In my line of work we run into business partnerships every day and we are often the ones trying to figure out how to resolve the myriad issues, problems and crisis that revolve around the small business partnership dynamics. A wise person once said famously,
“Choose your business partner twice as carefully as you choose a spouse..because your spouse can only take half of what you have.”
Business partnerships can be a wonderful thing, especially in the early stages in the life of a small business start-up. The sense of mission and teamwork can be addictive. But what we often see is that the business partners didn’t really agree to anything before they become partners.
Often the partnership conversation goes like this:
Mary, “Bill, I have a great idea. I’m going to make ice skates that have training wheels.”
Bill, “Cool, I have some free time, I can help. Want to be partners?”
Mary, “Sure 50/50”
Bill, “Awesome, let’s go to Starbucks and noodle out a plan.”
There you have it, you now have your business partner and, as long as the business doesn’t succeed or fail things will likely be o.k. However, every business, over time, does exactly one or the other. It either succeeds of it fails.
When you are thinking about a business partner you need to consider many things. Below is a list of outcomes and issues you might want to consider. We’ll go through these issues using Mary and Bill as the potential business partners. To make things easy we’ll assume both are married but not to each other. The issues below are a very short list and the list doesn’t cover all the possible issues. The idea here is for the partners to sit down and talk about ALL of the possible outcomes and what they want to do in those circumstances. Also, just as a point of interest, every item below I have seen (and more than once) in real businesses involving real people:
Issue: Mary and Bill love being business partners, but what happens if, against her wishes, Mary ends up with a business partner that isn’t Bill? How could that happen? What if Bill get’s a divorce and as part of the divorce settlement Bill’s wife Jane get’s Bill’s interest in Skate Blades & Wheels LLC? And then Jane decides her new boyfriend Bubba needs a job and Bubba starts “reporting to work” with Mary every day?
Solution: Have an agreement in the Limited Liability Companyagreement that specifically defines how/if partners can transfer ownership to other parties. You can be very restrictive.
Issue: Mary and Bill get the business plan done and they need to buy $1,000 worth of skates that they can modify as prototypes. But, Mary doesn’t have her $500 and Bill doesn’t either but Bill has $750 open on his credit card and Mary has $250. Who puts in how much? If they are 50/50 partners what do they do?
Solution: The Limited Liability Company (here’s a Hub on LLCs) operating agreement can have a provision whereby the capital would go in as loans and the partners can get their loans paid back before any profits are shared.
Issue: Mary and Bill have been working on this idea for 100 hours per week for 6 months. Things look promising but it will take 100 hours a week for 3 more months to get where they want to be. Bill decides he has to get a job and will only be able to devote 10 hours a week to the business, Mary will have to pull the load across the finish line almost all by herself.
Solution: The operating agreement can state that the additional labor contributed by a partner can be reimbursed to that partner, at an agreed on rate, prior to any profit sharing from the partners.
Issue: It’s 3 years later, the business is wildly successful, Bill and Mary are happy as clams. The have a Christmas party with the employees but driving home some guy falls asleep at the wheel, crosses the center line and crashes into Mary’s car. Mary is in coma and, if she ever recovers, she will be unable to work in the business again. Because of the medical costs the family needs money fast and the family wants to sell Mary’s interest in the business. Bill would like to help but neither he nor the business has the cash to buy out the value of Mary’s interest and Bill doesn’t want Mary’s interest sold to someone else.
Solution: Businesses can buy insurance that will “buyout” the other partners interest in circumstances like this. This type of insurance is commonly called business buyout insurance. Talk to your commercial insurance broker for your options. It is important to have a mechanism in the LLC that states HOW the business value will be determined so that adequate insurance can be purchased. You don’t need to know the value at the time of the partnership agreement if you have a formula to determine the value if the need for a forced buyout occurs.
I could go on forever but the above 4 issues are examples of things to think through. I’m sure you can think of more as well. A good business attorney will also be helpful. You need to take the time to go through the issues and consider the solutions long before you have the problems.
If you have any business partnership concerns or issues please feel free to drop me a question in the comment section and I’ll take a shot at providing a possible solution.