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Most business partnerships end in divorce. Here are the top 5 ways to beat the odds.

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.

 

 

Andrea Henry

Vox Law LLP

The Law Firm Built With Love for Small Business™

T: 416.639.6235

E: andrea@voxlaw.ca

W: http://www.voxlaw.ca

Sign up to receive legal tips I don’t share anywhere else and a must-have checklist for Canadian small businesses at  The Secure Startup.

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.

How to get Clients to Pay On-Time

Let’s start off by admitting that as much as we love what we do, as small business owners, we do this to make money.

Let’s also admit that we have clients who have not really grasped this concept and who Just. Don’t. Pay. Us. On-time- or at all.

How do you deal with it? As always, prevention is better than cure. Here are my top three tips to getting paid on time.

 

  1. Get it in writing.

Relying on verbal agreements and handshakes is for amateurs, and you my friend, are a professional with bills to pay. State your fees and payment terms in writing so that you avoid misunderstandings about payment expectations. Your written contract should also include, at a minimum, a Scope of Work Clause which is a very clear, very specific description of exactly what you are going to provide to the client and a Cancellation Clause which will tell your client if and when they can cancel and what, if anything, they will still owe you after cancellation.

 

  1. Make it super convenient and easy to pay you

In your initial meetings, ask the client what works best for them in terms of timing of invoices, credit terms and payment type. Instead of just accepting cash and cheque, consider accepting credit and debit cards, online payments, direct deposits and email transfers. Paypal, Square, Quickbooks and Freshbooks are just a few companies which allow you to send invoices that clients can pay with just a few clicks.

You remain in control of the decision but by involving the client in the process and by being flexible in response to her needs, you make it more likely that the client will pay you on time.

 

  1. Create a structured, well-thought-out procedure for collections

Even with the most rock-solid contract and convenient invoicing systems, you’ll still occasionally have to deal with a client who doesn’t pay on time. When creating your collections system, think about:

  • How often you will remind your client to pay the invoice eg. every week, every month, every quarter and for how long will you send those reminders
  • Whether to add interest to the outstanding amount after a certain number of days have passed (pro tip- you should add interest because it acts as a deterrent to long delays in payment)
  • What escalation will you use if the client still doesn’t pay- eg. send the matter to a collections agency, retain a business lawyer or take the client to small claims court
  • How important is the client to you- using a collection agency or starting a court action often leads to a permanent breakdown in the relationship.

The first time you ask a client to sign a contract or you send out a collections letter may be nerve-wracking. But remember, while you might be new to this entrepreneurship thing, you definitely are not new to the service or product you are providing.

By insisting on a signed agreement and a collections policy that protects your ability to get paid, you signal to the world that you take your business seriously. When you take yourself seriously, guess what? Your clients take you seriously and serious people get paid.

 

Andrea Henry

Vox Law LLP

The Law Firm Built With Love for Small Business™

T: 416.639.6235

E: andrea@voxlaw.ca

W: http://www.voxlaw.ca

Sign up to receive legal tips I don’t share anywhere else and a must-have checklist for Canadian small businesses at  The Secure Startup.

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.

Top Five Legal Questions every Business Owner should ask ….and the answers you need to know

 

  1. How can I raise capital?

The textbook answer that a corporate finance student will give you is that you should have both equity and debt financing. Arlene Dickinson, who has built an empire from her sheer will, says equity is the most expensive form of financing there is as you’re giving up a part of your business. Whichever option you pick, it is important to have your records in order so that your potential lender or investor can have confidence in your business and your ability to be organised and well structured. Speaking of confidence in your business…

 

  1. Am I too small or new to incorporate?

This is a conversation you need to have with your accountant AND your lawyer. At any stage of its life there are many ways a business can benefit from becoming a corporation. Just a few of these benefits are:

  • Limited Liability. This advantage is the one everyone knows- if you carry on business as a sole proprietor or a general partnership, your assets are at risk if the business incurs any liability. That means that if a client sues your business, really, he’s suing you, and your house and car and bank account are all at risk. A corporation is a separate legal person with its own assets. That means if a client sues your corporation, he can get at the corporation’s assets but not your personal assets.
  • Increased credibility. Seeming bigger and more established than you really are is crucial when you’re the newest one in the pool.
  • Ease of raising capital. How do you sell a part of your business if your business is you? While maybe some investors would take a kidney, issuing shares in a corporation is the easiest way to exchange a share of your business for that influx of cash you need to grow.
  • Tax reduction or deferral. A big reason why people incorporate is to reduce or defer the tax they pay and to provide flexibility in finances but taxes are only an issue if you’re making a profit.

The bottom line– if you’ve got good business insurance, work in a field where the risk of a significant claim against you is low, are not interested in attrating investors and you’re using every cent you make from your business to fund your personal needs, incorporation may not be a top priority.

 

  1. How likely is it that I’ll get sued and what can I do to reduce that risk?

As soon as you start to run a business, you open yourself up to the possibility of a legal claim against you. Some businesses have a higher risk than others- a club teaching axe-throwing vs a studio where you learn to paint landscapes. However, all businesses are at risk of suits from disgruntled employees, dissatisfied clients and allegations of trademark and/or copyright infringement.

Could your small business survive if you had to pay legal fees of $30k? That’s the average cost for legal fees for a matter up to and including a two-day trial in Ontario and that doesn’t include the cost to you if you lose. Those eye-watering sums are what you’re trying to avoid by putting the right protections in place.

There is no way to guarantee that someone won’t sue you, but if you put the right contractual and regulatory protections in place you dramatically reduce the chance it will happen.  If you haven’t been sued before, being served with a claim can be terrifying and disorienting so it’s smart to get professional advice and put in place a plan for dealing with lawsuits before they arise.

 

  1. What contracts do I absolutely need?

Ideally, any relationship in which rights or duties are involved requires a contract. Whether it’s the terms and conditions or service that a client accepts, a confidentiality agreement for a possible investor or an agreement that lets your employees know that after two written warnings, they’re fired, properly drafted agreements can be worth their weight in gold if there is ever a dispute. For most businesses, if you have to pick only three, get an employee contract, a client contract and an agreement among or between co-owners if that’s your set up.

 

  1. If I have a business partner, what happens if we have a disagreement that we can’t sort out on our own?

The legislation that governs businesses doesn’t provide much protection for business owners with respect to their disputes with partners. Minority shareholders can bring a claim if the directors are acting in a way that is damaging to them, but when it comes to equal partners, which is how most small businesses are set up, you’re pretty much on your own. If you ignore everything else I’ve written, GET A PARTNERSHIP OR SHAREHOLDER AGREEMENT. And if you’re in business with friends or family, you ought to have gotten it yesterday. If things go wrong, you need to have a way for one or more of you to exit the business without blowing it up. The most difficult, bitter and costly disputes and sadly, the most frequent disputes, are the ones involving family and friends who go into business with each other with nothing written down.

 

Andrea Henry

Vox Law LLP

The Law Firm Built With Love for Small Business™

T: 416.639.6235

E: andrea@voxlaw.ca

W: voxlaw.ca

 

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.

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