So you have a great idea but you just aren’t sure you have the ability to make a go of it on your own. Wouldn’t it be great to share the excitement (not to mention the risk and expense) of your new venture with a friend or associate?
Take your time. Like marriage, a business partnership is a commitment that should not be taken lightly (we’re using “partnership” generically, so it could include other structures such as corporations). In fact, marriage and partnership are more similar than you might think. Considering that many marriages end in divorce, your “friendly” partnership could be less permanent than you would like.
Here are some things to think about before you tie the knot:
1) Trust Trust is important in any business relationship. However, it is especially so in a partnership where either partner can bind the partnership contractually, leaving both partners liable if things don’t work out. If your intended partner is a close friend, trust may not be an issue; if a more distant acquaintance, you may not have the same level of confidence. You should make yourself aware of your partner’s past business history, through background checks if necessary.
2) Compatibility You may think you know your friend very well. However, do you know how she acts in a work environment? when he’s stressed? It is important to take some time to analyze how your partner acts in those types of situations because starting a business is not all smiles and roses.
3) Control Most partners like to enter a partnership on at least an equal footing. If two partners have the same investment in a business, they will generally carry the same risk and therefore should be equally committed. However, an equal partnership also means equal control of the partnership. As a result, a difference of opinion can become a major or even fatal obstacle for two partners.
The simplest way to remedy the equality conundrum would be to give one partner a controlling share in the partnership (eg. 51%) balanced with a lesser degree of risk (investment) for the other. Another would be to define areas of control, such as saying Partner A has the final say on purchasing decisions while B gets the call on hiring. A third option would be to simply agree at the outset that if there isn’t agreement between both partners on any major move, the decision is a “no go”.This slight shift in expectation is often enough to avoid resentment.
4) Separation, Breakdown and Unforeseen Events While many people avoid a prenuptial agreement because it’s distasteful, this course of action is not particularly prudent from a legal standpoint. This tenet is equally true when dealing with a business partnership. However, these issues can generally be dealt with all in the same Partnership Agreement:
a) Divorce No matter how things start out with a partnership, you can always expect change. Sometimes, even in a thriving business, partners decide to part ways. Whether a separation is on good terms or bad, it is always best to negotiate an exit strategy up front.
b) Death (and remarriage) While you may not want to think about it, what happens if your co-shareholder dies? All the time you spent ensuring you had the right partner could go down the drain and you could find yourself “married” to your partner’s beneficiaries. There are numerous ways to plan for this unforeseen circumstance. Often, life insurance taken on both partners to pay out their respective beneficiaries upon death will avoid the inherent problems of an unplanned “remarriage”.
As with marriage, there are many issues to consider before entering a business partnership. Before you tie the knot, make sure you exchange vows and get them in writing