We cover a lot of ground here, yet we are truly just scratching the surface. This is a complicated subject, with serious long-term financial and psychological implications.
No, the topic isn’t marriage; it is business partnerships. The two share lots of
similarities, including (sadly) that many ultimately fail. And with both, normally the root causes of failure include expectations not being met and a lack of communication. Financial and Working Partnerships.
The two most common partnering relationships are financial and working partnerships.
Financial partnerships are pretty straight forward; a financier provides capital for a return on investment. From an operations standpoint, the financier generally remains at arm’s length.
Here we focus on working partnerships, which entails two or more owners involved with day-to-day operations. Financial commitments, including loan guarantees, are usually part of the deal.
My personal thoughts and experience with working partnerships is that… pardon my French… most suck, and all require a ton of ongoing effort. Involving family members adds another layer of complexity.
Why even consider the working partnership model? Partners can bring different skill sets to the table, which can definitely increase the odds of success. Also, two heads tend to be better than one, plus generally the financial burden and risk is shared.Working partnerships can suck less, and even thrive, though not having key understandings and guidelines in place is risky business.
Operating Agreement (OA). Prior to pulling the trigger, you and your prospective partner(s) should thoroughly think through what is expected from each. Document these core responsibilities, plus how you plan to run the company, in what is commonly called an Operating Agreement (OA). Plans will change, but you need a defined starting point.
Performing this front-end work will not prevent future flare-ups, disagreements, and bruised
egos, but it will reduce their frequency and severity because what you collectively agreed to is documented!
Disclaimer: I am not an attorney, nor have I ever played one on TV. Attorneys can provide sample OA language that should include these fundamentals:
Partner’s ownership percentages
Profit distribution
Who has authority to sign on behalf of the company
Rules pertaining to selling of stock and allowing new stockholders
General roles of partners
Who has access to financial accounts
Buy/sell basics, including what happens to your shares if you die or divorce
Dissolving the company
So, when you first start seriously contemplating a partnership, see what suggestions and sample documentation your attorney can offer. Once the partners agree to the details, your attorney will draft your specific OA.
I suggest that your OA also addresses these topics:
Clearly define each partner’s core duties and responsibilities.
Compensation - For example, let’s say there is a new venture named The Rocket Shop. There are three partners with equal ownership, but different roles within the company. One partner is a lead designer, another a nuclear propulsion physicist, and the third is the Office Manager. In the open market the Office Manager would be on the low end of the income pole. Conclusion… profits are split equally but pay may be tied to what you bring to the party.
Establish rules for cash management, and what personal expenditures will be considered a company expense. Jointly review financial data on at least a monthly basis.
Will all partners agree to personally guaranteeing loans? Are partners’ guarantees limited to their ownership percentage or can one partner be held liable for all debt (in solido)… this may be dictated by your lender.
What happens if there is a cash call and a partner cannot “ante up”?
Is the “horse trading” of company services or products allowed? If so, what is the limit? Are the other partners compensated for profits lost due to your trading?
Be specific with your buy/sell agreement. How will the company be valued? Consider funding, or partially funding the buy/sell with key-man life insurance in case of death.
Anything that involves money is a potential point of contention. Eliminate as many gray areas as possible. For example, are company loans to officers allowed?
Include the framework for “last resort” dispute resolution, such as mediation or arbitration.
I leave you with these final words of wisdom (in my humble opinion)… these are things that do not necessarily belong in an OA, but are considered Best Practices:
Communicate clearly. What you know you meant may not be what others heard. Write things down, and on important topics maintain an email paper trail.
Have structured meetings no less than once a week. This keeps everyone in the loop, plus collaboration generally yields better results. Produce meeting minutes that include to-dos and follow-up assignments.
Be accountable and hold others accountable.
Make decisions based on facts, or “most probable case”, not emotion.
Practice tact. Don’t be petty or selfish. Walk in the other person’s shoes.
If you employ in-house bookkeeping, have your outside accountant validate the numbers at least every quarter. Even people you trust will steal.
This last one is key… Continuously strive to improve communication and organization in both your business and personal life.
Go forth and prosper!
About the Author Bret Lovett has resided in SW LA since 2015. Prior to this, over a 34-year period, he founded, owned, and operated several businesses in NE LA. In 2001, Bret received the Louisiana State Entrepreneurial Success Award. Currently, Bret is the VP of Workforce Housing and Support for a Lafayette-based firm, plus he owns Action Path Business Consulting (actionpathbc.com), located in Sulphur, LA. Contact him at bret@actionpathbc.com
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