The Importance of a Good Partnership Agreement (Segment I of II)
Credit: Nevin Beiler, Attorney
In this article I will tell you about two business partners, who I will call Jake and Henry. The specific facts of this story are fictional, but the issues that are illustrated are ones that many partnerships have faced.
Jake and Henry were brothers. Jake was twelve years older than Henry, and when Jake finished school he started helping his father with the family hardware store. When Henry finished school, he also starting working full-time at the store.
When Jake turned 25 his father let him buy 10% of the business at a discounted price, and when Henry turned 25 he had the same option. When their father’s health declined to a point that he no longer could work at the store he offered to let Jake and Henry buy him out completely, again at a discounted price. This resulted in them being 50/50 owners with equal management rights. Jake would have rather purchased a larger share of the business, but he decided not to raise a fuss.
Jake and Henry’s working relationship slowly deteriorated over time. They had very different personalities, and they struggled to see eye to eye on many issues. Jake had a more careful and frugal personality, while Henry was more aggressive and liked to spend money to try to grow the business. Because they were 50/50 owners, and they had no partnership agreement stating who was in charge, they frequently disagreed about how to handle things. Their level of communication kept decreasing until they were hardly talking at all.
Eventually, things came to a point where they could no longer ignore their differences. This was mainly due to their lack of communication, but also partly due to the fact that some of Jake’s sons were interested in buying a share of the hardware store. Several of them had been working for the store for a while, and Jake wanted to give them a chance to become owners like his dad did for him. But neither Jake nor Henry wanted to sell any of their ownership shares because doing so would mean that the other brother would have more ownership percentage, and therefore more control over the business.
The bad feelings were beginning to make for strained interactions at family gatherings, and sometimes also between the uncles and their nephews during the workday. Henry finally decided that he could not continue on in the business because he didn’t see any way his family and Jake’s family would be able to work well together.
Henry offered that Jake could buy out his share of the store. Henry said that he could start his own separate hardware store in a different location that would not compete significantly with the existing store. Jake didn’t mind the idea of buying out Henry, or that Henry wanted to start another store in another location. This agreement was a great start!
But when they started talking about the buyout price for the store, their ability to agree abruptly ended. Each brother had vastly different opinions about what was a fair buyout price, based on what they had each paid for their shares of the store and the amount of years they had each invested in working there. Jake thought that because he had worked there longer than Henry and helped their father build up the business in its early years, he should get a significantly discounted price. Henry thought that because he was willing to sell out and let Jake have the business, he should get at least close to full price. They were not trying to be unfair to each other, they just had different ideas of what was fair, and their lack of communication prevented them from fully understanding the perspective of the other.
To complicate matters further, the eight-acre parcel of land on which the store was located was located in a rapidly-developing commercial area and had risen in value dramatically. It would have perhaps made financial sense for the existing business to sell the property for a high price and move to another location, but Jake was reluctant to sell the original business location as it had been in the family for many years and it was located just a short walk from his home.
After several months of fruitless and sometime tense negotiations, they both realized that they were not going to be able to resolve their disagreement on their own. Fortunately, they both knew that it was wrong to take their dispute to court. Based on the advice of their church leaders, they were both willing to work with a trained Christian mediator to help resolve their dispute. But even with the mediator’s assistance, the road to reaching an agreement was not easy. It required many meetings and long discussions, but in the end they were able to reach a resolution.
To be continued….
Nevin Beiler is an attorney licensed to practice law in Pennsylvania (no other states). He practices primarily in the areas of wills & trusts, estate administration, and business law. Nevin and his wife Nancy are part of the conservative Anabaptist community, and Nevin served as the in-house accountant for Anabaptist Financial before becoming an attorney. Nevin’s office is in New Holland, PA, and he can be contacted by email at email@example.com or by phone at 717-287-1688. More information can be found at www.beilerlegalservices.com.