“Marry in haste, repent at leisure” – it’s an old saw, but if the current divorce statistics are anything to go by, it’s a piece of advice that we are not too good at taking. A business partnership can be just as fraught with danger as a personal one, and in this modern age of small business entrepreneurism, there are almost as many new partnerships springing up as there are sole trader enterprises.
The marriage comparison is not as fanciful as it might sound. A new business partnership starts with a similar level of euphoria, and the parties are as keen to get the Partnership Agreement signed and sealed as any idealistic young couple might be to get their names on the marriage registry.
But the good thing about this kind of agreement is that it gives you both the chance to set out the exact terms of your future relationship. Here are some points to keep in mind.
Questions do not get more fundamental than this. Record how much each of you is putting into the partnership before it opens for business. This calculation will often, but not necessarily, dictate the ownership percentage. For example, one might be a “sleeping partner” who stumps up the money, while the other will do all the work. That’s fine, as long as it is set out in black and white.
Will profits (or losses) be allocated proportionally to ownership? This is usually how things are arranged unless the Partnership Agreement says differently. Will drawings be permitted prior to profit allocation? Get it all worked out in advance, and there will be nothing to fall out over later.
If you’ve ever watched the “Couples” version of Who Wants to be a Millionaire, you will know that when partners try to make joint decisions, it often leads to disaster. The same can happen in a business partnership. Neither partner wants to commit or take responsibility, and the result is inertia at best and complete failure of the business at worst. Establish the decision making process before the business starts. One of you needs to be team captain.
People are fragile and fickle creatures. If the business is a success and thrives, there will come a time when one of you will want to leave or retire. And to be pragmatic, there is always the risk of illness or accident – if you sign the partnership today and one of you is run over by a bus tomorrow, what will happen? Look at it from that perspective, and you are ready for anything.
A young couple don’t want to talk about a prenup because it acknowledges the possibility of the marriage not lasting forever. Business partners need to be a little more pragmatic. Just like the bus example, think of worst case scenarios. If you have a dispute and just can’t agree, what will you do? Court? Arbitration? Mediation? It’s better to talk about it now, while you both have each other’s interests and those of the business at heart.
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