06 Dec Business Partnerships & Initial Questions to Ask
Over the past couple of weeks I helped a client avoid what could have been a potentially fatal or at least business-killing partnership. In the end, my client was able to trust her gut, avoid the worst aspects of the problem, and pay her way out of the problem.
It got me thinking about how people need to approach entry into new business partnerships. When you enter into a partnership in a business, whether it is a straight partnership, Limited Liability Company with multiple members, or even a corporation where there are just a few stockholders, it is like a marriage, only more complicated, because there is no such thing as a no-fault business divorce. Often, business matters are fraught with emotion as well as finance.
You don’t always have to be friends with your business partners, and sometimes it is better not to be. But, if you are friends, one of the key questions to consider is whether your friendship can survive the failure of this business. If the answer to that question is yes, you’re probably going to be okay, but recognize that “yes” is the exception rather than the rule for friends who become business partners. If the answer to that question is no, then it is probably not a good idea to go into business. If the answer to that question is I don’t know, it is time to have a nice, long chat with your friend and soon-to-be business partner because you need to be on the same page.
So, before you go into business with somebody, you should be having conversations not about the nuts and bolts of the business, but about the large scale contributions. Believe it or not, you can go to couples counseling. I’ve actually recommended that to clients before, but that may be for another post.
Before you think about entering into a partnership, it is important for people to understand what factors need to be included in the thought process.
One of the top factors that I often advise on is to figure out who is bringing what to the table. If partners are each contributing the same amount of money, then there is less concern. But since most partnerships begin with unequal contributions or some money and some labor, the parties have to have some idea of what is being contributed. Whether the contribution is money, sweat equity, skills, equipment, contacts, knowing at the start what the value is can avoid one of the biggest potential disputes—who is entitled to what when the money starts to flow or stops flowing.
If both people are building the business from scratch, you need to think about essential issues such as complementary skill sets and effective communication. These are not easy to determine at the outset, but before rushing into a partnership agreement, the partners really need to think about these kinds of questions:
- Are you a compatible match in terms of temperament?
- Are you going to communicate effectively?
- Do you share similar goals (beyond just making money)?
- Do your management and operational skills match?
Another thing that I often counsel people to think about is how you are going to handle decisions about money. You need to ask each other:
- Is there going to be some sort of threshold at which either partner can make a decision?
- Over that threshold, you need to have an agreement. What is that threshold going to be?
- Will it be different for different purposes?
For example, I often write in to partnership agreements a provision that says a partner can hire an employee so long as that employee’s salary is under a certain level. In a separate section, I discuss how much one partner can borrow without the other partner’s consent. These are financial decisions that have a lasting impact on the business itself and should be something that the parties agree to upfront.
By asking these initial questions and figuring out these issues early, business partners can work on preventing conflict before real problems arise. Stay tuned for more posts on business partnerships since this is a common question that comes up.