I receive a surprising number of emails from prospective business buyers who are thinking about going into a venture with a partner. Usually, it’s a family member, friend or business acquaintance. What I find astonishing is that most inquiries relate to whether or not there needs to be a formalized agreement between the parties. After all most note, the partners have known each other for many years, they get along great, and trust one another. That’s all wonderful but the answer is an overwhelming, unconditional and categorical "yes" – you absolutely must have a formalized agreement.
To give you a personal example, my brother and I owned a large company together. I would trust my brother with my life in addition to him being a tremendous business confidante. Our partnership was perfect but, if heaven forbid something happened to him or me, the last thing either of us wanted was to suddenly have the other’s spouse as our partner (even though we love our sisters-in-law). For this, and numerous other reasons, it just makes sense to have everything documented.
It does not have to be a 50-page shareholder/partnership agreement but it must clearly spell out the necessary fundamentals. Everyone goes into a partnership all glassy-eyed and hopeful. Dreams are shared. You are convinced you’ll conquer the world together. Unfortunately, situations change. Like my first boss and late uncle once told me: "you never know a woman until you marry her, and you never know a man until you work with him".
While you will want to have an attorney compile any agreement, a few of the issues to consider include:
- Definition of ownership
- Dealing with disputes
- Mechanisms to dissolve the partnership
- Procedures to follow and a pre-determined formula to value the business in the event of a buyout by one party
- Voting rights should one partner own the majority of shares (some issues such as dilution, binding the company, selling additional shares may need unanimous consent)
- Procedure to follow in the event one partner dies, becomes incapacitated and unable to contribute to the business for an extensive period of time
Above all, the agreement must be fair to both parties.
I have had many partners in the numerous companies I have owned over the years. Most were great, and only a few were disastrous. Personally, I am a huge believer in having a partner. If the combination is right you can really divide and conquer!
If you are going to buy a business with a partner here are a few things to consider:
- Partnerships work best when each party brings a distinct set of skills to the equation. In other words, you should each have your own area of expertise and not simply a duplication of skills.
- Just because you get along with the other party is not enough reason to go into business together.\
- You need to formulate a list of fundamentals in advance that you both agree any business you consider purchasing must have in place. If not, each partner will find a reason not to buy every business you review.
- Understand that your personal relationship with the partner will never be the same once you’re in business together. It may get better. It may get worse. Just remember what my uncle said. In my opinion, it is never worth it to jeopardize a friendship over a business but that’s not always possible. Be mindful of it and try as best as you can to keep business and personal issues separate.
- You need to share the philosophy that the business comes first before individual personal gain. If you do right by the business, the personal rewards will always follow.
Business partnerships are a lot more difficult than marriage because there’s money at stake from day one and it can really influence people. Just like a marriage, a business partnership takes work; you must have full faith in the other party, and initiatives you undertake should be for mutual benefit. Most importantly like a marriage, if there are "issues", you need to communicate no matter how difficult it may be. You cannot sweep problems under the rug hoping they’ll go away. Just like in a marriage, problems left unresolved or ones that are too big, will cause the business to breakdown and will likely not be salvageable.