The trouble with partnerships Featured

9:48am EDT July 22, 2002

When David DeLullo went into the powdered metal business in the late 1980s, an aunt and a brother-in-law joined him as partners in Comtec Manufacturing.

His brother-in-law left the business without incident a few years later, when it was still struggling along in the start-up phase. But when his aunt, Aileen DeLullo, decided that she wanted to retire and get out of the business two years ago, the exit wasn’t so smooth, thanks to a less-than-clear buyout agreement and method of valuating the company’s worth.

Aileen DeLullo decided in 1997 that she wanted to sell her share of Comtec Manufacturing. David DeLullo says he was willing to buy out her holdings and suggested she get an appraisal for her share of its value. The company’s accountant valued her share at $1.25 million, says DeLullo, but his aunt wasn’t sure that is was accurate and got another opinion.

Meanwhile, David DeLullo offered his aunt $1.25 million, which she apparently declined. Then she hired an attorney, and the two parties engaged in a legal battle that ended up in court and took a year and a half to settle. It cost both sides thousands of dollars in legal fees.

Ironically, after all of the hassle, Aileen DeLullo ended up with $1.12 million for her share, less than her nephew’s original offer, and a stack of legal bills.

The parties’ lawyers disagree as to the appropriateness of the original buy-sell agreement. DeLullo’s lawyer, Gary Hunt, managing partner of law firm Tucker Arensberg, says it wasn’t adequate. Aileen DeLullo’s lawyer, Joseph Colavecchi, insists that it was, and that the personal mistrust and animosity between the two family members was the central problem and the reason that it dragged on and costed both parties a lot more than it should have.

That’s not all that unusual, says Colavecchi. “They all end up with greed on the part of both parties.”

Colavecchi says that there was nothing wrong with the agreement that David Delullo and Aileen DeLullo had drawn up when they initiated their partnership.

“I thought they had an excellent agreement,” insists Colavecchi. “I can’t imagine that they could have had a much better agreement.”

But Hunt says the contract “failed to consider some of the more obvious possibilities” that could occur in the course of a company’s ownership. “If they had had a more comprehensive buy-sell agreement, many of these issues would have never surfaced,” he adds.

The trouble with partnerships is that people who enter them usually do so because they believe that they can get along with the prospective partners, a reason some people go into business with friends or family members. Trouble is, business relationships can sour and leave partners who got into business under amicable circumstances bitterly at odds.

While Colavecchi and Hunt may disagree about the suitability of David and Aileen DeLullo’s buy-sell agreement, they agree that a good agreement up front is essential.

Unfortunately, when someone brings up the notion of crafting an appropriate buy-sell agreement, says Hunt, managing partner with the law firm of Tucker Arensburg, potential partners often balk, interpreting the suggestion as a sign of mistrust.

“They’re often not greeted with a great deal of enthusiasm,” says Hunt.

But a good buy-sell agreement can head off problems for its signatories and make it easier for the partners to maintain a good relationship. The buy-sell clearly spells out what will happen if certain events occur, such as the death of one of the partners or the decision by a partner to divest himself or herself of their share in the venture.

While no agreement can anticipate every circumstance that may arise, Hunt says it’s relatively easy to identify the events most likely to occur and to plan appropriately for them.

David DeLullo agrees that a proper buy-sell would have avoided a lot of needless expense and time in litigation.

“The two years of litigation and the hundreds of thousands of dollars we spent would not have been necessary,” says DeLullo.

Hunt says that an appropriate buy-sell can keep partners out of court if a dispute should arise.

“The courts are the deadlock breaker of last resort, and that’s not where you want to be.”

Ray Marano (rmarano@sbnnet.com) is associate editor at SBN.