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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

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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.

WHAT DOES STATED INCOME MEAN AND HOW DO YOU QUALIFY?

Amina

So recently I had a client come to me – he is self-employed and is also incorporated, and works as a self-employed contractor.  He was turned down by the banks, and in addition he was getting divorced and needed to find a home for himself and his child, when she would come to stay on weekends.

We sat down together and I explained that I could proceed one of two ways; because he was incorporated, I could “fully qualify” him IF I could prove his income through his NOA’s and T1 Generals as well as other supporting documentation.

If I could not qualify him as such, I would have to qualify him as a “stated income” applicant, which is more difficult to prove, as different lenders have different requirements.

When it comes to the self-employed, lenders have made it difficult to qualify for various reasons; as an entrepreneur and business owner they benefit from income tax credits and great reductions and write-offs on their personal tax returns.  This is a great advantage when it comes to the actual amount of taxable income they have to pay tax on at the end of the year, but the disadvantage is that their net income is incredible low.  This unfortunately impacts a self-employed client’s ability to FULLY qualify.

A stated income mortgage is where the lender fully understands the self-employed income dilemma and will accept a client simply “stating” an income on their application without having to show net taxable income on your tax return to prove it.

What’s important to note is that the interest rates and/or fees/default insurance premiums are based on the credit rating and available down payment and are sometimes a little higher than a more traditional mortgage and depending on the client can be worth it if home ownership is a more affordable solution than renting.

There are basically three ways to qualify under “stated income”

Type 1: Fully Insured

In this instance, I can look at “A” lenders based on beacon score and debt ratios – rates will be lower than 3% -this is stating income that makes sense compared to the T1 Gross income for the last two years; if an applicant has provable income either on their T2125 (part of the T1 General) or corporate financials and the gross can reflect adequate income to qualify, we can go fully insured with the following documents to prove this:

  1. Proof of self employment such as a business license, Article of Incorporation, invoices etc
  2. Last two years full Income Tax Return including your T1 General and all the attachments
  3. Last two years Notice of Assessments to confirm no income tax arrears
  4. A letter from the employer stating job title, income and start date for XXXXX
  5. Recent pay stub
  6. Proof of down payment, through bank statements, RRSP statements, etc
  7. … and any other documents the lender might deem necessary at the time ( this is lender specific as some will accept stated-income individuals and some will not)

Type 2: Stated income – best rates, 80% LTV 

When we cannot provide an avg. gross income of the two years to make sense for qualifying, we must go stated income under insurer guidelines.  Here are the documents that are needed:

  1. Avg. 6 months of deposits plus invoices through last 12 months bank
  2. Last two years Notice of Assessments to confirm no income tax arrears
  3.   Last 2 years corporate financials and/or last 12 months bank statements as long as they show business activity (keeping in mind that the lender may ask for 2 yrs) – i.e., deposits
  4.   Proof of self employment such as a business license, Article of Incorporation

Type 3: Stated income – posted rates, 80% LTV 

This is stated income when there are no documents to show your income – however the rates will be upwards of 5.99%.  The only documents needed in this case are:

  1. Last two years Notice of Assessments to confirm no income tax arrears
  2.  Stated income letter “stating” to what you make –to qualify you at an amount you need.  Ie. if you need $400K to purchase a home, we state you make at least $65,000/year

Keep in mind, that “stated income” needs to make sense for the industry you work in – ie, as this client is a self-employed contractor, he was able to qualify on Type 3 as the “stated income” amount was in line with the industry.

Not all “stated income” deals are funded, but mostly due to lack of paperwork and proof of income.  This client was successful in his goals to own a home because he was willing to work with me and was able to provide the paperwork that was being requested.  If you are a self-employed client and don’t know if you can qualify, a mortgage professional can be your best ally in qualifying for a mortgage.  Speak to me today if you have been denied by the banks – we are here to help!

To your Wealth!

Amina

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