When the Fairness Scale Starts to Tip the Wrong Way

Posted on March 2, 2015 in Disputes

Like any other relationship, one with a business partner is not always on an even keel. You do the best you can, recognizing that there needs to be give and take. The important thing is to make sure that the “giving” and the “taking” isn’t one-sided.

This is especially important in situations where each partner is responsible for bringing in different lines of business. What happens if, over time, one partner is a bigger producer than the other? Wesley Deaton, Esq., a business attorney in North Carolina, neatly points out not just the fairness problems, but also the valuation problems inherent in letting this kind of situation fester over time.

Let’s say Partner A brings 70 percent of the company’s business; Partner B brings in only 30 percent. A is fed up and wants to split up.  As Wesley points out:

Unfortunately for Mr. A, however, the assets will be split in proportion to stock ownership: 50 percent each; which is not in proportion to the amount worked. Perhaps Mr. A had, when he set up his company, entered into some sort of agreement by which he could buy out Mr. B at some point. That’s savvy, but if the purchase price is determined by the company’s value, Mr. A has hurt himself by letting things drag on so long. He’s increased the value of the company by his own labor, and is now going to have to pay Mr. B a premium for his stock–stock that rose in value primarily by Mr. A’s actions!

Word to the wise: speak up! Don’t be afraid to discuss these issues.

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