Do's and Don'ts of Business Partnerships

So as I've always said when you start a new business you are always "making a deal with some devil" to fund your . It's either....

1) Your spouse or significant other because they are either supporting you or forgoing income whilst you spend your time building your business. What's that you say, your significant other isn't a "devil". Well just wait until you get 18 months into it and haven't earned any money! :)

2) The other options is that you are getting money from a Venture Capitalist or Angel Investor. Trust me if they are an expert investor wait until you see the terms and conditions they'll place on their money (like you having to put up equal or more amounts of money for the same share, guarantees around their getting their money back within a certain time frame, they get preference on payment of debtors if the business closes and so on) you won't think them an "Angel" any more. It will likely take months to negotiate an agreement with them.

3) Finally a business partner. You agree to split the business between you and one or a few business partners. The challenge there is that a business partnership can be as complicated as a marriage and more difficult to get out of. The bigger challenge is in making the partnership fair. Because there will always be one partner who works harder than the rest.

... so there is no easy answer in terms of funding your business. In this article I'll talk about the last option (having a business partner) and give you a few suggestions to make it easier...

1) Always have a Prenuptial (Partnership) Arrangement

Yes I know, just like with marriages in partnerships people are always lough to talk about how to end the relationship just as it is starting. But also just like in marriages if things do go south (which more often than not they do) then you want a way to get out of the relationship in a fair and equal manner. Do get me wrong it's not that people are nefarious. Often business partnerships break up for good reasons. For example one partner retires. Or perhaps their "spouse" has got the great job across the company and they need to move. Perhaps their priorities change. Or it could be that they've gotten out of the business what they wanted and they want to try something else.

Whatever the reasons you need to make sure that you plan for that departure. If it is a simple two person relationship then you can use a "Shot Gun Clause". For a description of what that is then click here.

You can also have what they call and "Earn Out". Again click here for a description.

In other cases you may have a lawyer draw up a complex a complex agreement with such things as "Drag Along" and "Tag Along" clauses in them.

Whatever you do, make sure you've written up a partnership agreement and make sure that partnership agreement talks about how you can get out of the partnership.

2) Have a way of encouraging equal effort amongst the partners

There will always be partners who bring more to the relationship than the other partners. To make it fair you need something in the partnership agreement that encourages a fair distribution of the equity and the profits from ongoing operations and the longer term potential sale of the business whilst not causing arguments amongst the partners. One way of doing that is through an "Earn In" . In an "Earn In" a partners share of equity increases as they achieve certain targets, Alternatively they can forego salary in favour of shares for a predetermined price over the course of time. The other options is to have specific rules for the distribution of Dividends with different categories of shares.

There are a number of ways you can do it but sit down before you sign the partnership agreement and make sure that you and your partners have agreed on a fair and equitable way to split the proceeds of the business. Just make sure you talk about it beforehand. Having an agreement that guarantees a fixed percentage both in terms of remuneration and in terms of equity amongst all of the players regardless of the circumstance is a quick way to create arguments over the course of the lifetime of the business.

3) Make sure the partners have clear roles and responsibilities and recognise those roles and responsibilities will change over time.

Who is responsible for Sales? Who is responsible for Marketing? Who looks after Product Development? Who is the "First amongst equals" in terms of being the managing partner. Sit down and write up a RACI chart and fill in a name for every single function you think you'll need in the business. Dated it as of today's date. Then create a version of the chart for a year from now, and then five years from now. Make sure the partners are clear on who is doing what now and into the future. If you are not sure what a RACI chart is then click here.

In conclusion, if you are going to have a partner or multiple partners in your business. Or there is the potential for you to have future partners then I would strongly suggest you look at having a partner agreement which covers...

- How to get out of the partnership

- How to divide up the benefits of the partnership

- How to divide up the responsibilities of the partnership

... it just makes good sense!