Depressed economy leading to business bust-ups

Depressed economy leading to business bust-ups

News that our GDP had shrunk by 2.2% in the first quarter of the year, coupled with downward revisions of growth forecasts, are casting a pall on the investment climate. Deals are not only drying up, but according to Gary Palmer, CEO of Paragon Lending Solutions there has been an increase in business partnerships bearing the brunt of the economic pressure.

After the initial flush of economic goodwill post the inauguration of President Ramaphosa, Palmer says the he has seen a flurry of business owners looking for finance to buy out their business partners.

“We have had a number of attorneys and accountant refer dissatisfied partners to us who are looking to exit partnerships. When the economy slows – as we have seen over the last few months – many partnerships begin to show signs of stress. All too often partnerships are seen as tools of necessity and those who rush into these deals without properly exploring the common values between parties will not fare well when things get tough. What many don’t understand is that undoing a partnership is not as simple as they may think and will come with legal and other costs over and above the finance to buy a partner out, ” explains Palmer.

Palmer looks at the most common causes of business bust-ups and how to avoid them:

1. Misaligned expectations

This occurs when potentials partners don’t share a common vision of where they want to go, how they want to get there and what each wants from the deal. Misaligned expectations of a business venture will result in disagreements sooner rather than later as they impact every strategic (and even some operational) decisions. It is worth considering a mediated session between partners before the deal is even drafted.

2. Effort Resentment

Another problem creeps in when one partner feels like they are tasked with doing all the work. Resentment around how much effort is put into the success of a venture is not something to be taken lightly – irrespective of it being based on perception or fact. Most contracts will be clear on the value of the equity each partner has, but many ignore the value of sweat equity and how that will be measured and factored into the deal structure.

3. The Golden Rule

Many partnerships are based on one individual who puts in the lion’s share of the capital and another who is committed to doing the day-today work. Effort resentment extends beyond the deal negotiation. When a contract between partners is drafted it reflects a future which is not yet known. As the venture progresses, reality will set in and the division of labour agreed at the outset may not match day-to-day business in year three or four.

It is sometimes useful to draft partnership agreements as you would a lease. Give it a three- or five-year timeframe, with clear deliverables and then, at the end of the period, re-assess the partnership and allow for renewals or re-negotiation. Having a sunset clause in your partnership agreement removes the soul-crushing feeling that you are trapped in an unhappy relationship with no chance of escape.

4. Honour amongst thieves

Although seldom encountered, there are some partnerships which fall apart because someone is doing something blatantly untoward. Finding out your partner had their hand in the till can be devastating but in tough financial times, such as we are currently experiencing, some people will resort to desperate measures.

5. Absentee landlords

In many cases, a partner may have committed capital to a venture and even agreed to joint expectations. But other work commitments (or a lack of interest) means they disappear from operations for extended periods. No-one wants to work with people who are uninterested in the future of your company. However, the truth of the matter is any breakup has associated costs. Unwinding a partnership can cost more than setting it up and this should be considered before going down that road. Many investors are involved in multiple ventures with the same partners and exiting one deal may result in prejudicing the future of others.

While no-one can predict how long the economic slump may last, minimising the potential for partnerships falling apart requires a meeting of minds. According to Palmer, this means agreeing to a common set of values and ethics which will govern how the business is run.

“Partners need to agree on how they see the world if they hope to make a success of the business relationship. Thereafter, they should explicitly voice their expectations of how the venture will work, what they want out of it, and how they see their role in achieving that result. In some instances business partners have been together longer than they have been with their spouse. It makes sense to treat the relationship with the same care. More particularly, healthy partnerships will attract more investment and will be a key decision factor when it comes to raising future funding,” Palmer concludes.