When a business partnership goes wrong, part II

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When a business partnership goes wrong, part II

On Behalf of | Mar 7, 2015 | Business Formation & Planning

In our last post, we began telling the story of a business partnership between two cousins that seemed successful for a while, but wound up in court. We will now discuss the outcome of the lawsuit, which is a cautionary tale about choosing the right partners for your business, and making sure everyone is on the same page regarding its operation.

To recap what we said last time: in 1985, a woman started a beer distribution business, but the business struggled. To keep the company afloat, the owner took out loans from her cousin, a real estate investor and economist. The loans totaled more than $500,000.

Eventually, business turned around, and in 2001, the cousin agreed to forgive the loans in exchange for a 34 percent stake in the company. He was supposed to have input on business decisions involving at least $50,000, but it appears that did not happen: the majority owner gave herself nearly $3 million in loans and “catch-up compensation,” and later sold the business without the cousin’s knowledge.

Complicating matters was the fact that the cousin, in need of cash, received $400,000 from the company as repayment of his loans, despite the 2001 agreement. At trial, the original owner argued that this meant the cousin no longer had a stake in the company.

But the judge disagreed. He ruled that the founder breached the partnership agreement and awarded the cousin more than $1 million to compensate for his lost equity and dividends.

Though most business owners select partners they know, respect and trust, occasionally disputes arise. The best way to prevent this is to structure the partnership in a way that everyone understands and accepts.

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