Resolving Partnership Disputes at the Laboratory

Avoid court to keep the cash

Bruce Bryen, CPA, CVA

Even successful partnerships at the laboratory may dissolve when egos get in the way of sensible solutions. There is only one winner if the points under consideration are not resolved amicably: the attorney for each side in the dispute. Preparing for a trial with depositions, testimony, and time away from work during the process can destroy a successful laboratory as well as emotionally drain the participants in the battle. Those who settle things among themselves essentially get a “monetary reward” by keeping funds otherwise paid to attorneys; they also avoid the stress and distraction of a legal battle.

If there is someone the partners trust, such as their long-time CPA or financial advisor, who can sit with them and explain the consequences of bringing an issue to court, it will certainly do no harm. Similarly, it is important to make sure that the advisors do not ignore the input of the owner(s). These advisors do not have the equity stake that the owners do have and do not face the risks that the participants may.

Sometimes when partnership disputes arise, it is like a divorce because emotions can get the better of those involved. This is especially true when the partnership has been together for a number of years and things seemed as if they were working well. Operating agreements will often overcome many of the issues that the partners seem upset about, especially if it is up to date based on the successful business and cash flow of the laboratory. More often than not, thought, there are no operating agreements in place. One may wonder how this can occur. Laboratories often begin small, sometimes with little to no capital since the partners have none to invest. As the operation grows and becomes profitable, those working on a handshake continue that way. So when disputes arise, there is nothing in writing that will settle things based on prior agreements.

The owners should look at the profits and understand that duplicating them in another laboratory business will be difficult. Questions to be addressed include: How long did it take to get the laboratory to the point it is now? Will the favorable reputation and current flow of funds continue upon the dissolution of the laboratory? Can the owners enumerate who has been responsible for each and every duty? Who has the contacts, cultivates sales, and/or receives payment for those services? These are some but certainly not all of the points to be raised in an attempt to resolve the dispute.

The true costs of going to court are rarely understood, fortunately, by each of the laboratory owners. The reason it is fortunate is because it probably means that this event has not happened before now. The monetary cost to go to court does not include the amount of time the owner(s) spend away from the business of running the laboratory. How much income is lost when the owner is not doing what he or she does best working at the laboratory? Gathering documents for the attorneys and experts who will assist is an enormous task for every partner involved. If confidentiality is an issue, each owner will do it themselves or want to have a trusted employee do this task for them. Either way, this results in lost productivity. Each partner will have meetings with their attorneys and experts as the trial date nears. If this is not bad enough, no one is able to guarantee the outcome of the judge’s or jury’s decision.

Much like in a divorce proceeding, each owner usually thinks that he or she is being as reasonable as can be, but they may still be miles apart in what constitutes a workable compromise. After all of the money and time spent, if nothing settles the dispute, then the case moves to court. The first event ordered by a judge is usually that the parties must sit together with their attorneys and try again to resolve the dispute before the judge hears the case. Those involved usually think this is a waste of time, but this settlement conference must occur. In a typical situation, at this juncture, the parties are probably at the 1-year mark of the case without the judge even hearing it.

The best advice anyone can give is that an all-out effort should be made for resolution. The parties still need to work together while all of this is going on, and the employees know what is taking place. Of course, it is critical to make sure that the dental customers do not know about the dispute, since they may become leery of sending cases to the laboratory in its current format. In the final analysis, what is better for the owner(s): the continuance of the laboratory while working together and attempting to negotiate a final settlement, or the wait, cost, and uncomfortable year or more fighting to win a court battle? Only the participants can tell.

About the Author

Bruce Bryen, CPA, CVA, is the principal in the firm of RKG Tax and Business Services, LLC, in Fort Washington, Pennsylvania.