On Saturday we left off talking about the four Ds that must be addressed in any partnership agreement. These are thing things that need be addressed in order to keep a business a float should one or more owners be unable to continue in their role with the company.
The four Ds are:
We already covered off the first two by discussing the need for proper Life and Disability Insurance held within the structure of the business partnership. Today we’ll take a look at the last two.
Distraction and Disinterest are perhaps the more common problems that most business partnership run into and are also paradoxically the hardest and most emotionally draining to deal with. A business partnership is not unlike a marriage and when one party becomes distracted or loses interest the emotional strain placed on the parties that remain can be devastating.
Most partnership agreements will contain what is commonly referred to as a “shot-gun” clause. This is a provision whereby if one partner is able to raise enough capital to buy the other partner out, usually at a predetermined price or using a previously agreed upon valuation method, the partner who has been offered the buyout will be given a period of time to either accept the offer or raise enough capital of their own to counter it and buy the first partner out. Once the buyout offer has been made the second partner must either accept it or counter. If countered the partner who initially made the offer must accept the counter offer. This is a great way for a distracted or disinterest partner to save face and leave the business if they are no longer able, or willing to continue in their role. But it can also backfire and force the first partner out of the business altogether.
One problem with the shot-gun clause arises when neither partner is able to raise enough capital to trigger it but the fact that someone is not doing their job or holding up their end of the deal is causing the value of the business to suffer. To combat this, the partnership agreement needs to have some very clearly spelled out roles for each party and consequences for people who do not execute. Consequences could include a lowering of the value of their shares to the point where a shot-gun clause could be triggered for a lower amount but still requiring them to raise the full value of shares to counter.
Another problem with the shot-gun clause arises when a distracted party plans to return to the business but has had to step back for a period of time to deal with personal issues. Communication is the key here. Everyone needs to be kept informed about what’s happening and when things will return to normal. If time away is warranted, a timeline for an expected return should also be spelled out. If things drag on then a calm and rational discussion about buy outs should be placed on the table early.
Some of the corporate consulting that we do at The Meekonomics Project revolves around developing and breaking up partnerships. While death and disability are realities that need to be addressed early, distraction and disinterest are by far the more common causes of partnership break ups. If there is one thing I have learned it’s that the more clearly things are spelled out in the partnership agreement the easier it is to move forward when one of the four Ds rears its ugly head. And once things are set in motion, there is no substitute for clear, open and honest communication.
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