You’ve planned your dream business. You’ve put together a top team. You’ve lined up the funding to make it a reality. Amid the unbridled enthusiasm, it’s easy to overlook the hard questions—What if it doesn’t work out? What if your partners don’t have the same tolerance for risk or your goals become incompatible?
Addressing these questions before you launch the business—or at the very least before problems arise—can be the difference between a brewery failing or succeeding. Here, with help from Candace Moon, a lawyer who specializes in independent breweries, we look at common mistakes and common-sense solutions that could help your business when a partnership becomes unsustainable.
Put It in Writing, Ahead of Time
The best time to prepare for scenarios that impact a partnership is before they develop, when every partner has a cooler head. In the heat of conflict, strong emotions take hold, leading to poor decisions.
“The best situations I’ve seen—where it’s been very civil, very professional—were people who basically thought about all these things potentially going wrong in the beginning,” says Moon. “They decided when they were friends, and unemotional, how they’d deal with those things—if they wanted to go in different directions, if the business wasn’t going well, if one person wanted to leave and one person wanted to stay. Unfortunately, if you don’t deal with these things ahead of time and they come up, at that point, people are very unhappy, angry, frustrated, and then it’s very difficult for them to have a very civil discussion.”
Think of your business operating agreement as a prenuptial and outline what happens if things don’t work out according to plan. If you’ve already launched and have an existing operating agreement, make sure you revisit it every time the business hits a significant milestone or changes direction. Taking on new equity partners? Review the operating agreement. Partner gets married or divorced? Review the operating agreement.
“It doesn’t matter if you formed your business 10 years ago,” says Moon. “You should review this stuff once a year, or at least every couple of years. Years two and three for a brewery are the time when they start thinking about expanding, so that’s a good time to go back and see what’s in your operating agreement. If you’re expanding, you’re probably thinking about bringing on investors or debt, so you’re going to need to update and change things.”
When couples go into business together, it’s even more important to work with an attorney who will ask the tough questions in a nonjudgmental way “because you need somebody who is going to bring up those worst-case scenarios. The last thing a couple wants to ask each other is ‘what are we going to do if we get divorced?’ So sometimes you need that impartial third person to bring that up.”
Keeping lines of communication open between partners is one key to keeping issues from metastasizing or reaching a point of no return. Brewing businesses are complex and require a lot of hands-on management; it’s easy for partners to get bogged down in day-to-day details and lose sight of each other’s changing outlooks or life circumstances, which may also impact their participation in the business. Take the time, at least once per quarter, to get away from the brewery and discuss how the business is performing at a higher level, how that aligns with the partners’ individual goals, and any changes that might be coming up down the road.
The Common Scenarios
“The most common occurrences are death, divorce, and disability,” says Moon. “But the harder question to ask is, ‘What if we get to the point where we just don’t like each other?’”
Generally, partnership breakups take one of two forms—either someone wants to leave or someone wants a partner to do so. No matter the circumstance, an operating agreement should address how this might unfold.
“You want to address this from the very beginning,” says Moon. “If one of the founders wants to leave, how does that change things? How much, if any, of their equity do they get to keep? If they helped build the business, they probably should keep some of it, but it depends on what that equity was based on. Was it based on building it and continuing with it for a few years? If someone leaves, do you want them to be involved in a decision-making sense but not an active sense?”
When the split involves asking another partner to leave, the stakes grow higher. “A lot of people don’t realize that being friends is different from working closely on a day-to-day basis. It’s tough to realize that there are some people they can’t work with. That can also get ugly.”
Married couples running a business together face even more pressure.
“How many divorces have we seen in this industry?” asks Moon. “It’s a sad side effect. Any time a couple ventures into something really stressful, that’s always a factor. There are days when you’re going to hate each other, even if you love each other. And I’ve seen situations that were doubly ugly—the end of the marriage and the end of the business.”
Other life events—impending retirement or a spouse’s retirement, a new marriage, new children, a health issue, a spouse’s new job—can all impact the business. Look at how things will change if a partner must relocate or cannot materially participate in the business. Agree in advance how you will deal with it.
Don’t Set the Business Up to Fail
One of the best ways to avoid conflict is to set up clear pathways to resolving problems. One of the more common scenarios is a 50/50 partnership with no tiebreaker in case of disagreement.
“Are you going to bring a third person on to the board to give advice, someone both partners respect and admire from the industry?” asks Moon. “No ownership, but a tiebreaker if it comes to that? I have one client who set it up so that one of the partners gets the final call if it’s a business decision, and the other gets the final call if it’s a brewing decision.”
Look at the Liabilities and Leverage
Be careful when setting up decision-making processes, as some concepts meant to protect the interests of partners can be costly when circumstances change.
“Two partners formed as a member-managed LLC with unanimous consent required for all decisions,” says Moon. “It’s not a big deal when there’s just two of them. At some point down the road, they decided to give their brewer 1 percent interest as a thank-you for being such a good employee. Soon after, the brewer left, not so happy. He decided he wanted to be bought out and came up with a number that bore no relation to what his 1 percent was worth. But because it was member-managed with unanimous consent, he could stop them from making any decisions or doing anything. If they wanted to expand and open another tasting room, he could say ‘no.’ If they wanted to buy a bigger brewhouse, he could say ‘no.’ He could stop anything they wanted to do, so they had to buy him out, and he got paid at least 50 percent more than his ownership stake was probably worth.”
While not legally binding, mediation is the best way to handle conflicts not addressed in an operating agreement. Like marriage counseling, it’s a neutral environment where each party can have their say with a third party to help resolve differences. Most importantly, a good mediator can defuse tension and find common ground, so partners can make decisions free of strong emotions.
“Brewers are passionate, artistic people,” says Moon. “I’ve definitely had brewers who were so pissed off at their circumstances that they would rather watch the whole thing burn to the ground than take what they were being offered.”
If some partners don’t agree to mediation, or to a solution proposed via mediation, then litigation may be the only recourse. This should be a last resort.
“As an attorney, it’s always informative and enlightening to put a client on the phone with a litigator who explains how much it costs to go to court,” says Moon. “It’s sad to say, but that’s sometimes what it takes to get someone to agree to mediation. You’re probably looking at a minimum $10,000 retainer, and that’s just the money the litigator is going to keep on hand. They’re also going to bill you the whole time.”
As a lawyer herself, Moon is honest about who wins when disputes go to litigation.
“The lawyers always win.”
Disclaimer—This article is for informational purposes only and should not be construed as legal advice. You should consult with your attorney for advice related to your specific issue or problem.