b. What values does your company espouse? What is important to you as a company? What do you stand for?

The answers to these questions and others like them should provide a guide as to the decisions they need to make and what they might need to do to resolve the problem.

This discussion should involve all of the partners if possible and may need to be a facilitated one so that all areas are explored and agreements made with respect to the kind of company they are building. As you know, it is easy to espouse a bunch of values when things are going well. It’s usually when the chips are down, as in this case, that sticking to a set of values can become difficult.

If they can come to agreement on what they stand for and what they, as a company would like to be known for, then they may have a pretty strong basis on which to make some decisions about what they are prepared to change, or give up, to maintain the business and address John’s needs (or not). John will perhaps also be in a better position to determine what he might be able to continue to contribute or live without (or not), given the hard facts that the business evaluation should reveal.

Frankly, I have no real experience with this kind of situation which, on a personal level must be heartbreaking, but I hope that there is a nugget or two in here that you might be able to use.


Mike Myatt   |   02 July 2010   |   Reply

While you did a great job of outlining the history underpinning the current situation, there is not nearly enough information to even really begin to sort this out. Issues like this can be resolved equitably, but it will take a great deal of collaborative effort to do so.

Beyond the moral and ethical issues in play here, there are key business issues that must be addressed both to resolve the current debacle, but also to address continuity issues moving forward. It is regrettably all too common that issues like this end-up in arbitration or even litigation because of the absence of astute prior planning and documentation.

Due to the public nature of this forum, I realize that personal and business financial metrics cannot be discussed in detail, but those are critical pieces to understand which are currently missing. Even though employment agreements, buy-sell agreements, and other forms of documentation may not exist, my guess is that someone has kept very close track of capital contributions and distributions, funding sources, etc.

Another key missing piece of information is whether or not the business can continue in absence of the current operating executive. If there is on ongoing concern post his departure (leave of absence, termination, etc.) then the options for all concerned parties expand considerably. If there is no business viability moving forward then the scope of the resolution gets narrowed down rather quickly.

A great place to start would be to conduct a current business valuation. This would at least give you a baseline from which to begin discussions moving forward.

Susan Mazza   |   15 July 2010   |   Reply

Thank you Mike H, Katrina, Mike M, and Gwyn for your thought filled responses. As I had hoped you each touched on distinct aspects of the situation and what there is to consider. All of this is being shared with those involved.

It seems that the possibility of an equitable and satisfying solution ultimately lies in their ability to communicate and negotiate to find that delicate balance between valuation and values.