By: Barry E. Haimo, Esq.
September 18, 2013
Choosing the Right Business Partner or Partners
Founders are filled with excitement when forming a new business. They visualize hitting their projections, rolling in money and living the good life. Unfortunately, for many reasons that are outside the scope of this post, this is not the case for most businesses. In fact, the statistics paint a dismal picture. It’s something like 90% of businesses fail within 5 years, and 90% of the ones that don’t fail in the first 5 years end up failing in the next 5 years. It goes without saying that you should be prepared for this contingency as unlikely as you feel it may be. Conversely, business planning ahead is also very important when you become successful. Money is flowing and that creates different types of problems, such as those relating to major decisions with respect to direction, and of course, distributions to partners. This post introduces some important points to consider before jumping head first into a partnership.
Why do you want to go into business with your partner?
What is he or she bringing to the table? Are they contributing money, property, expertise, relationships, etc? I generally say to pretend that you are well capitalized, and can afford to pay to bring in talent. Would you pay top dollar for your partner? If you wouldn’t, it’s a good sign that they really aren’t bringing as much value to the table as you think. Another point to consider is that your partner or partners should complement each other well. There’s probably no need to duplicate talents. Find someone that brings something to the table that you do not.
Who is your partner?
You should characterize a partnership as a marriage. Without proper planning, if things don’t turn out well, you will have to go to court for a messy divorce. Therefore it’s prudent to consider who your partner is as a person. You need to understand their work ethic, integrity, and loyalty. You also really need to know how they make and honor commitments. Let’s break these down individually.
- Work ethic – Is your partner a 9-5 kind of person? Are they going to disclaim responsibility because it’s after hours? If you’re starting a business, you work nights and weekends, always.
- Integrity – Do you trust your partner? Can you count on him or her to act in the best interests of the business and be a team player?
- Commitment – Is your partner prepared to do what is necessary to make the startup successful? Is he or she prepared to work through the highs and the lows? Make sure to be very aware of their financial, health and family situation. Enthusiasm and passion only take you so far. Family and financial difficulties are poisonous. You can’t eat enthusiasm and passion and it’s hard to operate an efficient machine when it’s leaking gas. One way or another, eventually, you will need a partner whose financial circumstances, family life, health and availability fit well with you and your company’s needs.
What are the partners’ expectations of time, money and work contributions?
While every startup’s initial business is to search for a profitable, repeatable and scalable business plan, there’s a reason you want to have an initial plan and strategy. It’s probably going to take a while to gain traction. The business cannot be successful if the partners are out of sync. It’s important that the partners work through the details of the plan prior to signing on the dotted line and especially setting up shop. The partners should be clear on responsibilities, obligations and workflow; do it when everyone is positive and optimistic so it’s easier. When you first address these issues when the business is struggling and emotions are heated, well, use your imagination.
What happens if it’s not working together?
Unfortunately, this is the hardest thing to address in the beginning. If done properly, there will be mechanisms in place to handle disagreements, deadlocks and transitions when a partner dies or otherwise wants to move on to bigger and better things. These are addressed in the governing documents and potentially partnership agreements.
What’s the best way to handle all of these issues?
The best way to address these issues is to schedule several meetings with a business attorney, especially ones that have experience starting businesses of their own. You will definitely need a governing document, such as bylaws, articles of organization or a limited partnership agreement. It may also be necessary to prepare agreements for each of the partners. Doing so will help flush out the governing documents in terms of ownership, control, financial allocations, obligations and responsibilities and termination. It will also help the team flush out and organize the business’s infrastructure and plan of attack.
Buy-Sell; Shareholders’ Agreements and Estate Planning Documents
Founders often want to address what happens to their soon-to-be-successful company if they are incapacitated or deceased. For this reason, they will often execute buy-sell agreements, shareholders’ agreements and estate planning documents to address these issues. This will typically include a will, trust, power of attorney, health care surrogate and living will. This raises questions as to which partner, if any, will take over control and/or management, who will inherit the deceased partners’ interests, and will that person or entity retain control. The more thought out ahead of time, the better. You do not need a crystal ball, you just need a framework and an understanding of the basic fundamentals surrounding various important contingencies.
The bottom line here is never just jump into a partnership.
Please note that I wrote a Startup Roadmap, which touches on a lot of these issues. It is constantly evolving. It contains an outline of what you should do to ensure you develop a solid foundation for your startup. It includes links to articles, books and videos. Email me and I’ll send you a link to view it.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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