Good Neighbors. Great Lawyers.

Business partnerships: What you need to know about getting in, out

By Johns, Flaherty & Collins on Monday, May 13th 2019

business partnerships

Business partnerships offer several advantages when they work

It’s well known that half of all new businesses will fail in the first five years. The outlook is even bleaker for partnerships: up to 70 percent of those don’t last, according to The Balance Small Business.

When they work, however, partnerships offer business owners a number of advantages — drawing upon a broader range of talent and skills and increased contacts of multiple participants, resulting in greater revenue potential. Additionally, partnerships are four times more likely to succeed than sole proprietorships.

Due diligence key to successful partnerships

Unfortunately, those prospects often entice people to begin working together before they have formalized all the details of their partnership. Up-front due diligence is crucial to being among the 30 percent of partnerships that succeed.

Finding the right business partners

The first step is identifying your potential partner(s) much like you would in hiring a key employee; it should extend well beyond friendship. Does this person have strengths that complement your weaknesses and visa versa? Do you communicate well? Do you have similar values and a shared vision for the company?

Work with experts to form your partnership

Once you’re reasonably certain you’ve found the right partner, work together and with other experts to set up the business. Meet with accountants to be sure you properly set up your books, inventory tracking and profit and loss statements. Talk with business bankers for advice about cash needs and cash flow analysis. Consult with a lawyer about the legal form for your partnership, ownership interests and management decisions. The Small Business Development Center at the University of Wisconsin – La Crosse can be another valuable resource for startup companies in assuring you have a solid business plan and have covered all the critical aspects of your business operations.

Preempt potential business conflicts

The process of setting up the business will tell you a lot about your potential partner and your long-term viability together. Much like premarital counseling, it will help you identify and preemptively address potential problem areas — such as allocating job responsibilities and establishing solid customer, billing and other policies.

Put your business partner agreement in writing

If after that process, you’re still confident you want to be business partners, get it in writing. Your partnership agreement should include basics such as individual responsibilities and allocation of ownership interests. Oftentimes, partners naturally assume a 50-50 ownership interest when in fact they, and the business, would benefit more from another arrangement. Even a 51-49 split can help during times when you can’t reach consensus on an issue — helping the company move beyond paralyzing stalemates.

Address exit strategies in business partnership agreement

Exit strategies should also be detailed in writing before business operations begin. They can be included in the partnership agreement or in a separate buy-sell agreement. Exit strategies should detail what happens to the business or a partner’s interest in the event a partner (a) voluntarily leaves the partnership to pursue other interests; (b) involuntarily leaves (e.g., due to a falling out or other reason such as a need to relocate); (c) dies; or (d) becomes disabled.

Deciding these issues up front — while each partner shares the potential to fall into one of those categories — is the best way to assure fairness in the future. Otherwise, a partner may need to take legal action to dissolve the company, with a receiver being appointed by the court to take control and liquidate the assets.

Include mediation or arbitration clauses

For this reason, it’s wise to include mediation or arbitration clauses in any partnership or buy-sell agreement. These clauses will help you avoid costly lawsuits and help save the company you worked so hard to build.

Written agreement offers better assurance for success

John D. Rockefeller noted, "It's better to have a friendship based on a business partnership than a business partnership based on a friendship." If you’re starting your business as friends, a clear, equitable and comprehensive partnership agreement at the outset can be your best assurance you’ll remain friends.

 

You may also like: