How do I avert a “conflict of interest” with my silent partner?

How do I avert a “conflict of interest” with my silent partner?

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The best way to deal with a “conflict of interest” is to refer to the terms of your partnership agreement.

Use the partnership agreement to solve the problem

Conflicts of interest are usually addressed in the terms and provisions of a partnership agreement. Along with identifying what constitutes a conflict of interest, the agreement also defines how to resolve any conflicts of interest that may become apparent, up to and including procedures for expelling a partner from the business.

By defining the contributions of each partner, a partnership agreement spells out what responsibilities the respective partners have and if those responsibilities overlap, who will be held accountable for various aspects of the operation of the company.

It should also include an exit strategy for the partners. A silent partner invests capital in a business but chooses not to play an active or public role in managing the day-to-day affairs of the company. Usually a silent partner’s wishes to see a business succeed, rather than to create a conflict of some kind, so one should be able, through the terms of the partnership agreement, be able to resolve the conflict.

No partnership agreement

If there isn’t a partnership agreement and a conflict of interest arises, try to manage the conflict yourself. To do this ask yourself these questions:

  • How did the conflict arise?
  • What are the main issues?
  • Can you take the emotion out of the situation
  • Is it possible to reframe negative issues positively
  • Are the conflict issues negotiable?
  • What interests are challenged?

Call a meeting with your partner or partners and try to negotiate an amicable solution. Take formal notes throughout the negotiations.

If your efforts fail, you should consider approaching an arbitrator or mediator to seek a resolution. A professional mediator has the skills to preserve business relationships in order to minimise disruption to the business. If this fails then you have no alternative but to seek legal advice.

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