Looking to start a business venture with someone? Let’s talk about PARTNERSHIPS.
Before I start, it’s important to understand this article doesn’t just relate to partnership-related structures. It can be directly related to any business venture of which two individuals are involved in.
Looking to start a business venture with someone? Perhaps that someone is your partner, a close-friend (or not so close ‘acquaintance’), a business investor or even that bloke who seems to know his stuff at the local pub? Regardless of who you partner up with, stepping into a business partnership is much alike the beginning of a romantic relationship. At first it’s exciting, everyone is committed to the future and what lies ahead, and it feels like nothing will go wrong. However, before you take that next step and ‘put a ring on it’ there are important issues to consider.
Just like any relationship, there are countless ups and downs that can test its strength (oh we all know it’s true), and this is no different to business partnerships. Before jumping into business with someone, it’s extremely important to take the time to discuss and enter into a partnership agreement (also known as directors’ agreement or trustee agreement, all dependant on the structure you utilise). This agreement is a simple concept, allowing those within a business partnership to understand and agree upon commonly accepted terms of business that bind the operations going forward.
Below are some important elements to be included in an agreement, which the partners to the business will need to sign. This list is not all-inclusive, we recommend consulting with your professional advisor for further advice.
1. Who gets what percentage of the partnership?
Perhaps one partner is providing the blood, sweat and tears, whilst the other provides the funding to enable the business to operate? Maybe both partners are equally running the business? Maybe one partner is committed full-heartily, whilst the other is only part-time? An important consideration, and something that can be seemingly difficult to establish, is what percentage of the business and its profits each of the partners entitled to. This is entirely up to you, however spend your time on this area, as we all know money is the root of most issues (especially in romantic relationships, see the link?).
2. How will the partners to the business be paid for their contributions?
One common complaint I get from partners to a business is they feel they do more/provide more/are just simply better than their business partner. Trust me, it happens A LOT. Just because you are in business with someone does not mean that the earnings of the business must be distributed as per the agreement. We highly recommend each partners services are paid for fairly, so that the balance of profits are then distributed justifiably to the partners of the business as per point 1.
Here’s an example for you to consider. Two carpenters go into business together. One is a fully licensed carpenter with 10 years’ experience, whilst the other has only recently completed his qualifications and is still learning his way around the tools. Would it be fair for both to simply split the profits of the business 50/50? We would say no, each needs to be charged to the business at a fair rate, with the balance of the profits derived from the business then distributed fairly (then everyone is happy!).
3. Understanding the future vision
Be sure to settle and understand the future hopes and dreams of each partner to the business. By agreeing to a common goal, and working towards this, you are one step ahead in achieving financial and operational success. Nothing worse than a 25 year old going into business with a 60 year old, who would have dramatically different goals and aspirations with the business.
4. Who can bind the business contractually?
This may sound silly, but it happens. Any partner to a business can bind the organisation to liabilities without the consent from the other partners. Say, for instance, one partner signs a contract for a nice flashy Porsche Cayenne (just a cool $120,000 +) to cart their tools around. That partner has just established a substantial liability to the organisation, which could be a significant financial risk. It’s therefore important to clarify and agree to what consents are required before each partner can obligate the business to any contractual liabilities.
5. How will decisions be made?
Something that you wouldn’t think would be an issue is the ongoing decision making within the business. Maybe when your business is small this won’t be an issue, however as operations grow, how will those important decisions be made and who will be allowed to contribute to making these decisions? Be sure to establish a decision making process, and responsibilities in the decision making process, so a pivotal decision won’t be left in limbo hampering business performance.
6. Settling disputes (tiffs/barnies)
How will you handle a crippling dispute? Head straight to the courts and unload your wallets on lawyers and court fees? Unless absolutely necessary, the last thing anyone needs is to lose all your profits to expensive solicitors and dispute resolutions. We recommend a mediation clause in your agreement, allowing partner’s the ability to settle disputes in a timely and cost effective manner.
7. Exit arrangements (Voluntary/Forced/Death)
It’s always important to consider the inevitable end of a partner’s involvement in a business (regardless of whether the business continues or not). To manage this exit, you need a buy/sell arrangement, which establishes a valuation system for which the partnership interest can be bought out by existing (or incoming) partners to purchase. So commonly we hear people overvalue their business because of their ‘effort’ they put in. It’s only as valuable as what someone is willing to pay, so understanding and agreeing to this early on, is priceless in minimising any potential complications (which could be pricey to settle).
I could go on forever with points of consideration when preparing a partnership agreement, however its contents are largely dependent on the business and arrangement you are entering. There is no ‘one size fits all’ agreement. Before commencing a business with someone, please be sure to contact your Accountant or legal advisor to discuss it in more detail.
Article written by Adam Pasquill, Client Services Manager / Accountant, Highview Accounting & Financial – Cranbourne.