Preventing Partnership Pitfalls: Best Practices
So… you and your best friend, brother, or spouse want to go into business together? Of course, you agree on everything right now, but what happens when you don’t? In many cases being realistic and pragmatic can be the kindest, mostly loving thing you can do for your partner and yourself.
Our very own Maine SBDC Business Advisor Chris Cole has personal experience with a scenario that ended very differently than she thought it would. Check out Part 1 and Part 2 for the full picture!
Part 3
Vision: Each person comes into a business with different personal goals and ideas on how to run the operation. It is important from the start to have an honest discussion regarding your vision for the business. Why do you want to go into business together? What complementary skills do you each bring to the business? Do you want to have a small operation or scale-up? Does your partner want the same things?
Delegation of Duties: The business of running your business. Who is in charge of the bookkeeping, hiring, scheduling, managing the staff, keeping the records, marketing, customer service, and inventory? There are many details that go into any business operation; knowing each other’s strengths will help to determine who will do those jobs. You may find that third-party providers such as a payroll company, bookkeeping service or Human Resource management firm should do some of the tasks.
Finances: Determine your salary needs first. This requires making a home budget to decide how much you must make to meet all of your personal obligations. Each partner might have very different financial requirements.
What will happen to the profits? Is the goal to reinvest in the company or to distribute it? Having a forward-looking business plan and budget will help to make those decisions. For instance, if you need to purchase an expensive piece of equipment or need reserves for payroll through the lean months then keeping money in the business would make sense.
Exit strategy: What happens when one partner wants to leave? Does the other partner have the first right to purchase? Will the selling price be determined by an independent valuation? What if the partners cannot agree on the price? Do you bring in a mediator?
It is hard to think about the end when you are just at the beginning; however, it is the best time to hash out the terms while you are still communicating.
A partnership Agreement is a legally binding agreement between two or more individuals who own/operate a for-profit business. It is a valuable tool that spells out each partner’s rights and responsibilities. It sets guidelines and rules for business partners to follow to avoid disagreements or issues in the future.
According to legal columnist, Priyanka Prakash “In the absence of a partnership agreement, your state’s standard statutes on partnerships will apply. Most states have adopted the Revised Uniform Partnership Act (RUPA). The RUPA might contain provisions that aren’t suitable for your company. For example, under the RUPA, partners are entitled to an equal division of profits even if they’ve contributed different amounts of capital to the company.”
There are many free legal document services online to create and customize a simple partnership agreement. For multiple partners or complex agreements, an attorney is advisable. A Maine SBDC Business Advisor can help clarify what you’re looking for and connect you with a network of attorneys.