Financial Disputes Among Business Partners: Common Issues and Possible Means of Resolution
Financial disputes among business partners are not uncommon. Whether arising during the entity formation process, in the course of a business’ operations, or when one or more partners exit the business, these disputes can disrupt the partners’ business plans, threaten long-standing relationships, and have negative outcomes for clients and customers.
When financial disputes arise, it is important for business partners to acknowledge them—and to address them proactively whenever possible. These disputes rarely resolve themselves, and the longer they linger, the more likely they are to lead to costly litigation.
5 Common Financial Disputes Among Business Partners
Business partners can run into financial disputes at all stages of the business lifecycle. Here are five common examples of disputes we handle for our clients:
1. Capital Contributions
All businesses need capital, and some need significantly more than others. Initially, much of a business’ capital may come from the partners’ financial contributions. Disagreements about how much each partner should invest (including disagreements about how much credit partners should receive for non-financial contributions) can lead to trouble before businesses get off of the ground; but, if the partners can work through these disagreements successfully, this can also set the stage for amicably resolving similar disputes down the line.
2. Capital Investments
Along with capital contributions, capital investments also can be a source of significant disagreement among business partners. If partners have strong—and differing—opinions about how to use the company’s funds, this can lead to disputes that can bring the company’s operations to a standstill. When some of the company’s owners want to make a significant investment in the company’s future and one or more other owners disagree that the investment makes sense, this can result in a contentious dispute absent clear controlling authority granted to one or more partners in the business’ governing documents.
3. Borrowing and Outside Equity
Business partners will often disagree about the desirability of taking on debt or bringing in outside investors. While debt and equity investments can both afford access to substantial working capital, there are a variety of reasons why business owners might not necessarily want to pursue either of these options. Here, too, unless the business’ governing documents give control to one or more partners (who are in agreement), contentious disputes can get in the way of moving forward.
4. Salaries, Draws and Distribution Rights
Disagreements regarding business partners’ respective rights to salaries, draws and distributions are common sources of disputes as well. Despite being key financial aspects of the partnership, these matters get overlooked during the entity formation process with surprising frequency. Whether partners disagree over their respective ability to share in the company’s profits or they disagree about whether any draws or distributions are warranted at all, these disagreements will often lead to dispute resolution proceedings.
5. Valuation Upon Sale of an Owner’s Interest
Finally, financial disputes can also arise when it is time to sell or when one or more partners decide that it is time to part ways. Disagreements over buyout rights, the value of individual owners’ interests, and what constitutes a reasonable selling price for the business as a whole all can—and do—lead to disputes. These disputes can have negative financial consequences for all of the company’s owners if they aren’t able to find an agreeable path forward. In many cases, they are accompanied by disputes involving non-compete obligations, alleged breaches of fiduciary duties, and other matters as well.
Means of Resolving Financial Disputes Among Business Partners
Like all business disputes, financial disputes between business partners can be resolved in a variety of different ways. Depending on the circumstances, finding a path forward may involve one or more of the following:
- Look at the Business’ Governing Documents – When dealing with any type of financial dispute, the first step is almost always to look at the business’ governing documents. If the owners have already reached an agreement on how the financial matter at issue should be handled, this could bring a swift end to their dispute without the need to pursue formal dispute resolution efforts.
- Mediation – Mediation is a form of guided negotiation that involves working with a neutral third party who does not have decision-making authority. Oftentimes, business partners will agree to pursue mediation for the resolution of financial disputes in their companies’ governing documents. But, even when partners haven’t agreed in advance, mediation can be an effective tool for achieving a resolution while also maintaining a healthy relationship.
- Arbitration – Similar to mediation, arbitration is a form of alternative dispute resolution (ADR). But, unlike mediation, arbitration results in a binding decision. Arbitration is more akin to litigation than mediation, though it is far more streamlined (and much less costly) than litigating a financial dispute among business partners through trial.
- Litigation – If all else fails, business partners facing a financial dispute may have little choice but to pursue litigation. While the outcome of litigation is never certain, the one thing that is certain is that litigation will produce a final resolution. In the vast majority of circumstances, business partners who end up in litigation against one another will part ways, and this is an important factor to consider when deciding how to approach the dispute resolution process.
- Settlement Negotiations – When dealing with a financial dispute, business partners can settle their dispute at any stage of the mediation, arbitration or litigation process. They can also enter into settlement negotiations without pursuing litigation or ADR. In many cases, even if business partners are in disagreement on a particular issue, they will agree that settling their differences is the best path forward, and this can be a strong motivator for coming to terms and moving on.
Speak with an Attorney at Edelboim Lieberman Revah
If you have questions about how to resolve a financial dispute with your business partners, we invite you to contact us for a confidential consultation. To schedule an appointment with an attorney at Edelboim Lieberman Revah, please call 305-768-9909 or inquire online today.