Points to Discuss When You Think You Want Business Partners

 

1.      The Little Red Hen.  Nobody wants to be in a partnership where one person does all the work, but everybody expects equal profits.  To avoid this issue, consider the following:

 

a.       How much money will each owner contribute to the company?

 

b.      Will investments be one-time or ongoing? If ongoing, how will the partners decide when the next time would be to invest?

 

c.       Will all of the partners work in the company day-to-day or will there be some active and some passive partners?  Discuss what jobs might be involved in the different kind of partners.

 

2.      Let Me Outta Here.  Some things happen in life that may cause unexpected consequences – death, divorce, permanent disability or partners simply decide they want to sell their ownership interest and move on.  Potential partners should discuss the following:

 

a.       If an owner dies, does the ownership go to the deceased partner’s estate or do the remaining partners have the first right to purchase that ownership.

 

b.      Should a divorce affect the partnership interest?  If so, how can you allow courts to divide property without giving up your company?  Usually we draft a waiver that the current spouse will sign to prevent divorce or death issues from disrupting the partnership.

 

c.       What if a partner can no longer work, can the other partners buy him out?

 

d.      If an existing partner wants to sell his ownership interest, how will that portion be valued?

 

                                                              i.      A simple way would be to take the previous 12 months of gross income and multiple by some multiple.  It is better to decide the valuation method in advance than waiting for the time when it’s needed.

 

e.       Will the business be limited to the present number of partners or will there be occasion to allow other partners to buy into the company? 

 

3.      Too Many Cooks in the Kitchen.  Too many decision makers usually leads to a situation where nothing is decided.  To help avoid this problem, here are a few things to figure out in advance:

 

a.       Will the business be member-managed or manager-managed.  In other words, do you want a partner running the day-to-day operations or do you want to hire a third-party to run the day-to-day.

b.      Despite your decision to the question above, what duties will the day-to-day manager be allowed to make without express permission from the majority of the partners?

 

                                                              i.      Many partnerships will either specify the type of decisions or the financial limits that are authorized without express consent every time.  This can be a trial and error, as it is difficult to predict every type of decision.

 

                                                            ii.      Some partnerships rather than making a list of everything the manager can do will instead provide a list of the few areas that the manager cannot do without express written consent from the majority of the partners.

 

                                                          iii.      However the partners decide this issue, this needs to be clear – this is an area that accounts for more disputes and costly lawsuits than many of the other areas.

 

4.      Get Out of Jail Card.  We all make mistakes, but the last thing we want is to risk our business interests for the poor choices of our partners  Take some time to think about the following possibilities:

 

a.       Is there any criminal conduct for which a partner should be removed from the partnership?  Often this might look like DUIs, theft, embezzlement, etc.

 

b.      To what extent, if any, will the company pay the legal cost to defend the partners against potential lawsuits?

 

                                                              i.      It could look like a reimbursement if the partner is cleared of wrongdoing charges.  It could also be set up to where the company pays the costs up front to a certain limit, which would be reimbursed to the company if the partner is found to be in the wrong.

 

5.      Watch Out For A Low Blow.  Every fight needs a set of rules, or we might just be the victim of a cheap shot low blow.  Here are a couple more things to hash out before getting married to the idea of going into business with some partners:

 

a.       How will everybody resolve disagreements?  Will you set up a simple majority rules system?  What decisions will need to be unanimous?

 

b.      Even if you have most of your decision process figured out, what if the dissenting voice really has a problem, what will happen? Can that person force the other partners to buy them out (i.e. buy their ownership interest)?  Can the dissenting partner take the company to mediation, arbitration or a traditional lawsuit?

 

Some of the above discussion may seem awkward at this point – everybody is excited about a new business opportunity and everything is going well.  The reason to decide the above scenarios in advance is that when the turbulent time arrives, the moment for peaceful discussion is gone.