Running a business with a partner can be a rewarding experience, combining skills, resources, and perspectives to drive success. However, what happens when your business partner isn’t pulling their weight? Whether they’re not contributing equally to the workload, failing to meet their obligations, or showing a lack of commitment, it can place a serious strain on your business and the partnership.
As a commercial lawyer, I’ve encountered many business owners facing these challenges, and the good news is that there are steps you can take to address the situation without jeopardising your business. In this article, I’ll guide you through what you can do if your business partner isn’t pulling their weight, from practical solutions to legal remedies.
Step 1: Address the Issue Early
The first step in dealing with an underperforming business partner is to address the issue early.
Allowing the problem to fester can lead to resentment, further strain the relationship, and damage the business. Open communication is key. Arrange a meeting with your partner to discuss your concerns in a constructive and professional manner.
When discussing the issue, keep the conversation focused on the business impact, rather than personal criticisms. For example, you could say, “I’ve noticed that several tasks have been delayed recently, and it’s starting to affect our clients. Can we discuss how we can better distribute the workload?”
This initial conversation can often resolve misunderstandings or clarify expectations. Your partner may not be aware that their performance is falling short or might be facing personal challenges that are affecting their ability to contribute. If so, you may be able to work together to find a solution, such as reallocating responsibilities or providing additional support.
Step 2: Review the Partnership Agreement
If the situation doesn’t improve after addressing it informally, the next step is to review your partnership agreement.
A well-drafted partnership agreement can provide a clear roadmap for resolving disputes, including how to handle situations where one partner isn’t fulfilling their obligations.
Your partnership agreement should outline each partner’s roles and responsibilities, as well as how decisions are made, profits are shared, and disputes are resolved. Some key clauses to look for include:
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Performance expectations: Does the agreement specify the level of involvement or specific duties that each partner is expected to fulfil?
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Decision-making processes: How are major business decisions made, and does the agreement allow one partner to take action if the other isn’t fulfilling their role?
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Profit-sharing arrangements: If your partner isn’t contributing their fair share of work, can you adjust the profit distribution?
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Exit provisions: Does the agreement provide a process for buying out a partner or dissolving the partnership if things can’t be resolved?
If your partnership agreement includes specific provisions related to underperformance, such as the ability to adjust profit shares or require additional contributions, you can use these mechanisms to address the issue formally. If your agreement doesn’t cover these scenarios, it may be time to revisit the agreement and update it to better protect the business.
Step 3: Mediation and Alternative Dispute Resolution
If direct discussions and your partnership agreement don’t resolve the issue, you may need to explore mediation or other forms of alternative dispute resolution (ADR).
Mediation can be a highly effective way to resolve disputes in a partnership without going to court. It involves a neutral third party (the mediator) who facilitates a structured conversation to help both parties reach a mutually agreeable solution.
Mediation is particularly helpful when emotions are high or communication has broken down between partners. It’s less adversarial than legal action and focuses on finding a workable solution that benefits both partners and the business.
If you and your partner agree to mediation, the mediator will guide the process and help identify potential compromises. For example, you might agree to redefine roles and responsibilities, bring in a third-party manager to oversee day-to-day operations, or restructure the partnership in a way that better reflects each partner’s contributions.
Step 4: Consider Legal Remedies
If mediation fails, or your partner continues to underperform and disrupt the business, legal remedies may be necessary. Depending on your partnership structure, you have different options:
1. Partnership Buyout
If your partnership agreement allows it, you may be able to buy out your underperforming partner. This can be an ideal solution if the relationship has become untenable and you believe the business would run more smoothly without them. A buyout usually involves valuing the partner’s share of the business and purchasing it either through business funds or with external financing.
In the absence of a buyout clause, you and your partner will need to negotiate terms, which may require professional advice from a commercial lawyer to ensure that the process is fair and legally sound.
2. Dissolution of the Partnership
If there’s no prospect of resolving the issue or buying out your partner, dissolving the partnership may be the only viable option. Dissolution means ending the business partnership altogether, which may involve winding up the business or one partner starting a new business independently. This is generally a last resort, as it can be disruptive and costly, but it may be necessary if the partnership has become dysfunctional.
Partnership dissolution can occur voluntarily, through mutual agreement, or involuntarily, via court intervention. Your partnership agreement should outline the process for voluntary dissolution, but if not, the Partnership Act 1892 (NSW) (or the equivalent state legislation) will apply.
3. Litigation
In extreme cases where your partner’s lack of involvement is causing significant harm to the business and mediation has failed, you may need to take legal action. Litigation can be used to enforce the terms of the partnership agreement, recover damages, or seek other remedies, such as an injunction to prevent further harm to the business.
Keep in mind that litigation can be costly, time-consuming, and damaging to the business relationship, so it’s usually considered a last resort.
Step 5: Preventing Future Issues
Once the situation with your current partner is resolved, it’s important to take steps to prevent similar issues from arising in the future. Here are a few tips:
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Update your partnership agreement: Make sure your partnership agreement clearly defines the roles and responsibilities of each partner, as well as the consequences of underperformance or failure to meet obligations.
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Establish clear communication channels: Set up regular meetings or reporting processes to ensure that both partners are on the same page and contributing equally to the business.
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Plan for disputes: Include dispute resolution clauses in your agreement, specifying mediation or other methods before taking legal action.
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Monitor performance regularly: Keep track of each partner’s contributions and address performance issues as soon as they arise to prevent small problems from escalating.
Conclusion
Dealing with an underperforming business partner can be a challenging and stressful experience, but it doesn’t have to mean the end of the business or the partnership. By addressing the issue early, reviewing your partnership agreement, and seeking mediation or legal advice when necessary, you can take control of the situation and protect your business.
If you’re facing challenges with your business partner and are unsure of your legal options, it’s important to seek professional advice from a commercial lawyer. An experienced lawyer can help you navigate the legal and practical aspects of resolving the issue and ensure that your business remains on solid ground.
