Small business BIG growth®
A good partnership utilises the key skills and strengths of each partner. Your new partner may contribute capital to help your financial position; maybe they have a great network of contacts to help your business grow; or maybe your partner is a superstar where you struggle. Together you can be the A-team, and move one step closer to your BIG goals!
Each and all of these can be compelling motivators to go into partnership. However, many friendships, family relationships and even marriages have been severely tested – if not destroyed – by business partnerships that has gone sour.
Whether you are starting a new venture together or bringing a new partner into your existing business, you need to get the fundamentals in place.
What is a partnership?
In very simplistic terms, the legal perspective to partnerships is: A partnership exists when there is an agreement between the parties to carry on a business in common with a view to making a profit.
A partnership implies that you will have joint ownership of the business. Partners will share in the returns and profits according to their share in the business. The sharing of profits is central to a partnership as is the sharing of losses and risk. Partners also exercise rights in terms of the decision-making and management.
Get real, before you get started.
Sit down with your potential partner and discuss all the things that may go wrong in your partnership and how they might impact your business. Don’t be afraid to ask the tough questions.
Here are a few to get you started:
- What will our individual responsibilities be? It’s important to define your individual roles and more than likely you have different strengths, weaknesses and experiences to apply to the business.
- How much time will we each dedicate to the business? Being clear upfront, will help avoid one partner feeling like they are doing 90% of the work for 50% of the benefits.
- How much income will we draw from the business and how will profits be distribute and/or re-invested? Being clear on payments to each partner at the outset avoids issues later.
- What happens if the partnership needs more money? Who will contribute and on what basis? If both partners cannot contribute equally, will that impact ownership of the business and the distribution of profit?
- What is the plan if one of the partners wants to exit the business? Sometimes circumstances change, or maybe you end up not being able to work together after all. A clear exit strategy and plan is essential.
You should definitely have formal, legal arrangements between you and your partner. This means instead of a friendly handshake or verbal agreement, your partnership will be formally documented to ensure you are both protected if things don’t work out. Even if your partner is family, formalising arrangements – including roles and responsibilities, money matters, and exit plans – is a vital.
You may need to seek external expert advice to get the new arrangements in place. This could mean consulting a business growth specialist, your legal advisor, or your accountant.
Understand the potential risks.
Perhaps the most important question for any partner is ‘what is my liability under this arrangement’.
Put simply, your liability as a partner is significant.
Each partner will be responsible both legally and financially for the actions of the other partners in the general course of business.
For example, if one partner acts negligently and there is no indemnity insurance (or the indemnity insurer refuses to cover the loss), the liability of all partners will be joint and several. If one of the partners becomes insolvent, the remaining partner is liable for the total debt of the partnership.
These are just a few of the reasons that you should proceed with caution when entering into a new partnership arrangement; and by no means is an exhaustive list.
Whilst working through these types of questions may feel uncomfortable, a little discomfort early in the piece is preferable to a disaster later on. Unfortunately, many partnership issues arise because of a failure to formally address potential issues upfront.
Building a successful partnership requires more than friendship and a bright idea. Avoid partnership perils by clearly defining the terms of your agreement and having it documented at the start if your journey.