A proper partnership agreement makes your new venture real. But the success of your business partnership depends on several intangible key factors that you must consider from the outset.
Sure, your partnership may look great on paper. But how well do you and your partners actually work together? Do your values align? Can you trust each other?
Just as I get a lot of questions about setting up a business partnership, I always get a ton of questions about getting OUT of a business partnership. Unless business owners have done the right work on the front end, such as setting up a proper Operating Agreement and Buy Sell Agreement, partners may find it more difficult than they anticipated to get out of a bad relationship. In the video below, find out more about getting out of a bad business partnership.
Thinking about going into business with a friend or family member? The first thing you need to do is establish the terms of your relationship.
First, determine who will do what. Is the relationship equal in terms of contributions? Is it equal in terms of who will do the work? Who will make the business decisions? If both partners make decisions, who will break a "tie" if there is a stalemate?
If you will form a LLC for your business, you need to have in place an Operating Agreement. That is the document where you will write down all of these answers and establish all the basics of your relationship. A business relationship is similar to a marriage. In the beginning, everyone is starry eyed and enthusiastic. Over time, resentments may build and damage the relationship. Similar to a prenup, the Operating Agreement will dictate what happens if someone wants out.
Despite the popularity of a certain song, blurred lines are not always a good thing, particularly in business. In the management of a business, clarity is key. What sort of things need clarification? The basics: who, what, when, where and why.
Who: who is involved in your business? What is his/her role? When entering into a business relationship with anyone else, whether that person is a friend, family member or spouse, clarity is key. Write everything down: the responsibilities of each person, the expectations and key accountable tasks.
What: what is your business? Selling goods? Providing services? A blend of both? You'd be surprised by how many people can't really clarify what exactly their business is about. They know they want to sell things, but they also want to dabble in this or that and the other thing. Know what your business is, who it serves and write it down. Stick to it. At least for awhile.
When: what are your deadlines? What are your goals? When do you want to achieve break even? When do you want to be profitable? Know these timelines inside and out and write them down to make sure you follow them.
Where: where will you conduct business? Where will you incorporate? Do you have a registered agent? Do you know what a registered agent is or why you might need one? Make sure you can answer these questions.
Why: why are you in business? To help people? To change the world? If you are starting a for profit business the only answer to this question (at least initially) should be TO MAKE A PROFIT. Some people think this is harsh, but think about it: how can you change the world or help people by running an unprofitable business? You can't, because you'll be out of business in no time. It's great to have noble objectives, but don't forget that you must turn a profit to keep your business going.
Remember: clarity is key...no blurred lines.
Ok, maybe enemies are not the logical choice as business partners, but sometimes it can be easier than doing business with friends.
Going into business with friends always sounds like a great idea. You would get to work with someone you like, have fun and bounce ideas off one another. However, going into a business with a friend opens up complex and sometimes conflicting personality traits and viewpoints.
Before you go into business with a friend, make sure you hash out all the important details, like who is going to contribute how much money and what assets to the business, how much of the business each person owns, what happens if there is a disagreement or someone wants to leave the business. Thinking about these things before doing business or setting one up can save you a lot of headaches down the road and prevent you from wishing you did business with your enemies instead!
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer in Philadelphia, the Main Line or New Jersey, we can help.