Selling a Business in the NEXT Energy Boom

Selling a Business in the NEXT Energy Boom

Selling a Business in the NEXT Energy Boom

Those of us who work regularly in and around the oil & gas energy industry recognize the difficulties presented by the current depressed energy prices and it’s effect on energy services, production and exploration companies. We view the world through the process of Mergers & Acquisitions as we work with business owners to sell their companies. Many Texas businesses are heavily impacted by the swings in energy prices. We see machine shops, water disposal, inspections, welding, tank, vessels, trucking, temporary housing and many other energy related businesses that suffer the financial pain when energy prices and production declines. We also see these same companies reap the benefits of rising energy prices and production cycles. Unfortunately too many business owners have short memories.
“When the energy business is good many business owners think it will last forever. It won’t.” Dan Elliott
Like you, we have seen this play out before in different cycles and many energy companies (and related businesses) always seem to recover. Selling a business for the highest value is often driven by timing. Will you be ready when the market is?
If your goal is to sell your business in the next energy boom here are 3 things you can focus on now to make sure your business achieves its highest value in the next energy recovery cycle.

  1. Get your financial reporting up to standards that will one day survive a buyer’s due diligence.
    Excellent financial records increase the value of your business because it reduces the buyer’s perceived risk that poorly maintained financials mean more financial room for error. Make sure your accounting is done consistently from year to year and make sure your current tax structure (C, S, LLC, etc) is what will create the highest value transaction. Look at your financials as a buyer would or better yet give us a call and we can review your information and give you a report that identifies the areas for improvement. Tip: To most buyers Reviewed financial statements are almost as good as audited financials and a lot less expensive. If you have audited great, but if you just have compiled statements find a good business accountant to do reviewed statements.
  2. Work hard on Customer Concentration Issues
    A buyer often perceives risks if 1 or 2 customers dominate the revenue of your business. Ideally your largest customer should be less than 20% of your annual revenue (unless you have long term contracts which assure buyer purchases). Shifting customer concentration is often a long process, start now. Tip: Look at your commission plans for your sales people. Are you rewarding sales people who diversify their customer base?
  3. Review your insurance to be sure you are adequately covered for your business risks
    An under-insured claim is a nightmare for a business owner and can interfere with the sale of the business for many, many years. Do you have enough coverage? Do you have the right coverage? The “right coverage” question is even more important than how much coverage. We had a client get hit with a $2 million claim that he thought he had insurance coverage for. He didn’t. The deal to sell his business that we had on the table for millions of dollars was delayed until he found out he wasn’t covered, then that deal disappeared altogether. Talk to more than one agent and certainly more than just your regular insurance agent who may think they know your business but really don’t. Many commercial insurance agents will be more than happy to give you a review. Tip: Talk to an insurance agent who specializes in your industry. Your trade association knows who they are.
  4. Here’s an article on West Texas Oil industry as oil production continues full bore.

Far too many business owners don’t plan ahead for an opportunity that could arise without much notice. Selling a business for the highest value and best terms is never an accident. The value goes to the prepared.

Top 8 Things Business Owners Do To Crush the Value of their Business


Business Value Can be Managed if the Business Owner Can Manage Themself 




If you read too many business magazines you might find yourself believing that creating a valuable business is more luck than skill. Business value can be managed and if you manage the value you will become more profitable.

Small business owners often confuse business earnings or profit with the actual value of a business. All profits are not created (or valued) equally. A fundamental method of measuring the value of a business is applying a multiple to earnings. Take two businesses that have the exact same earnings of $100,000. Will they have the exact same value to a business buyer? No.

Why not? There are many, many reasons. Here are some examples of why business buyers value earnings differently, we’ll use the $100,000 earnings for company A and B example.


·       What is the quality of the earning? Company A earnings have been growing for 5 consecutive years, company B earnings have been down for 5 consecutive years. Which is more valuable?


·      Company B financial statements are cleaner than company A and a buyer will pay more for a company with cleaner books because there is less risk. Uncertainty in the quality of the business financial records drives down value.


·      Company A has 5 lawsuits against it, company B never had any lawsuits.


·      Company B has well documented processes and it’s easier to train employees, therefore B’s owner can take lots of time off. Company A, with no processes, couldn’t stay open a week without the owner at the business. Which business has lower risk and therefore higher value?


·      I could give you a hundred more variables as to why one business’ $100,000 profit is worth more, or less, than another business’ $100,000 profit.


As you can see business value and corresponding multiples of earnings is based on a number of fundamental factors that a business owner can control and these factors effect how valuable the business is. There are many businesses that are very valuable to the current owner but of little value, or much lower value, to a buyer. There have been several good books written about building value in a small business including Built To Sell.


8 Mistakes Business Owners Make that Hurt their Business Value
Mistake #1: Keep your financial records as obscure and inaccurate as possible to make sure that the IRS can’t figure out if you made a profit. Effect: If the IRS can’t figure out if you made a profit neither will a buyer.

Mistake #2: Don’t know what your competitors are doing, just assume you know what you don’t know. Effect: If you don’t know where your prices or services fit in the market your prices are probably too low. If they are too low you are missing profit. A smart business buyer will know this and buy your business based on your under-achieved profits, they will then increase the prices and make more money from your business than you did.


Mistake #3: Don’t document any systems, just spend 20 hours a day at the business and when somebody needs to know something they’ll ask. Effect: If you get hit by a truck, the business will be in the tank before you’re out of the hospital.


Mistake #4: Let people who you didn’t train….. be the people who train the new guy. Effect: See #3 above.


Mistake #5: Mix your personal finances with your business finances. (Relates to #1 above). Effect: You won’t be able to plan since you don’t know what your real business results are. If your business makes $200,000 but you spend $250,000 it’s the owners fault, not the businesses.


Mistake #6: Don’t get the proper business insurances you need. Example, many businesses who should have product liability coverage..don’t. Often they also fail to obtain adequate umbrella coverage or have policies that don’t adequately cover the risks. Do you know the difference between a claims made policy and an as occurred policy? Effect: Buyers don’t want to be exposed to litigation, which is inadequately insured, created by the business before they buy the business. I have seen more businesses fail due to under-insurance than I’ve seen businesses fail because customers don’t pay their bills.


Mistake #7 – No documented policies related to employees, i.e. vacation, sick pay, etc. Are employees classified as salaried who should not be? Are there 1099 contractors who really should be W-2 employees? Effect: If the best buyer for your business is a big company they will spend a lot of time in due diligence of employment practices and they don’t want to inherit confusion and risk. There is huge risk in poor employee documentation and policy inadequacies. If you have more than 4 employees you should seriously explore outsourcing your HR functions to professionals.


Mistake #8 – Let your customer concentration get out of balance. Meaning one or two customers represent a huge portion of your business Effect: A business with 2-3 customers that do 90% of the business has more risk than a business that has 100 customers each doing 1%. If your top customer does 75% of your business it might be easy for you to manage one customer but if that customer leaves you, you’ll take BIG steps backwards. Try to get your largest customer to represent no more that 10% of your total sales.


While it’s easy to get wrapped up in making a business profitable, always keep an eye on the things that make a business valuable.

I can guarantee every business owner one irrefutable fact. You will exit your business, either willingly or not, but it is 100% guaranteed. 

What other things business owners do to crush the value of their businesses?



Caring for a Cause can be Good for your Business

Many business owners I encounter say they want to “give back” and will start doing so after they …hit it big. I’m sure many of them mean what they say and I’m equally sure that many, many of them will never get to the point where what they’ve achieved is enough to start “giving back”.
Should You make A Charitable Cause Part of Your Business Model Instead of Just a Part of Your Hopes?

There are many benefits to a business if they make a serious and genuine effort to support a charitable cause on a consistent and ongoing basis. A few well known businesses do this and many other lesser known companies do as well. Business charity is not only good for your’s good for your business. Never underestimate the power of a good business plan.

The best known of these companies is Ben & Jerry’s Ice Cream Foundation. Every year Ben & Jerry’s contributes a percentage of their profits to the foundation and distributes grants based on a complex process of applicatsions and evaluation. What they do is not nearly as important as how they do it. Everything you see from Ben & Jerry’s references their commitment to this charitable cause. It’s on the ice cream containers, the Ben & Jerry website and all promotional materials. Why does Ben & Jerry’s do what they do?
First, I think they truly care about giving back and making a difference in communities.

Second, it’s great for employees. Nearly everyone wants to be part of something bigger than themselves.

Third…it’s great for business. Supporting a company that is trying to do more than just earn a profit is emotionally satisfying for a large percentage of people.

Can every business do what Ben & Jerry’s does? Probably not but that doesn’t mean you shouldn’t do anything. Give this some thought, how much is it worth to have employees who care just a little more? Or customers who respect what you do a little more? Or suppliers who respect what you’re trying to do?

It has been my experience that, like many things in business and life, getting started is the most difficult part. It doesn’t have to be complicated. Here are some ideas on how to start, this worked for us:

   Be genuinely committed, no faking it! – Make the commitment that supporting a cause is part of your business, everyday..not just when it’s convenient or when you’re rolling in the money.

   Pick a Cause You or Your Employees have or can develop an emotional attachment to – In my business we support two causes every year. One is Cystic Fibrosis Foundation. We support this cause because an associate in our firm is very committed to this organization. He sits on the board and works tirelessly at fund raising for this terrible but under-funded disease. Our other cause is the Pulmonary Hypertension Association for whom we sponsor the annual fundraisers The Woodlands CrawPHish Festival. We chose this effort because a local attorney and friend of our firm, whose family has been touched in a very personal way by this disease, is very active and works year-round to raise money to cure adolescent pulmonary hypertension. In addition, this Crawfish Festival is great fun and we invite employees, clients and referral sources for a great day.

   Commit to a Financial Contribution – The tendency with many is to view charitable donations as the “extra” money available in a good year. Although any contribution is good, it is better for your business and the charity if you make a financial commitment and stick to it. Why is it good for the business?

   Market Your Charitable Efforts Consistently – By making your financial commitment without fail, you can embed that in your marketing efforts. Market your support on your website and other marketing materials that you are producing anyway…there’s no additional costs. As an example, I have recently been invited by a financial advisory firm to a wine event by Tithe Wines. The mission of Tithe Wines is to make great wines AND contribute 10% of their revenue (not profits.. 10% of top line revenue, that’s a commitment) to Living Water which is a charity with a mission to provide clean, safe water in poverty stricken places around the world. Had Tithe wines not partnered with a financial adviser who I know to present this event, it is highly unlikely I would have ever heard of this wine. Now I get to try some new wines and help bring clean water to people that need it. Tithe Wines is doing their part by supporting a great cause and I’m happy to help them do so.

With business charity doing good can go hand in hand with a business doing well…In fact it can help give you an edge. Start with your employees, find a cause they can connect with then build that commitment into your business plan and day-to-day activities.

Small business owners can make a difference in their communities and can make a big difference over a long period of consistent charitable contributions. Get involved, do good.

Notice: All content here is copyright protected and cannot be reproduced without my written approval to do so. This content is property of Sunbelt Business Brokers Houston Texas.

Anatomy of a Successful Small Business Purchase


Although the names, location, types of businesses and other details have been changed for confidentiality purchases this Hub reflects real transactions in the world of buying and selling a business.


The Buyer


Susan, 45, had been employed in the corporate world for 15 years and had done well, worked hard and gotten good performance ratings. She felt like she would be with her company for a long, long time. She thought that right up until the moment when, on a Friday afternoon, she opened an email from the company CEO stating that the company had just agreed to be acquired and more details about what that means to individual employees would be forthcoming in the next few weeks and months.

This news wasn’t a total surprise since there had been rumors for months but now it was real. Susan felt like her group might get consolidated and that, though she might survive, she was fairly certain that would require a move for her family. However, within weeks it became apparent that no one in Susan’s group was likely to survive the merger and now they were just waiting on the details of a severance package, if there was to be one.

Susan began as many in her situation often begin, she updated her resume, did a quick analysis of her current financial situation and started thinking about where she might look for another job. She started going through her contacts and she quickly found out that another job at her pay grade was likely to be very difficult to find. In addition, she wondered what would happen if her job search went on for months or even years, would she need to use up her savings and 401k money just to live on while she was looking for work?


What other options did she have? One of her contacts asked her if she ever consider owning her own business. Susan had only occasionally given it a brief thought but decided to investigate it more closely since she had no idea what the process of buying a business entailed.


Susan’s financial situation wasn’t great but wasn’t terrible either. She had some liquid assets (about $30k cash), not much debt, pretty good credit and her 401k plan had about $125k in it. She considered her 401k sacred and had no plans to touch it until retirement. Susan’s salary was $90,000 per year with the occasional bonus….although there hadn’t been one for the last two years.

Susan had no idea how to find a business to buy and didn’t know what are the right questions to ask when buying a business so she did the obvious, she googled buy a business Houston Texas.

That’s how Susan found us.

The Seller

Arthur had owned his small manufacturing business, XYZ, Inc, for 30 years and was comfortable. It had been a good business for him. Arthur had recently turned 68 years old and, although he had hoped otherwise, his children had their own careers and weren’t returning to run the family business.


Arthur was talking to his accountant about his taxes and mentioned he had had some health problems. His accountant asked Arthur if he intended to run the business until they carried him out on a stretcher or did selling the business make more sense for him? After talking with his wife Arthur decided selling the business was the right thing to do. He could get the value of his business to fund his retirement, relax, travel more and enjoy his family.


Arthur told his CPA he was ready to sell and his CPA referred Arthur to us.


That’s how Arthur found us.


The Business


XYC is a light manufacturing business that makes a variety of small parts used in the transportation industry. Arthur hadn’t really worked on growing the business for the last 10 years. He had a variety of regular customers and didn’t have any organized sales effort. At this point in his life he felt like growing the business would be more work than he wanted to do. He liked his 30-40 hour work week.


•   XYZ did $1,200,000 in annual sales most years and didn’t vary much from year-to-year


•   XYZ’s net profit available to Arthur was consistently around $180,000 per year. This $180,000 is often called Seller’s Discretionary Earnings (SDE) because it includes Arthur’s salary and all of Arthur’s substantial benefits. Many of these benefits are in pre-tax dollars so they can’t be directly compared to a salary that might be earned from working as an employee at a big company.


•   XYZ didn’t have any debts other than what was normal accounts payable owed to suppliers.


•   XYZ was located in a leased building and did not own the real estate.


•   Asking Price for the Business $675,000 – FYI- How we determined the asking price is too long for this post and I’ll create another Hub to describe the business valuation logic and methodology.


The Transaction


Susan came to us looking for a business to buy and based on her experience, skills, lifestyle and financial capability we decided to present XYZ company to her. (Here is a post about Confidentiality when buying a business). Susan liked the industry and the business location. We provided her with some high level financial reports for her review and Susan decided she wanted to look more closely at this opportunity.


We arranged for Susan and Arthur to meet to tour the business and for Susan to ask Arthur all the questions she felt were important. After due diligence, research and negotiations here is the final transaction that was completed and Susan purchased the business which she still runs today.


Selling price $655,000


Susan’s down payment was $110,000 which she obtained, tax & penalty free, from her 401k plan.


Susan received an Bank Loan with an SBA Loan guaranty for $605,000 (the bank included some working capital to assure Susan’s financial comfort). Terms: 10 years @ 6.0%. Click here for a Hub about using aSBA Loan to acquire a business.




•   The business was earning $180,000/year.


•   Susan’s bank note payment is $80,000 per year.


•   Earnings available to Susan in excess of debt payments = $100,000/year ($180,000 – $80,000)


•   The business is paying the debt. On a straight line basis Susan is building $60,500 per year in equity ($605,000 divided by 10 years). That’s a 55% investment return per year on Mary’s equity of $110,000, I doubt you can get that kind of return over 10 years in any other investment.




•   Susan was able to immediately replace her $90,000 per year, fully taxable salary with $100,000 per year of income that had significant tax advantages.


•   Susan had no worries about being laid-off ever again. She did have a business to run that comes with it’s on worries but at least Susan feels like she is in complete control and can manage any problems successfully.


•   When the day comes for Susan to sell the business she expects the value of the business to have far outgrown the value of her $110,000 had she left it in her 401k plan and relied on the luck of the stock market. Susan, like Arthur before her, is now in total control of her retirement investment.


If you have the skills to operate a successful small business the financial rewards can be tremendous.

If you want a good book on Buying a Business here is our recommendation:


How to Use an SBA Loan in Acquisition of a Business

When looking at businesses you might want to buy you should always keep in mind how you are going to finance the purchase of the business. Most small businesses are purchased using bank lender financing in the form of a small business SBA loan. This post discusses the Small Business Administration (SBA) loans that are available and what are the general requirements to qualify for an SBA loan. Keep in mind that specific banks may have slightly different requirements but the main issues will be the same across all banks. The SBA supports small business development centers throughout the U.S. which can provide information about the SBA Loan process.


What is an SBA Loan? What are the SBA guidelines for small business acquisition loans?

Commercial banks and the SBA agree to certain ground rules whereby if the bank adheres to the SBA loan rules, guidelines and regulations and makes a loan to a borrower under those rules, then the SBA will guarantee a significant portion of the loan (up to 90% in some cases). This SBA loan guarantee makes the loans very low risk for the banks and therefore the banks have an incentive to make these loans to small business borrowers. Not all banks participate in this program and it involves a lot of paperwork!

What do I need and what can I borrow?

Here is a basic formula that will get you a good idea of what’s possible when it comes to getting a bank to provide an SBA loan to finance the acquisition of a business.

Assumptions: You purchase an on-going, operating business that meets the requirements and criteria below. For this example, it assumes the business is in a leased space and you plan to take over the existing facility lease and keep the business in its current location. If you are buying a business which includes the purchase of real estate there are some differences. Generally a down payment on the real estate portion can be as low as 10 -15% and a longer amortization – as long as 20 years.

Typical Loan Structure for Purchase of an Operating Business:

Loan Term – 10 years

Interest Rate – Prime Rate +2.75% adjusted quarterly (currently this would mean a 6% interest rate)

Here’s the formula 20%/70%/10%

20% – Unencumbered cash required from the buyer should equal approximately 20% of the total purchase price of the business. Unencumbered means pure equity… which means you can’t borrow this amount. However, if you’re lucky enough, a significant portion of this can be a gift, if you have friends and relatives willing to do that. Do not try to disguise loans as gifts. Committing bank fraud is no way to start a business.

Here’s the good news, you can use your IRA or 401k Plan funds tax free and without any early withdrawal penalties to generate your equity. The rules for this are complicated and you will need to work with professionals who specialize in this area of very complex tax law. But the decision to use your retirement funds is easier. Would you rather use your retirement funds to bet on your self or would you prefer to leave your retirement funds in the hands of Wall Street?

70% The SBA backed loan would equal 70% of the total purchase price. Again this is usually a 10 year loan at an interest rate of Prime Rate plus 2 3/4% adjusted quarterly.

10% The bank will likely ask the seller to finance 10% of the purchase price. The theory is this 10% note is an incentive to the seller to help the buyer succeed. While in some cases this may help, the real reason the bank does it is to reduce the banks risk. This 10% seller note will be subordinated debt to the bank which means the seller will have little recourse against the assets of the business if the loan is not repaid by the borrower. It is important that a seller have confidence in your ability to run the business successfully so that you can pay the seller note according to the terms.

The above breaks down the source of money for a purchase. Now let’s look at the qualitative requirements so that a bank will actually lend you 70% of the purchase price.

You’ve found a business you want to buy, now what?

Getting an SBA loan from a bank to acquire an operating business has its own special rules and requirements. There are 3 primary elements of the qualification process – the borrower, the business and the financial elements. Let’s take them one at a time although as you will see there is some overlap.

Here’s a good book about getting an SBA Loan

The Business I Buy

A bank will look at a business to try to determine the risks in the business that could affect the borrower’s ability to pay the loan back. As a buyer these risks affect you the same way, so in this respect the borrower and the bank are on the same side of the issue. Here are some, but not all, common red flags:

Customer concentration – there are many businesses that have 1 customer doing 50-75% of the total revenue for the business. What happens if this customer leaves? 75% of the business goes with it. When looking at businesses to buy remember this – less customer concentration is better unless there are some long term, ironclad, contracts

Vendor Concentration– A business may have a great deal from a vendor but if the business loses the vendor the buyer would need to pay more for the product and their profits would be harmed.

Regulatory Issues– Are there new laws, regulations or licenses coming into play that will require the business to significantly change their operations? How will those changes affect their profits and cash flow? For example – Back in the 90s nearly all dry cleaners used a chemical that was basically outlawed. The dry cleaning businesses had to invest significant money to change their business. For a couple of years you couldn’t give away a dry cleaner , many of them were losing money due to the cost of the conversion and with the uncertainty of the effect on profits, it was nearly impossible to sell a dry cleaner.

Location Issues – Let’s say you own a great business on the corner of the busiest intersection in town. Things have been great for 10 years. But what if the state decides to widen the road and condemns your building?

Financial Issues

Assuming the business passes all the operational reviews it’s time to look at the businesses financials.

Cash flow and profits – The bank (and I’m sure the borrower) wants to be certain that the business can pay the debt incurred to buy the business. And in addition to being able to pay the debt the bank wants enough free cash flow to pay the debt with room to spare! The banks room to spare is officially called the “Coverage Ratio”. The coverage ratio is best described in simple terms. If a banks coverage ratio is 30% it means that for every $100 of debt payments required the business needs to have $130 to pay it. Another way to look at it is 30% can go wrong and the business can still pay the debt.

What are the “real” earnings and cash flow of the business?

The smaller the business the less likely it is that you will find what would appear to be well-kept financial records for the business. I emphasize the word appear. The simple fact is small business owners are, for the most part very, very tax averse. If they can manage their affairs to minimize their tax burden they will do so. By the way this is no different from large corporations. Business tax returns seems to bare little resemblance to their profit and loss statements. Don’t be surprised to see small businesses with owners living really well but the business tax returns show the business barely breaking even or even losing money.

There is a process that you can go thru with the business owner (or Business Broker if one is involved) that can identify the true earnings and cash flow of the business. If you use experienced advisors and you can’t get to the numbers that make sense you just need to move on. There are lots of businesses whose financials will stand up to due diligence.

Determining the real earnings of the business is key to determining if the business will generate the free cash flow needed to pay back the bank loan.

What is the value of the business and will the bank make a determination as to the business value?

Since the banks and the SBA have an interest in getting the loan re-paid they have an interest in making sure that the buyer is paying a fair and reasonable price for the business. Most SBA lenders will, as part of the loan packaging process, require that an independent Business Appraisal (often called a business valuation) is completed on the business. The bank normally picks the valuation firm and the buyer pays for the valuation. This valuation is part of the banks risk mitigation system. The basic idea is that even if the buyer and seller agree to a price and the cash flow debt service work… the deal still has to pass the fair market value hurdle.

Business Plan for Success – As part of the business loan application process the buyer/borrower will need to produce a business plan.Here’s a piece of advice you may find to be very valuable. Before you start looking for a business to buy you should invest in good business plan software. Start building this business plan before you get serious about a search. That way when you do find an interesting business you just plug in their specific numbers and you’ll have a very quick answer on many critical questions including cash flow available for debt service, working capital required for the business and capital expenditures effect on cash flow.

Borrower Guidelines

Credit History – As you might imagine, when you are borrowing money a good credit score is important. If your credit score is below 680 it will be very difficult to get an SBA backed loan even if all the other requirements are met.

Other financial obligations and resources – The buyer can’t have a heavy personal debt burden that will require the business cash flow to pay. Similar to a home mortgage loan the bank will look at the buyer’s overall financial situation, not just the cash flow of the business. Often this is where the Coverage Ration becomes an issue.

Personal History – We often see items in buyer’s personal history that cause problems in the loan approval process. There are little problems and big problems, Some can be worked around, some can’t. Example- we once had a buyer in his early 30’s. On his record he had pleaded no contest in a bar fight incident 12 years earlier while in college. That held up his loan process for months.

For certain you need to make sure you don’t have problems with student loan repayments, child support or alimony.

Applicable Skills

This is often the most important element in a successful business acquisition loan process.

The banks and SBA want to have a borrower who has some skill or experience that can be applied to the business immediately. An example is if your only experience is as a high school history teacher it is very unlikely that you could get approved to purchase an industrial machine shop. However, you might well get approved to purchase a vocational training school.

A buyer should search their personal history so that they can identify all of their experiences and possible skills applicable to the business the wish to purchase.


You may be able to buy a business on favorable terms using a small business bank loan backed by the SBA. The requirements are lengthy and complicated but there is a great deal of help available to guide you through the process. The truth is a commercial bank would be very, very unlikely to loan money to small business buyers without the SBA guarantee loan program.

There are many, many very good businesses available to purchase which might fit your  personal goals.

Business Partnerships – The good, the bad and the ugly…

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.


Good Business Partnership Agreements are All About the “What ifs?”

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.