When Partners Part – A Five-Act Play

The recruiting business is tough. You fight for every assignment and every placement. Most are made by convincing employers that their job requirements are unrealistic, then convincing someone else’s employees to work for them. There can only be only one successful candidate in each placement. The high roll; the big race; the whole enchilada. Winner take all. It requires someone with a strong personality, a “go for it” attitude and a sense of timing.

It is this entrepreneurial spirit, and the stresses of retaining entrepreneurial consultants, that makes the divorce rate so high among owners. Ironically, the problems arise far more frequently in the successful businesses.

Here’s a typical placement play:

ACT I

A and B leave their old employer, where they each worked a desk. They come into a lawyer’s office holding hands, and insist on a partnership, or each owning half of the corporation stock. Their first “partner’s quarrel” is about who should be President . . . each wants the other to have this coveted title. The comment by the lawyer that they are building a deadlock into the relationship either way is just theoretical legalese. Their buy-sell agreement will cover it when they get around to working out the details. Besides, neither of them have an ego problem and they trust each other completely. That’s why their next stop is to the bank to open the checking account which will authorize withdrawals by either of them.

A is the high biller. He thrives on a 12-hour recruiting day . . . the thrill of the chase and the kill. A talking, dialing placement machine.

B is an administrative type . . . the kind who does everything in the office but face the rejection of most recruiting calls.

It seems like a perfect marriage: A will keep the doors open, while B will hire, motivate, train and retain consultants.

ACT II

Predictably, A “concedes” to be President. Anything to keep peace in the family. He continues pumping out placements without missing a beat. B deals with the lawyer and accountant, handles the negotiations for the lease, furniture, phones, job boards, office supplies, and various other items. After a few months, he starts hiring and working with consultants.

Within a year, the business grows to ten desks, and the cash-in reaches $1,500,000. Each “partner” withdraws an equal amount. A spends the money faster than he can write his checks, and considers himself the sole reason for the success of the office.

His relationship with the consultants is strained from the beginning. Those that place are threats; those who don’t are thieves.

B runs out of busywork, and starts working shorter hours. Signing a buy-sell agreement is a subject neither mentions. A replay of Act I in the lawyer’s office would include several scenes that didn’t appear in the original version.

You probably know the script by heart. Even in this relatively uncomplicated marriage, right and wrong, fair and unfair are inextricably combined. As one owner so perfectly stated it: “When I work harder, I feel angry. When he works harder, I feel guilty!” The dependence injects additional fuel into an already volatile business. Consultant custody questions fan the fire.

Then, after a short intermission, here is . . .

ACT III

There are five basic areas of dispute. In order of importance to the parties, they are:

1. The name.

2. The phone number.

3. The location.

4. The employees.

5. The amount of the buy-out.

Logically, the order should be reversed. It’s not. Interesting prose on how closely recruiters identify with their businesses.

Article Continues Below

If there is a buy-sell agreement, or even a property distribution agreement, no problem. This occurs in about 5% of the cases. The rest of the time, it’s guerilla warfare.

The business lawyer and the accountant are usually the first to know about the problem. Independent calls from each of the “un-partners” are the clues. You would think they would realize that these professionals can’t ethically advise, assist or represent one against the other. At this point, information will be given to both or neither. The phone company, landlord and creditors can be expected to look out for themselves.

ACT IV

Usually, self-defense is next. A starts by giving out his home phone number to clients and candidates, sandbagging placements by waiting to invoice them, or (a few weeks later) even invoicing them with a home or post office box address. B is liberal with consultant advances, begins checking out office space, and goes back to working full time on administrative stuff for himself.

Psychological warfare also occurs. The most absurd example we’ve seen was when A called the phone company to remove the phone on B‘s desk. When the technician arrived, B was working, and A was out picking up a check from a client. B honestly didn’t know why A had placed the order. A arrived to find his phone had been removed.

ACT V

Assuming that a buy-sell agreement doesn’t exist or isn’t honored, and the parties are beyond the point of settling their differences, one or both of them go to another lawyer and file an action for dissolution of the partnership or corporation, an accounting, declaratory judgment of their rights and liabilities, and breach of contract. Breach of fiduciary duty, fraud, conversion (civil theft), conspiracy, and injunctive relief are also there.

Ultimately, some arbitrator or judge will try to figure out what the business is worth. This is impossible to do in almost all cases, because there are limited fixed assets, no inventory items, and no receivables. There is usually not even good will, since placement is a “what-have-you-done-for-me-lately” business

EPILOGUE

If you have ever been in a partnership, you know that there should be a mandatory cohabitation period of not less than one year to be eligible. It should also be against the law for two people not related by blood or marriage to equally own the total number of shares in a closely held corporation.

We have seen so many of these situations backfire, that when two parties insist, they should have to sign a “Family Feud Agreement” before proceeding. Our offices require the following:

We understand that in the event it becomes necessary to enforce or interpret the terms and conditions of either of our ownership interests, or any part thereof, because we do not agree, the Law Offices of Jeffrey G. Allen cannot advise, assist or represent either of us against the other. Further, we understand that if either of us desires a dissolution of the (partnership or corporation), and we cannot agree on its terms and conditions, it may become necessary to seek a court determination of our rights and liabilities therein. The prevailing party shall be entitled to reasonable attorney’s fees, costs, and other necessary disbursements in addition to whatever other relief may be awarded.

When this agreement was first used in 1981, 60% of the equally-held partnerships and corporations never made it to a second season. Now the mortality rate is down to 20%. The reason? Clients realize they are making a mistake and select an acceptable alternative.

There are several ways to avoid the deadlock and “egolock” created by equal ownership. The best we’ve found is to have the parties incorporate, so they have all of the protection it affords. Then we issue 49% of the stock to each of them. The remaining 2% is issued to someone they both trust. Otherwise, 51% should be issued to one and 49% to the other. If they can’t decide, we suggest they flip a coin while they still have one. Both are winners.

More than thirty-five years ago, Jeffrey G. Allen, J.D., C.P.C. turned a decade of recruiting and human resources management into the legal specialty of placement law. Since 1975, Jeff has collected more placement fees, litigated more trade secrets cases, and assisted more placement practitioners than anyone else. From individuals to multinational corporations in every phase of staffing, his name is synonymous with competent legal representation. Jeff holds four certifications in placement and is the author of 24 popular books in the career field, including bestsellers How to Turn an Interview into a Job, The Complete Q&A Job Interview Book and the revolutionary Instant Interviews. As the world?s leading placement lawyer, Jeff?s experience includes: Thirty-five years of law practice specializing in representation of staffing businesses and practitioners; Author of ?The Allen Law?--the only placement information trade secrets law in the United States; Expert witness on employment and placement matters; Recruiter and staffing service office manager; Human resources manager for major employers; Certified Personnel Consultant, Certified Placement Counselor, Certified Employment Specialist and Certified Search Specialist designations; Cofounder of the national Certified Search Specialist program; Special Advisor to the American Employment Association; General Counsel to the California Association of Personnel Consultants (honorary lifetime membership conferred); Founder and Director of the National Placement Law Center; Recipient of the Staffing Industry Lifetime Achievement Award; Advisor to national, regional and state trade associations on legal, ethics and legislative matters; Author of The Placement Strategy Handbook, Placement Management, The National Placement Law Center Fee Collection Guide and The Best of Jeff Allen, published by Search Research Institute exclusively for the staffing industry; and Producer of the EMPLAW Audio Series on employment law matters. Email him at jeff@placementlaw.com.

Topics

Leave a Comment

Your email address will not be published. Required fields are marked *