By Lynne Abercrombie, CPA, CGMA, of Haynie & Company (formerly known as Abercrombie & Associates, PC)
Starting a new business partnership can be a thrilling thing in the beginning: the sky’s the limit as you start implementing strategies for success together. Everyone gets along, the excitement is high as you build your business, and all partners and equity holders are working in tandem toward the same goal.
That said, some partnerships aren’t so lucky over time. Relationships can sour, partners can overstep their boundaries, and disagreements over how to handle things can result in angry stalemates. Then, you could ultimately be left picking up the pieces in the wake of a business split or termination.
How do you protect yourself in these situations, and how do you know when it’s time to pursue legal counsel? I’ve handled business partnership litigation for years, and I’ve encountered several tried-and-true ways to protect yourself upfront, and along the way of a business relationship:
Document, document and document some more
- Best practices are to have your own copies of all financial records, including core agreements, buy/sell agreements, minutes discussing financial changes, promises made to you, and initial shareholder agreements, Without these records, it might be hard for your attorney to prove you’ve been wronged. And make sure you keep electronic and paper versions of these documents away from the office.
- If you are at a place where you feel that so much bad blood has transpired and that some kind of “triggering” event might happen (unlawful termination, locks changed, that sort of thing), listen to your instincts and get smart. I’ve seen partners and equity holders suddenly be denied access to these records during a shareholder fight, so make sure to gather these documents in advance if there is a rift in the relationship.
- Although it’s best to always keep copies of all financial decisions, pay particular attention to all documentation that has an impact on you.
- Document all business conversations: keep copies of all your work contributions, how often you’ve received praise or approval and the specific types of financial contributions you’ve received. Ask for documentation of daily happenings and how you fit within the company, but better yet, make your own notes of conversations as a best practice.
Seek Legal Support
Oftentimes, I’ve seen litigation started because of contract disagreements, new partners being added to the business due to a death of the old partner, and especially, a lack of financial planning. To settle cases quickly and effectively, seek legal advice in advance of potentially damaging personnel or financial decisions.
Although arbitration might be time-consuming, it can sometimes be necessary to reach a middle ground between parties. Legal counsel will also be necessary in the event of a wrongful termination that disallows one partner or equity holder access to financial records.
I sometimes get asked if my clients should “tip their hand” giving hints to the other parties you’re seeking legal counsel. I’d advise against it, as it can cause disagreements, worsen the relationship, and accelerate decisions that could cause you significant hardship.
Common Sense is Key
Overall, the best takeaway I can provide is use your best judgment when decisions are made and agreements are settled. In the initial startup of a business, be diligent in acquiring records of all financial decisions, and of course, don’t agree to terms that could potentially be damaging to your person or career.
I would also encourage all parties to have an independent attorney review the documents before signing to explain the language within the document and the impact to the owner. If an independent attorney can’t understand the contents of the agreement, then others won’t either.
In conclusion, I suggest always taking preventative measures to keep yourself safe. Although we hope every medical practice and partnership will be successful, it’s foolish to not take the necessary steps to keep yourself and your livelihood in good hands.
With over 20 years of experience, Abercrombie & Associates, PC, is a full-service CPA firm in Woodlands, TX, with a diverse range of specialities in tax, accounting, estate planning and retirement. We pride ourselves on our professionalism, responsiveness and high-quality services. Contact us today to learn about our offerings and experience our Big Firm Talent, Small Firm Touch.