When Partnerships Turn Bad | BTalk Australia

Last Updated Jan 19, 2010 10:41 PM EST

Podcast

(14min 48) We've all heard horror stories about businesses where the founding partners can't work together any more. If that's you, how do you get out of it without spending a fortune in legal fees?

In today's BTalk Australia Phil Dobbie talks to lawyer Paul Brennan, author of "The Law is an Ass â€" Make Sure It Doesn't Bite Yours!" They look at valuing assets, client lists and liabilities. If you're smart you will have written a partnership agreement, but what would you put in it?

Any other advice? Add it in the Talkback section at the end of this post.

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  • Today's Transcript
Phil Dobbie: Hello, I'm Phil Dobbie and welcome to BTalk Australia. Today business partnerships, what happens when it all goes wrong and what can you do about it?
Business partnerships, many have made the mistake of getting into business with their best friend only to become arch enemies, so how do you extricate yourself from a partnership that's turned sour? And what, of course, should you do to avoid getting yourself in that situation in the first place? Well, Paul Brennan is a practicing Queensland lawyer. He's also a humorist lawyer, they're a very rare thing and he's also the author of "The Law is an Ass Make Sure it Doesn't Bite Yours". So Paul, it's not going well in a business, you don't have any agreement which you should have had when you started out that stipulates how it's going to be broken up. So if you're in that situation what sort of choices have you got?
Paul Brennan: Well, it all depends how much money you're earning. I always find that people who get into partnerships for a second time always insist on a partnership agreement because at least you have some control over the rules. But if you haven't got the control it all depends. If you're being a successful partnership sometimes it's just a matter of maybe one of the spouses or the other halves of the partners getting involved and causing upset or maybe one partner may feel he's doing more than the other. But I do find that when partnership is going well and money's coming in then it's not a problem. Normally the problem starts when the money is not there and then there are two issues that really you have, either there's enough money to argue about or there's not enough money to argue about. Even when there's not enough money to argue about often partners will argue on anyway just for the hell of it. And I think that what we tend to advise people is just to say, you know, what's in it for you before you start partnership arguments and also how much money's involved in this thing because people will argue about all sorts of things. For instance, IP rights, who owns the domain name and other issues like that. That argument can go on quite a lot. But really, if the partnership wasn't earning any money in the first place, why bother?

Dobbie: I can imagine money is at the root of all evil isn't it? So you're saying the money is the most common cause but could it also be personality? I imagine there'll be situations where people just start to grate on each other after a while and just decide look I can't take this anymore I hate you.
Brennan: Often if that's going to happen sometimes I feel it tends to come from their partners getting involved in one way or another. But, basically, if the money's coming in usually people are able to get on well together.

Dobbie: Right, now, things like assets particularly when you're getting into areas which are a little harder to value like IP rights and web domains and stuff like that. I mean how do you start to split up stuff like that?
Brennan: I think that what people tend to do is they fall out and then they go to their respective lawyers and about $5,000 later they both tend to sort of walk away from everything discussed after a number of messages go back and forth. If you have some agreement or partnership agreement obviously you write down who owns what. But, basically, if you don't have any agreement then a particular sort of partnership law almost in any, most country applies and that says that all the assets of the partnership belong to the partnership and they're, basically, divided equally after any debts are paid. So that means that, basically, if you have a website you both own it. But look having said that, domain names are not really something that have intellectual property rights as such. Trademarks have intellectual property rights. Company names don't have intellectual property rights as such, but it does get difficult and people get very attached to names.

Dobbie: Yes, if things like furniture, solid assets, are easy to split up because you just sell them and throw the money into the kitty, I guess, and it all comes out in the wash. But how do you actually put a physical value on those things which are worth something to the business but worthless to other people?
Brennan: I think that you have to be creative, but what often happens is people just get very bloody minded about things. I've been in one high court where people have --- a divorced couple --- argued about two goldfish they couldn't separate them because they had to be together and they wouldn't take one each. So therefore, it's almost a matrimonial breakup when you get a really vicious partnership breakup. Nothing more than two lawyers breaking up. And you can be creative, like you can put in two offers in an envelope and open up the two envelopes and see who makes the highest offer for something.

Dobbie: Right
Brennan: You can put a list, you can put two lists one person makes two lists of the stuff that you've got and the other person picks which list he has, so there are ways to solve matters. However, there has to be some agreement at the end of the day and normally people always want to spend about $5,000 before they get to that stage.

Dobbie: Yes, you've always got to involve the lawyer in the process which you've got to be happy about. But, I guess it is --- if it does get to that stage --- then you are leading yourself up an expensive road aren't you? Even though it means more money for you you'd be advocating that try and avoid getting to the lawyer if it's at all possible.
Brennan: That's true, the last thing is that normally the partnership has one lawyer and because one of you tends to go there and say we're not getting on then he immediately says, look I've got conflict of interest here so I can't act for either of you so go off and find your own lawyers. So like most things, look it depends how much money you're arguing about and if it's not worth very much really shaking hands and walking away is not a bad idea.

Dobbie: Now, if you're totally hacked off with the experience and you walk away too quickly, I guess there's liability involved in that isn't there, particularly if you're leaving some clients hanging?
Brennan: Well, what tends to happen is that when you have a partnership you are equally responsible for the debts but worse than you're your creditors can go after one of you. So if one of you has got $100,000 and the other one's got $5.00 then the creditors don't half and half it they just go after the person with the most money. And that can be a real problem because especially say when a partnership gets a loan from the bank, if you get one loan from the bank of $100,000 it means that if one partner can't pay the bank goes against the other. So some people recommend that it can be done where you get separate loans so at least you know how much you're liable for, because the bank are the people who really tend to go after you in these circumstances.

Dobbie: And clients would as well, I guess, though wouldn't they? If you had an undertaking that you were going to do something and the company splits up before you finished what you said you were going to do I guess there's legal --- well, there's obviously legal repercussions with that as well that you've got to look out for.
Brennan: Certainly your clients can sue you and this can get expensive in that they can start suing you for putting right the problems that you've made. What the law tends to do is they tend to try to put people back in the same circumstances that they would have been if the problem hadn't arisen, which, obviously, is not so great for some people. But if you have a customer, you promised them to do certain things then if you don't do it then they'll go off and find somebody else to do it and send you the bill and that really can be quite a lot of money.

Dobbie: Now, client lists are an interesting one as well aren't they? I would imagine that you could split up those client lists, but in reality you're both going to have to accept that you both got access to the same list of clients because human nature being what it is you're going to try and grab all of them even though you've said you've only taken half.
Brennan: That's right so normally what happens is that people have introduced clients and in an ideal world they both would like to disconnect and slope off with their own clients, but often it's a matter of them both going for the clients and there's unseemly telephone calls and it all gets very unpleasant. And, of course, that would reduce the value of the business if there is value there. So in all of these things it's best to agree but unfortunately in partnerships and marriages, people don't.
Dobbie: No, it is so much like a break-up of a marriage isn't it really the whole thing?
Brennan: It is, I used to be in a firm which used to act for lawyers who used to fight and we had stories about lawyers being in receptions and sort of both having their hands on a firearm and pulling and shoving it. So lawyers can get involved in this stuff too.

Dobbie: Now, what if the split up is not by choice but your business partner goes bust and there's some shared costs or loans that he should be contributing to? That is where it gets messy. You sort of touched on this but presumably it can be an opportunity as well because if you've got the cash it could be an opportunity for you to buy him out ---
Brennan: For sure.

Dobbie: --- so it could be an opportunity as much as a problem.
Brennan: Well, it could be but look you don't want to be in business with someone who's shaky and if they really do go bust and the trustee and bankruptcy takes over then all of a sudden you're in partnership with the trustee and bankruptcy and he will immediately say, how much did my client lend to the business and want to take that money back. And so, therefore, you tend to try if your partner might go bust try and get rid of them. Obviously, you take the separate loan so you don't try to mix their money. But, like I said, the idea is that you've got to look at who you're going into business with. Sometimes, obviously, people do get into trouble as the business goes along, but the idea is really to terminate your partnership with someone because they will just draw you in, especially if creditors --- you're the only person with money.

Dobbie: OK, so all of this is pointing to the need for a partnership agreement but even the stuff that we've spoken about over the last 10 minutes, it's sounding like it's going to be a very weighty document. I mean how big is a partnership agreement and what sort of steps should you be putting into it? You could be going on forever about it couldn't you?
Brennan: You could be couldn't you really and I guess this is why people don't do it because they can be a bit expensive. I would look for a partnership agreement, speaking generally, you're looking at about, say, $1,500 or something of that nature, so it does cost money. And I would say 20 odd pages at least in a partnership agreement just to cover all the basic areas that you have to cover. One of the good things to put in a partnership agreement is that maybe you're going to solve it by an expert rather than going to court because that will save both partners a lot of money because once you get into the fight you'll find the other partner being very bloody minded, unreasonable and you wonder why you got into bed with them in the first place.

Dobbie: So the whole point of it is it's like a prenuptial agreement isn't really? If the whole thing goes to pot how are you going to split it up?
Brennan: That's right and who gets what. And, for instance, if one partner wants to leave then it doesn't mean that the whole thing sort of flattens in a heap, there's some method expressed in the partnership agreement as to how that's going to do it. Imagine you have a business and you borrowed money from the bank and all of a sudden one of the partners wants to leave and just fit off. Well, what happens there: do you have to pay that partner out immediately, could you delay payments for a year, is there going to be interest on the money, it's all those sorts of things to make it a little bit smoother.

Dobbie: Right and I suspect it would have to change over time as well. It's something you'd have to revisit at least every few years.
Brennan: I think you can. Most people tend to do partnership agreements and throw them in the drawer until the problems start. But, yes, in an ideal world you could --- I'm sure there are clients out there who do everything right --- but normally people tend to address things as they come up.

Dobbie: Now, are break-ups common in partnerships and do they get more common in times like this?
Brennan: Yes, I would say that acrimonious break-ups are maybe more common. In good times people are prepared to shake hands and walk away. In bad times it tends to get a bit fierce especially when you've got sort of relatives lending money. Normally you find in any partnership there's one guy who does all the work, maybe there's one other guy who brings in all the clients and there's normally a person who does nothing according to the other person. And so, therefore, it just can get very, very bitter, and there's not the option in bad times of walking away. Often nowadays there's money, there's landlords at stake and now if you have a lease then you've entered into a long commitment. When you enter a lease, even though you might be able to get out of it, your commitment often still sort of goes on with the people who take over from you, so it's a big commitment and the one thing you should talk to a lawyer about.

Dobbie: So the simplest rule, of course, all of this seems to be that any liability, make sure you split it.
Brennan: I think that I would say that in some ways a partnership between two people is not the ideal structure. I still feel that a company with shareholders behind it is the ideal structure. And people tend to go into partnerships because they're kind of cheap, but really they should go and see an accountant and get a company set up if the accountant says that's the way to do business, and at least that gives you some structure. But even with the company you should have a shareholders agreement 'cause there's a lot of things that a company doesn't cover.

Dobbie: Here's a final question. We talked about lawyers getting involved towards the end of a break-up, what about the accountant? I guess the accountant might have been dealing with one partner more than the other and so there's going to be a temptation to go out and get a completely different accountant someone who's fairly neutral.
Brennan: That's true and I mean it all depends on how much money there is. Often people, when it comes to having the accounts drawn up, want to use their own accountant because they don't trust the one that's close to the other guy. But really you should just get the accounts paid. And depending on if you've got lots of money to argue over then you can but by involving other people you just increase the expense of the break-up.

Dobbie: Yes, it's difficult to imagine isn't it people not trusting an accountant. I mean imagine that. Hey Paul, it's been a pleasure talking to you. I hope we'll talk again soon. Thanks for your advice today.
Brennan: Thank you very much.

Dobbie: Paul Brennan. So there we are 15 minutes with our lawyer. We'll send you the bill later on.