Partnership Mediation Case Study

New Venture Suffers From Unmet Partner Expectations

George and Nora are partners in a new gourmet food store in an upscale Washington D.C. neighborhood.   The store was starting to gain traction after a rocky first year but their inability to communicate was making it hard to take timely action and they worried that they were missing out on critical opportunities. They agreed that mediation was the best course to try to resolve their issues.

Partnership Background:

The partners met and became friends in business school almost fifteen years ago and had remained friends since then.  They both had experience as management consultants, but neither had run a retail store.  Nora had been in a business partnership previously that had ended very dramatically, and expensively, and was sensitive that this partnership not end as that one had.

They had decided on a 50/50 equity split though George contributed over 70% of the start-up capital.  He planned to keep his job as a partner in a management consulting firm and Nora would manage daily operations of the store and keep some of her own consulting clients on the side.  He took on the role of CFO and Nora was COO.

A year in, the store launch was over-budget, they were having issues with inventory management and staffing, and both felt unable to communicate their concerns as attempts were often met with defensiveness on both sides.  One of the store staff was now running interference on their communication; something both of them knew was a bad idea.

Key issues:

  • Nora felt that her work at the store had become all-consuming, much more than expected, and wanted additional equity to compensate for lack of salary. George agreed that Nora was much more engaged in the store, but saw that as part of their deal and felt her management-by-crisis led to the financial distress in the company.
  • They were going to need another capital infusion to continue and George was reluctant to do this without resolving their work issues.
  • George had always seen Nora as incredibly competent and was surprised by how much support and input she needed in managing store operations.  He had seen his role as contributing capital, monitoring finances and thinking strategically, and given his demanding job that was all he felt able to do.
  • Nora valued George’s advice; it was the most valuable thing she thought he brought to the business. His lack of responsiveness, sometimes not responding to her texts for days, left her without support in dealing with day-to-day decisions, but then second-guessed when it came to the financial implications.
  • George was sometimes late with financial reporting which Nora felt made it hard for her to manage inventory and plan appropriately, which affected sales and customer service.
  • They both were concerned that they did not interact as friends at all anymore and the business had taken over their entire relationship.

 

Results:

  • We completed an “Ownership Matrix” to give more detailed, and documented, accounting of what each was bringing in terms of capital contribution, skills, and time to the partnership and how that calculated into their ownership shares.
  • While Nora and George made an effort to define roles at the start, they were not explicit enough about the details of their expectations of each other. A year in, they had a clearer idea of what needed to be done and were able to better divide and assign responsibilities.
  • The partners were reassured by what their assessment reports showed about how well-aligned their values were.  They had both done assessments before, but seeing them side-by-side reminded them of the core of their long friendship and gave them confidence in their ability to resolve issues together.
  • During the mediation they agreed on parameters for financial decisions that were part of operations that Nora could make unilaterally.   George agreed to add additional capital as part of a structured plan and also agreed to meet reporting deadlines consistently.
  • Their Memorandum of Understanding documented their decisions, a six-month time line to implement the changes, and benchmarks by which the changes would be measured.
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