partnership-gone-bad

If you and your partner have a standard business agreement, great—but it won’t protect you if the partnership falls apart.

Standard agreements map out how to deal with the impacts of death, disability and bankruptcy. They’re essential, but you’re fooling yourself if you think they cover true worst-case scenarios.

Michael Vaughn*, a Vancouver-based advisor, found out the hard way.

Early in his career, he joined a senior colleague’s new, independent business. Vaughn, who was brought on for his investment expertise, thought they had a solid partnership agreement. But the document only covered common exit scenarios and didn’t protect him when things went sour.

Worse, some portions of the agreement were verbal—a major oversight.

Though he and his partner were compatible the first few years—both worked on “revolutionizing and growing the business,” he concedes—their connection deteriorated.

We exited “the honeymoon phase and entered a nightmare scenario,” he says. “My partner underwent a major personality shift. Whether that was due to greed, jealousy of my client relationships and expertise, or his natural disposition coming out, the relationship turned hostile.”

The older partner started exploiting holes in their agreement by bending compensation rules, adding clauses and altering how Vaughn could access equity.

Realizing it was impossible to save the marred partnership, he cut his losses. And, in the aftermath, Vaughn’s former partner used industry connections to attempt to ruin his career, forcing him to do damage control while getting back on his feet.

While a more detailed partnership agreement would have better protected his interests, it couldn’t account for a vindictive partner.

The lesson? Properly evaluate your partner’s personality, and then enact a complex, detailed agreement that protects your clients and your share of the business.

Test your compatibility

One major indicator of a prospective partner’s value is her work history and reputation, says David Shlagbaum, partner at law firm Robins Appleby & Taub in Toronto. “Look at the existing liabilities and assets of your target partner, as you would an investment in a business,” he says.

Find out her preferred compensation and fee structure, approach to risk, balance-sheet strength, and the content of her client reviews over the past five years. Look for red flags like high turnover rates and pending lawsuits. If your prospective partner won’t co-operate with the discovery process, walk away.

And, it’s not enough to have similar backgrounds and investing styles. You need to know whether your partner will be able to handle unanticipated challenges as your business evolves.

Vaughn recently started fresh with new partners; and, chastened by his breakup, proceeded with caution. Before sealing the deal, the new group met two-to-three times per week for six months to discuss operational details and business planning, as well as each of their working styles, outlooks and experiences.

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