Done correctly, going into business with a partner can be a great way to grow quickly as each partner brings expertise or assets that the other party is missing but which are crucial for business success. Yet, according to some studies, 80% of business partnerships fail. When you consider that the failure of a business partnership can often lead to loss of valued relationships, financial struggles, lawsuits and even complete business failure, those are eye-wateringly bad odds.
So, how do you beat the odds?
Get on the same page
If you’re starting a business together, don’t jump straight into setting up the bank account and buying inventory. Spend a lot of time (I’m speaking about days if not weeks) mapping out what your business will look like. What are the business goals? Timelines? What is your vision for the business and what it will take to achieve this? What is the sacrifice plan? When will you increase your team and how? What is the exit plan?
Skipping this step can be disastrous. If you plan to build a large business with 10 locations across Canada and sell it to your largest competitor in 7 years for $10 million and your partner is content to stay small as long as she can make $72,000 a year from it, your business partnership is not going to work out and it’s best to know this before you invest your energy and money.
The Devil (and the Lawsuit) is in the details
The big picture is crucial but it will remain an unfulfilled mission statement on a wall somewhere if you don’t nail down the details. Having a clear, detailed plan can often be the only thing that allows you to ride out changes in the market and in the emotional state of the partners. Before you get started:
- Establish the objectives and expectations of each partner;
- Determine each partner’s contribution in terms of funds, skill and time;
- Complete an organizational chart, even if right now it will only contain two names- yours and your partner’s, and assign the jobs each partner will have. This is often the most difficult part as someone has to be the Managing Partner.
- Form evaluation objectives and plan ways to monitor and assess performance;
- Decide on a procedure to resolve problems when there is a serious issue e.g mediation or arbitration.
Map out Your Mutual Expectations in Writing
Now that you know where you want to go in your business and how you plan to get there, step back and think about the roadmap for the relationship between you and your partner. Before you visit a lawyer (more on that later), you and your partner(s) should take the time to draft your version of a partnership agreement. This will save on legal fees as it will allow you to experiment with different structures and solutions on your own, get a clearer idea of what you need to address and distinguish business issues from legal issues. The more work you have done before stepping into your lawyer’s office, the more useful and less expensive your agreement will be.
Get Professional Advice Early On
I know you wouldn’t start a partnership without legal advice! A business lawyer who has helped form partnerships before can help you assess your draft agreement and determine how realistic and beneficial your wish list is. She can also help develop your negotiation strategy including determining what you should ask for and when.
You should also have a consultation with an accountant who will be able to give you advice on how to make a budget, manage revenue and minimize tax liability.
Trust Your Instincts
A wise person once said- “Always trust your gut. It knows what your head hasn’t yet figured out.” Sometimes, a partnership looks great on paper but something just doesn’t add up.
A former client had the opportunity to join a business started by a husband and wife team which had strong financials and an expanding client base but in her meetings with the husband, she just always felt uneasy. Still, she thought she was being unduly sensitive and decided to go ahead with the partnership on the expectation that she could do really well financially. It turned out to be a disaster. The husband was a manipulative creep who consistently undermined my former client and then tried to force her out of the business without compensation. During that period, every time I spoke with her she expressed how upset she was, not so much with the partner, but with herself for ignoring her gut.
So, by now you’re probably thinking that you need to have a long chat with your partner but you’re wondering how to raise the subject without causing a rift. I’ll discuss that next month.
Vox Law LLP
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This article is made available by Andrea Henry of Vox Law LLP for educational purposes only and not to provide specific legal advice. By reading this article you acknowledge that there is no solicitor-client relationship between you and Andrea Henry and/or Vox Law LLP. The article should not be used as a substitute for competent legal advice from a licensed lawyer.