Co-founders at odds.


15th July, 2019

When co-founders no longer get along, can their business carry on?

The stresses of jointly running an SME can strain most interpersonal business relationships, sometimes to the point where co-founders believe they can’t continue. Fortunately, an equitable solution may not be out of reach, writes Mark Phillips.

The business world is littered with failed relationships. Facebook co-founders Eduardo Saverin and Mark Zuckerberg’s infamous fall out even became a movie, The Social Network. More recently, dubbed the “Godzilla” of all divorces, Amazon CEO and the world’s richest man Jeff Bezos and his wife MacKenzie split, although they tweeted that they may occasionally still work together.

Not all disputing business partners raise the white flag or hang out a “for sale” sign, but in acrimonious situations, there’s probably no alternative. It’s either sell out to the ex, dissolve the SME and go your separate ways – often at the risk of bitter monetary disputes and drawn out, stressful, hugely expensive legal battles – or try to keep co-working with someone you don’t think you can abide.

Why SMEs fail

The Australian Centre for Business Growth at the University of South Australia Business School recently unveiled research identifying the reasons many Australian SMEs fail.

In a first-of-its-kind study, data was collected from 650 CEOs who had been part of a company failure or whose small or medium-sized entities also went south. The top reasons cited were lack of leadership management skills, including poor planning (25 percent), insufficient market research, marketing or sales skills (17 percent), mismanagement of financials (14 percent), and being blindsided by externalities without a contingency risk management plan (13 percent).

Notably, 11 percent said poor governance structures, problems with partners or family members led to failure.

READ: Succession planning as a competitive advantage strategy

Of course, many family businesses or partnerships between friends do survive inevitable disagreements. All business partnerships are a lot like marriages, which rings true even when things start to go off the rails. When any business partnership ends, it’s a lot like a marital divorce.

Accordingly, because the Code of Ethics for Professional Accountants stipulates that agents avoid actual or potential conflicts of interest, you might have to find another accountant or financial advisor. In cases where warring partners share the same accountant, it is almost impossible for that agent to objectively and impartially continue to advise both parties.

Maintaining a successful, joint-owned, income-generating SME based on complementary strengths, talents, and experience might well be the best option.

Collaborative practice

Collaborative practice – also known as collaborative divorce – is a comparatively recent alternative dispute resolution (ADR) process to help partners find durable solutions to interpersonal differences with the support, protection, and guidance of lawyers and other trained professionals. It comes with one proviso: litigation is strictly off the table.

Conflicting parties must sign a Collaborative Divorce Participation Agreement, undertaking not to go to court while attempting to negotiate a resolution.

“It’s about being able to take a different perspective to understand the concerns and fears the other person might have, and that their world view might be very different to yours,” said Hetherington Family Law principal Jennifer Hetherington.

“We often find solutions that for one partner might mean very little, but for the other mean a great deal, which isn’t really possible through other processes.”

Retaining trust

Hetherington says it is critical to reach a formal agreement on the roles each person will take in the future running of the business, along with their remuneration, otherwise risk a breakdown in communication and trust. Disagreements can easily become serious disputes, so as far as practically possible, minimising anything but essential daily interpersonal communication can help reduce stress and misunderstandings.

If disputing partners really want to move the business forward together, it is vital to quickly establish interim agreements before trust completely erodes; an example is when one partner signs a new contract or purchases equipment – which they might have always done – but since separation, the other feels entitled to be consulted about.

READ: Family matters – the challenges of a family business

“If weeks or months drag on and one party has more information or control about the business, the other can quickly become suspicious about what they’re doing,” Hetherington warned. “What is not seen to be important by one might by the other be interpreted as a significant breach of trust.

“People need to be on the same page.”

The same applies to staff.

“Sometimes [communicating a co-founder split] is easier done in a joint, all-staff email rather than a meeting, which can be a bit awkward,” she said. “But, if both parties want to stay in the business, it’s important to try to present a united piece of communication.”

Accounting matters

Hetherington, who is associated with the International Academy of Collaborative Professionals, says that above all else, it is imperative business partners continue to closely liaise with their accounting advisors, whether APES 110 precludes using a mutual agent or not.

“Accountants often have documents that we need, like financial statements and tax returns, and being able to send those through to us as PDF documents quickly is a lot easier than the client having to go and source them,” she said.

“We will often have a client tell us what they believe their [business structure] to be, but it turns out they don’t understand it at all, and being able to get that information directly from their accountant makes it so much easier and less expensive overall.”

In other words, it enables accountants to be a source of information to ensure all financials are in order but leaves the negotiations to a neutral financial professional trained in collaborative practice, who then hands the matter back to the accountant once any agreement is formalised.

If it’s broken, can it be fixed?

Of course, the overriding issue is whether anyone is ever really going to come up with a permanent solution.

“Because divorce is such an individual thing between parties, we can’t pluck a statistic from the air to say how many post-divorce business relationships prosper, because their success or otherwise could hang on many factors,” Hetherington said.

“The key is a willingness to see the other party’s point of view and work together to achieve mutual goals.”