Sunday, December 18, 2011

Benjamin Franklin's Words of Wisdom For Closely Held Businesses

Most of my practice currently consists of representing businesses in disputes with their insurance companies and helping international companies do business in the U.S. However, I started my career as a general commercial litigator, handling everything from banking and securities litigation to product liability cases. Although my current firm represents many larger companies, we also represent many middle market companies and family businesses. One staple in this area is what I loosely call the "corporate divorce." 

Corporate divorces happen when business partners (I use the term in the general and not purely legal sense) no longer get along. Perhaps there is a difference in where to take the business. Perhaps one partner has worked hard and built the business when the other has been content to sit back and share in the profits. Perhaps animosities have built over personal issues that really have little to do with the business. 

Often, these animosities divide life long friends and family members. The resulting disputes can be every bit as acrimonious and destructive as a marital divorce. The primary reason that these disputes develop is because the partners never contemplated that their interests would diverge and consequently never planned for it.

One of the greatest citizens that America ever produced was Benjamin Franklin. Before Franklin achieved success as a civic leader, scientist, inventor and diplomat, he was a successful businessman, a printer by trade. Franklin achieved success by hard work and through developing successful alliances and partnerships. Franklin set up a number of his apprentices in their own printing businesses, seemingly without disputes or disagreements. Here is Franklin's advice from his famous autobiography:

"Partnerships often finish in quarrels; but I was happy in this, that mine were all carried on and ended  amicably owing, I think, a good deal to the precaution of having very explicitly settled, in our articles, every thing to be done by or expected from each partner, so that there was nothing to dispute, which precaution I would therefore recommend to all who enter into partnerships; for, whatever esteem partners may have for, and confidence in each other at the time of the contract, little jealousies and disgusts may arise, with ideas of inequality in the care and burden of the business, etc., which are attended often with breach of friendship and of the connection, perhaps with lawsuits and other disagreeable consequences." (Franklin's Autobiography is in the public domain and is available free in's Kindle store).

Franklin's clear and concise advice rings as true today as it did when it was written over two hundred years ago. While technology will change and new businesses will be started and others will become obsolete, human nature is still the same. If you are in a closely held business, whether it be a start-up, small, medium, or large, Franklin's words are some of the best free advice you will ever receive.

Here are a few other thoughts on how business partners can avoid, as Franklin so aptly put it, "lawsuits and other disagreeable consequences":

1. 50/50 is almost never a good idea. Many friends and family members envision a "50/50 partnership" as the ideal business arrangement. Although it may seem like a good idea when the business is starting and goodwill among the participants abounds, 50/50 partnerships seldom end well. When disagreements occur, which they will, 50/50 partnerships result in automatic deadlock, with no way to move forward. Note that, in my experience, there is a direct positive correlation between the success of this business the the likelihood of a dispute. If the participants are unable to agree on a resolution, the only legal solution is often the appointment of a receiver to take control and run the business and sell it or dispose of its assets. Not a happy result.

2. You need an exit strategy from the get go. If you are involved in any venture with more than one investor, you should have an exit strategy in your operating agreement, shareholder's agreement, or partnership agreement from the very beginning. There are numerous options, but typically such provisions provide for one party buying the other out based on an agreed metric. 

3. If you did not document your business arrangement properly at the beginning, do it now. If, as is so often the case, you started a business venture without documenting the relationship among the participants, and there is still good will among the participants, do it now. Just because things are going well now does not mean that harmony will last forever. View the present cordial circumstances as a second chance to do when you should have done when you started the business.

4. Bring in new "partners" carefully. Often, businesses will want to bring in an individual as a "partner," perhaps as a reward for loyal service or perhaps to provide an incentive to a new participant viewed as valuable to the business. Although the concept of an "equity kicker" may seem like a good idea, keep in mind that it creates an additional level of risk and entanglement. Consider other forms of rewards in the form of structured bonuses, etc. If you do bring in a new partner, have an exit strategy if things do not work out.

5. If there is a dispute, see an experienced lawyer sooner rather than later. If things seem to be going south, see an experienced lawyer sooner rather than later. The sooner that a dispute can be resolved the better. Business people almost always, in my experience, underestimate the toll in time, distraction, and human energy that a dispute will impose on a closely held business. Be careful in selecting a lawyer. If all the lawyer can talk about is the fight and taking it to the other side, that may appeal to your raw emotions, but it rarely makes for a quick or relatively painless resolution. Be open to the possibility of mediation, as it is often the best (and least public) way to resolve disputes.