It is always exciting to think about starting your own business. Sharing the excitement of planning and launching the business with a friend, associate or loved one is even better. Or is it? A successful business partnership shares many of the same qualities as a successful marriage. Qualities such as commitment, communication, sharing and mutual respect. However, in many ways, it can be even more challenging to build a partnership. So, the first question you want to ask yourself is “Do I really need a partner?” If you can build a viable business by yourself, I suggest you are well-advised to do so.
Someone near and dear to me, we’ll call him Joe, started a business as a sole proprietor. He then brought two buddies in as equal partners – yes, they each own a third of the business. Any arrangements about how the partnership would function were verbal only – after all they were friends. My advice “get a partnership agreement while you still like each other”.
Joe: We are best friends. This is going to be great!
Me: What happens when one of you gets married and then goes through a messy divorce?
Joe: That will never happen.
Me: What about when one of you wants out of the business?
Joe: We’ll figure it out. It’s not going to be an issue.
Two years later…
Joe: OMG! I can’t believe these guys! I’ve done all the work and they are just dragging me down. How can I take the business back, so it is just mine?
Me: Did you ever get that partnership agreement?
Joe: No, we never thought we would need it.
Many years ago, I was involved in a partnership in a real estate company and the following reflects that learning experience combined with other learning along the way.
Choosing a Partner
There are four things to consider when choosing a partner.
- You must have absolute trust in each other. So much so that the trust will survive things going awry.
- Choose someone with skills that complement yours. This allows for greater creativity from your different points of view. As well, if both partners have the same skills, you will probably need to seek outside help or hire to fill the gaps.
- Ensure your working habits are compatible. It may well be that one of you is a morning person and the other do their best work late at night, but it is important for each to feel the other is pulling their weight. In other words, is passion for the business shared.
- Both partners must communicate openly and honestly with each other. With today’s technology, there are no excuses for one partner being in the dark about important news, decisions or issues.
Your best friend or spouse is not necessarily going to be your best choice for a partner. Entrepreneur’s post “10 Characteristics of an Unstoppable Partnership” is a great read as well.
Being of One Mind
Partners must have a shared vision of the future of the business which includes several factors:
- Shared goals. Partners should be satisfied with the priority and timing of goals for the company.
- Business Plan Agreement. The Business Plan should outline how those goals will be achieved along with a realistic commitment of resources – time, human, capital and cash – required. It should have a timeline of those action steps and responsibilities required to fully implement the plan with agreement by both partners.
- Agreed ‘Plan B”. The Business Plan will have addressed the market need for your products and/or services along with the competitive and economic environment you will be operating in. It should also look at risk and you should agree on a ‘Plan B’ should things go awry.
- Decision-Making Process. You will want to have an agreed decision-making process in place to allow the business to be agile and react swiftly to things that arise.
- Plan Execution. The key to success is taking the correct actions with appropriate energy in a timely fashion. Partners should be of one mind on this.
First, let’s talk about what a contract is and what it isn’t. A contract cannot physically make someone perform in and of itself. For example, a contract to purchase real estate will not physically make the buyer buy or the seller sell. What a contract does is communicate the parties’ intentions to an independent third party. This is often a judge. It is about having an agreement that can be enforced by the courts so that one party can hold the other accountable for any damages.
In the case of a partnership, a written Partnership Agreement is the best way to avoid misunderstandings from the outset. It should cover what happens when things are going well and when things are going badly. In my opinion this agreement should be made whether your partner is a relative stranger or your best friend or spouse. As each of us goes through life there are many influences that change our priorities and needs. Sharing in an enterprise is just one aspect of life’s journey. Record your partnership while you still like each other!
It is essential that you have a lawyer familiar with partnerships draw up your agreement. However, here are some items you will want to consider addressing:
What is the ownership split among the partners based on financial and time contributions both initially and over time?
One of my clients had registered their business with a partner where they each owned 50%. My client ran the day-to-day operations of the business and had, in fact, invested more money than his partner. A time came where a cash injection was required, and the active partner approached his family for a loan. The family gifted him the money but required that the amount be recognized in the share of ownership. There was not a Partnership Agreement in place. As we calculated the contributions in time and money that each partner had invested, we determined my client should own 88% of the business and his partner 12%. He was extremely lucky that his partner agreed to this and the other terms of the new partnership Agreement.
How will profits and losses be distributed among the partners?
Will you distribute all the profits or reinvest some into the business? How will losses in the business be handled?
How much power does each partner have to commit the partnership to legally binding agreements?
In fact, partners can bind the partnership without the other partner knowing. Each partner will be fully responsible for any debts and obligations of the business. This is known as being ‘jointly and severally’ liable. In other words, the partners are responsible as a partnership and as individuals. Your Partnership Agreement should state a maximum amount that a partner can spend or commit to spending. Amounts over that require the agreement of all partners. Such agreements need to be documented.
What areas will each partner be responsible for, if any?
A ‘silent’ partner may not have any areas of responsibility. Will one partner oversee operations and the other marketing or finance? Be clear about the authority each has in the day-to-day running of the business.
How much time will each partner commit to the business?
It may be that each partner is committing the same amount of time. Or one partner may oversee day-to-day operations while the other contributes in another way. The important thing is that this is agreed upon upfront.
How will partners be paid for their efforts?
Will they be employees and earn salaries or be compensated with dividends. An accountant is your best friend when making these decisions.
How will changes in the partnership be handled in the event of the death or disability of one of the partners?
For example, in my Partnership Agreement, we agreed that the business would buy life insurance for each of us with the estate of the deceased partner the beneficiary with the intent that the insurance is the buyout of the deceased’s interest in the business. This avoids you ending up with the executor or beneficiaries of the estate as partners but gives them the financial benefit of the deceased partner’s share of the business.
What will happen if one of the partners wants to sell their share of the business?
Often a Partnership Agreement will include a ‘Buy-Sell Agreement’ that outlines the process to be followed. Again, this arrangement protects the remaining partner from ending up with a partner who is not their choice.
What is the process for selling the business?
What is your exit strategy? Will you dissolve the partnership and sell the assets of the business? Will you sell the shares in the company? There are many things to consider here and your lawyer is the best person to advise you in this area.
How will partner disputes be managed?
A dispute resolution provision is a way to manage expectations about resolving important partnership matters such as management of the business or allocation of resources. It also helps partners determine how badly they want to push a disagreement (pick your battles). Will you invite a third party to help resolve issues, use mediation or arbitration?
Back to the beginning. It takes a lot of work to create and maintain a successful partnership. If you can operate a viable business without a partner, I highly recommend you do so. If you must enter into a partnership, engage the services of a lawyer with experience in such matters to draft a Partnership Agreement. The mere suggestion that the proposed business arrangement is documented in a Partnership Agreement by a lawyer will be the first test of commitment by the participants as that will be an expense some may not have contemplated.