Business Negotiation Skills: How to Deal with a Failing Business Partnership

It's not always easy to enter into business negotiation when your partnership is failing.

By — on / Business Negotiations

business negotiation

It had seemed like the beginning of a fruitful relationship and successful business negotiation. Back in April 2012, six wealthy businessmen teamed up to buy the Philadelphia Inquirer and several affiliated businesses for $61.1 million, promising to work together to reverse the newspaper’s flagging fortunes. Their infusions of cash and appointment of a Pulitzer Prize-winning reporter, William K. Marimow, as editor in chief reassured a staff made nervous by cost-cutting and a string of failed ownerships.

But the honeymoon was short-lived. Two of the new owners, George E. Norcross III, and Lewis Katz, accused each other of meddling in the paper’s operations, in violation of a pledge they had signed to stay on the sidelines. Norcross had put his relatively inexperienced daughter in charge of the paper’s website, a decision that displeased Katz.

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Business Negotiation Scenarios in Real Life: A Failing Agreement

In October 2013, Marimow was fired after clashing with the paper’s publisher, Robert J. Hall. Katz and another owner, H. F. Lenfest, sued the paper and Hall, saying that Norcross had dismissed Marimow without consulting Katz, in violation of an agreement they had made to co-manage the company. He and Lenfest asked for Marimow to be reinstated and Hall to be fired.

Norcross countersued. Because Katz’s longtime companion, Nancy Phillips, was the paper’s city editor and an ally of Marimow’s, Norcross said that Katz was biased in favor of Marimow. Then Norcross and another owner, William P. Hankowsky, offered to buy out Katz and Lenfest’s 42% stake in the company for $29 million, an amount they said would mark a 12% profit on the 18-month investment. Katz and Lenfest rejected the business negotiation. The newspaper’s guild issued a statement calling the infighting “a disgrace.”

In November, a judge reinstated Marimow as Inquirer editor but declined to remove Hall. The following month, Norcross bought out another owner to become the paper’s majority owner. With the five remaining owners unable to settle a business negotiation to come to an end to their partnership, a Delaware court chancellor ordered that it be dissolved via an auction.

To use a term popularized by actress Gwyneth Paltrow and musician Chris Martin during their breakup, separating romantic partners often strive to “consciously uncouple”—to accept individual responsibility for their role in the breakup and work together to separate peacefully for the sake of themselves and other interested parties. In a similar manner, business partners who decide to end their working relationship typically hope to minimize any negative fallout that may arise from the decision.

But as the Inquirer story illustrates, anger, bitterness, and the desire to come out ahead can complicate those goals. By contrast, as we will see, business partners who prepare in advance for the possibility of dissolution can reduce its strain and expense.

A business “prenup”

Just as many engaged couples reject the idea of a prenuptial agreement, businesspeople often fail to thoroughly negotiate what will happen if their relationship breaks down. Optimistic that their business will grow and thrive, and fearful that discussing possible conflict will sour the deal, they don’t consider the strong possibility that one day they will want to go their separate ways.

Norcross and Katz, the warring newspaper owners, couldn’t even agree on what they had agreed on regarding a future dissolution, David Sell writes in the Inquirer. Norcross reportedly told a Delaware judge that he had been willing to share management oversight of the company with Katz only if their agreement specified terms for an “amicable divorce.” But Katz testified that he had no recollection of any such discussion. “It wasn’t the time to talk about divorce,” Katz reportedly said, adding that there had been “a lot of respect” between him and Norcross during their negotiations to buy the paper.

In fact, the flush of courtship, when respect and goodwill are high, is an excellent time for business partners to talk about the possibility of a divorce. Rather than signaling pessimism, the topic should communicate a levelheaded desire to prepare for the range of outcomes that can affect business partnerships.

During your initial dealmaking negotiations, you might say something like the following: “Though I believe our relationship will be long and rewarding, I hope you agree that it’s important for us to negotiate an exit clause that would work for each of us—and the company—if one or both of us want to move on.”

Dealing with deadlock during a business negotiation

When partners are no longer capable of making joint decisions about the management of their business, they are said to be deadlocked. If the business is failing, they are left with the task of dividing up debt and assets. If the business remains viable, they might agree to seek new ownership with the goal of cashing out.

When one or more of the parties want to retain ownership, one partner typically makes an offer to sell her shares or buy out the other party; if the other side is interested, the two try to settle their business negotiation from there. If these business negotiations break down, the parties remain locked in a failing partnership, and the prospect of a costly legal battle becomes more likely.

Notably, parties often overlook a more efficient method of dividing assets that may actually be specified in their contract, according to researchers Richard R.W. Brooks (Yale Law School), Claudia M. Landeo (University of Alberta), and Kathryn E. Spier (Harvard Law School). Lawyers often include buy-sell provisions—clauses that stipulate a particular separation method—when drafting contracts for business partnerships and limited-liability companies. When the time comes to separate, partners often ignore these provisions, to their detriment.

The Texas shoot-out

One buy-sell provision that has practically become boilerplate in certain types of partnership agreements is the so-called Texas shoot-out (or “shotgun provision”). In a Texas shoot-out, one owner or group of owners propose a price; the other owner or group then must decide within a specified number of days whether to buy the proposer’s shares for that price or sell their own shares at that price. The Texas shoot-out resembles the classic cake- cutting procedure, in which one person cuts the cake (names a price) and the other chooses one of the slices (whether to buy or sell at that price). Because a Texas shoot-out requires the proposer to either buy or sell for the price he names, it gives him a motivation to name a fair price.

Despite its ubiquity, separating partners rarely trigger the Texas shoot-out clause in their contract. That’s a mistake, according to Brooks, Landeo, and Spier. Because Texas shoot-outs dissolve failing partnerships swiftly, they can be the fairest and most efficient method of dividing assets, the researchers found, particularly when parties own roughly the same share in their organization. If one partner has more information about the firm’s value than the other, they can improve the fairness of the outcome by having the more informed party serve as the proposer.

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The business negotiation researchers advise new business partners to include mandatory Texas shoot-out clauses in their negotiated contracts when they have a similar ability to run the firm and similar financial resources. If, on the other hand, one partner has much deeper pockets than the other, a Texas shoot-out could enable the richer partner to one day acquire the business at a predatory price. Similarly, a Texas shoot-out would not be the best choice if one partner was incapable of managing the firm on her own.

Going once, going twice

Parties might also choose to dissolve their partnership through an auction. When two parties are both fully informed about the value of their shared assets and have equal access to capital, an auction can be just as equitable as a Texas shoot-out in terms of dividing value, write Landeo and Spier in an article in the Yale Journal on Regulation. But when one party, such as a managing owner, has better information about the value of the company’s assets, then a Texas shoot-out can be a fairer choice than an auction.

Partners can choose from various auction formats, as discussed in Harvard Business School and Harvard Law School professor Guhan Subramanian’s book Dealmaking: The New Strategy of Negotiauctions (W. W. Norton, 2011). In a sealed-bid auction, the party that submits the higher bid purchases the company for that amount and buys out the other party. The owners of the Inquirer engaged in an English-style auction: Bidding began at $77 million and increased by $1 million every 10 minutes until one party dropped out. Norcross, Hankowsky, and owner Joseph Buckelew competed against Katz and Lenfest.

Katz and Lenfest won the company for $88 million, an amount that included about $15.3 million in debt and significantly exceeds the larger ownership group’s 2012 purchase price of $61.1 million. The Norcross group was to be paid $41.7 million for their shares within 15 days. Editor William Marimow was in, publisher Robert Hall was out, and Lenfest was appointed interim publisher.

“It’s going to be a lot of hard work,” Katz said, noting that the paper’s advertising and circulation had been falling for years. “We’re not kidding ourselves. It’s going to be an enormous undertaking.”

As part of their plan to turn around the company, Katz and Lenfest said they would turn over company management to a board of directors and bring in new investors. Whether the company will more carefully negotiate terms for investors to consciously uncouple in the event of a future rift remains to be seen.

In a tragic twist to the story, just four days after the auction, Katz and six other people were killed in a private plane crash on a Massachusetts airfield. Lenfest said that Katz’s son, Drew, would take over his father’s seat on the media company’s board.

What tips do you have for business negotiation with a failing partnership? Leave us a comment.

Claim your FREE copy: Business Negotiation Strategies: How to Negotiate Better Business Deals

Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.

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