Should you team up with a partner or go solo?
It’s lonely at the top. Even if, by the “top,” it’s just heading up a brand-new business. That’s why many great companies were started by partners: Ben and Jerry. Steve Jobs and Steve Wozniak (Apple). Larry Page and Sergey Brin (Google).
Starting a business with a partner offers many advantages. You have:
- Someone to share the excitement of starting a company
- Someone to share the risks of running a company
- Someone to bounce ideas off of
- Someone who has talents and skills to balance yours
- Someone to help shoulder the financial and work-load burden
Ideally, in a partnership, there’s strength from having a balance of complementary talents or personalities. You may be a terrific “outside” person: securing sales, marketing and networking. Your partner may be a terrific “inside” person: making certain bills are paid and your products or services get produced.
Face it: starting and running a business can be a lot more fun when you’re working with someone you like and respect.
But partnerships have perils. Over time, partners are likely to have disagreements, resentments, changing goals and lifestyle choices. Partners may have conflicts about how to spend money, who to hire, which direction to take the company. When partners don’t get along, the business inevitably suffers.
SUBSCRIBE TO OUR NEWSLETTER: The Daily Money delivers our top personal finance stories to your inbox
If you’re thinking of starting a business with a partner – or already have a partner – it’s important to think through and formally structure your relationship.
I learned this lesson the hard way.
I once started a business with a partner. In the beginning, we liked each other, strategized together, travelled together to meet with customers and strategic partners. We thought we had the same goals, same commitment. It all was good, until it went bad.
Then came one of the most stressful period of my entire business life. Not just because the partnership was falling apart, threatening the business. But because we had never had a partnership agreement.
That’s right: I, a small business expert, had screwed up. And I paid the price: not just in legal bills and the demise of the business, but in stress.
SMALL BUSINESS AND BANKRUPTCY: What should you do when your company has too much debt?
So before you enter into a partnership, be sure to:
Put it writing
Have an in-depth discussion with your partner, during which you decide how you’ll handle this issues, if and when they arise:
- What is the ownership division? Who owns what percent?
- If it’s a 50/50 split (which I do not recommend), how will you settle disagreements?
- What jobs and responsibilities does each partner have?
- How much time will each partner put in to the business?
- How much money will each partner contribute?
- How will general business decisions be made?
- What decisions does each partner have final authority on?
- How will serious disputes be resolved?
- What happens if one partner wants to leave the business?
- What happens if one partner wants to sell the company?
- What happens if the company needs to take on debt?
- What happens if a partner dies or becomes disabled?
- What happens if you want to bring on additional partners?
- Can partners work for any other company or do any other work on the side?
Draw up written partnership agreement. Have an attorney draw up a legally-binding contract spelling out the terms of your partnership. If you’re already working with a partner, you still need to do this! If one partner doesn’t want to do this, that’s a big red flag.
Choose a corporate form
A simple partnership does not provide protection for either of your personal assets. Instead, consider incorporating or becoming a limited liability company (LLC) or partnership (LLP).
Consider a buy/sell agreement
A “Buy/Sell” agreement spells out the terms by which one partner can buy the other out. It helps avoid disputes over value if the partnership fails. And you can discuss ways – such as purchasing life insurance – to buy out a partner’s heirs in the event of death or disability. After all, you probably don’t want to run the business with your partner’s spouse or children.
And here’s something to keep in mind: in the eyes of the law, you don’t need a written agreement to have a partnership. If, over a beer, you and a friend decide to start selling your special salsa at a street fair, you may have become partners. Your friend may acquire rights to your salsa recipe and you may each be responsible for all bills and obligations. So be very clear about the nature of the relationship before you begin working with anyone.
Partnerships can be terrific, but when things go wrong between the partners, it often means the death of the company.
LUNAR NEW YEAR: Will small businesses roar back in 2022, the Year of the Tiger?
