5 Ways to Create a Winning Business Partnership and Agreement
According to the Small Business Administration (SBA), over 70% of all small businesses are owned by one person—a sole proprietorship. Despite the numbers, greater rewards may result if you form a business partnership with an individual who complements you both personally and professionally.
Humans, by nature, work better together. Partnerships offer owners a collaborator, someone to share ideas and responsibilities with, and someone to succeed or fail with.
There are quite a few issues you should address with your prospective partner before forming a partnership. Attend to these issues before you start, and you have a better chance of a successful venture.
Have the Same Vision
For a partnership to be successful, all parties involved must agree on the same strategic direction for the company. If one partner wants to build a well-known national chain of retail outlets and the other partner only cares about earning a decent living, the business is destined to fail. Set a clear, agreed-upon course for the business that meets the needs of both partners.
Define Business Roles and Responsibilities
A winning business partnership capitalizes on the strengths and skills of each partner. Divide business roles according to each individual's strengths. For example, if one partner is strong in marketing, operations, and finance and the other partner excels in sales, human resources and leadership then split tasks accordingly.
Binding agreement authority is the ability to enter into contracts with other entities. You might consider deciding if any partner has this authority, and in what scope. You and your business partner could split this authority based on the responsibilities you each take on.
If your partner is responsible for procurement, they could enter a contract with a supplier without needing to confer with you. By agreeing who can make these kinds of decisions, you mitigate the risk of conflicts down the road.
The structure you choose for your business will dictate how you and your partner pay taxes for the business. Limited liability companies and general partnerships have different liabilities and tax responsibilities.
Avoid the 50-50 Split
It may seem logical and fair to equally split decision making. However, this kind of split can impair decisions. Instead of a stalemate when you can't come to a compromise, consider developing a way to overcome differences.
If this is not possible, then consider using an outside source to weigh in on big-ticket disagreements. You may not want this source to have final decision ability, but see if they will analyze the situation and give you their opinion for a course of action. If needed, get more than one opinion.
There will be disagreements between partners. Not many pairs of people can agree 100% of the time. You should consider how you are going to handle disputes between each other, with employees, suppliers, customers or any other stakeholders.
One way to deal with this is to include a mandatory arbitration clause in your partnership agreement and the contracts you make with other entities. Arbitration is the use of an outside party to determine the outcome of disagreements and disputes.
Arbitration is a legally recognized method of dispute resolution. Binding arbitration means that all parties involved agree to abide by the decision of the arbitrator.
You should decide with your partner how much is each of you is going to contribute to setting up your business or partnership. If you are both already operating, the costs may not be as high as if you both needed to start out.
Everyone has their own limit for tolerating risk. Financial risk can be more stressful than physical risk because it affects much more than your own safety. You should discuss with your partner how much financial risk you both can tolerate, and set limits.
An example of risk could be the method that you choose to finance your business. There is generally more risk involved with debt financing than with equity financing (using loans to finance instead of issuing shares, venture capitalists, etc.).
You may not have much of a choice at first how you finance your business, but be sure all parties understand the risks, and how much each person is responsible for.
The type of business you put together will also dictate the risk that you assume. Creating a limited liability company keeps owners from personal responsibility for the debts of a failed business.
When you create your partnership, you should discuss the expectations for pay. Most businesses do not generate profit within the first year or even the second year. The number one reason new businesses fail is that they don't have enough cash to pay the business' and owner's bills. Ensure you and your business partner know how you are going to make ends meet.
Generally, in a partnership, the assets belong to the business unless specified in the partnership agreement. Partners will then own a percentage of the value of the company property based on the agreement. This is usually only a concern for businesses when they are closing out, and owners are working through who gets what.
Buy-outs, Dissolutions, and Exits
Partnerships dissolve for many reasons. One partner may decide the partnership is no longer beneficial. You should include buy-out terms in case one partner wants to leave.
You might consider adding a dissolution clause to the partnership agreement. If the partnership is not working out, it would be beneficial to have pre-agreed upon terms for splitting things up.
An exit strategy is a plan if both partners should want out. This is can be accomplished by selling the company, or by selling all the inventory, assets, and interests a business has.
Hold Partner Meetings
A strong business partnership is built on open communication. Meet on a regular basis so you can share grievances, review roles, provide constructive criticism, and discuss future plans for the growth or direction of your business.
Your business may grow over time as you and your partner work together. You may want to readdress your partnership agreement as your business grows. You may need to add more partners, include senior employees, and include expansion agreements.
You could include this in your initial agreement, but it might be better to wait until you are in a position to consider growth and expansion.
The Partnership Agreement
It is simple to set up a partnership because there are no legal documents to file. A written agreement, signed by all partners, is a legal document recognized by law.
Partnerships are often an oral agreement between two or more parties. Oral agreements can present problems in case of disagreements, even though they are legally binding. Instead, avoid potential problems by drawing up a partnership agreement.
According to the Small Business Administration(SBA), your partnership agreement should include the following (at a minimum):
- Amount of equity invested by each partner
- The type of business
- How profits and loss will be shared
- Decision-making policies
- Partners' pay and other compensation such as bonuses
- Distribution of assets upon dissolution of the business
- Provisions for changes to the partnership or provisions for dissolving the partnership
- Parameters of a dispute settlement clause
- Settlement of the business in case of death or incapacitation
- Restrictions regarding authority and expenditures
- Expected length of the partnership
It's always worth considering a business partnership structure when you find someone who complements your skill set and you know will add value to your company. These partnerships can be enjoyable and lucrative if the right foundation is cemented in the beginning.