When two business partners find themselves at an impasse, the consequences can be devastating, especially if theirs is a 50/50 ownership structure, where neither party can outmaneuver or outweigh the other. Deadlocks can quickly transform a promising future into a nightmare. Fortunately, there are several legal processes that can be used to break stalemates and provide a path forward that satisfies both parties. These include mediation, arbitration, and forced buyouts.
Mediation offers the most collaborative approach to resolving business disputes. Unlike the adversarial process of litigation, mediation brings in a neutral third party who works to help both sides communicate with each other and find mutually acceptable solutions. The mediator doesn’t make decisions: Instead, they guide partners toward compromise. This approach is especially valuable when partners want to preserve their professional relationship or where complex interconnected interests make dissolution an undesirable option.
The mediation process typically begins with each party presenting their side of the issue. The mediator then works to find common ground, helping partners see their conflict in a new way and explore potential solutions. Unlike filing a lawsuit, mediation is a confidential process. It can address underlying personal and professional tensions that might be overlooked in the setting of a trial. Additionally, the costs are significantly lower than litigation, and the process can be completed in a fraction of the time that a court battle would take.
If mediation fails, arbitration offers another, more structured alternative to traditional litigation. In arbitration, a neutral arbitrator or panel hears both sides and then makes a binding decision. This process provides a definitive resolution and offers more flexibility than court proceedings. Including arbitration clauses in partnership agreements can establish that disputes will be resolved through an arbitration process.
Where the differences between partners are irreconcilable, a forced buyout may be the best and most effective solution. A forced buyout lets one partner buy the other’s share of the business at a fair market value, which is typically determined through independent business valuation. Buyout provisions can be included in partnership agreements, and can specify the valuation method and payment terms that will apply in case of a dispute. This approach provides a clean break when partners simply cannot continue working together.
Taking a proactive approach to partnership disputes is always the smart strategy. When partnership agreements are being crafted, clear dispute-resolution mechanisms should be included. Conflicts are a fact of life, and by anticipating them, businesses can create a roadmap for resolving deadlocks before they become insurmountable.
If you need assistance in resolving a dispute between partners or in crafting an effective and thoughtful partnership agreement, contact us today to set up a time for us to meet.