Partnerships are like marriages. They can be extremely rewarding--both financially and personally. They can also be an extrodinary source of misery--both financially and personally. Also like a marriage, it's generally much easier to jump in than to "jump" out. Time and money spent at the front end, discussing some important things with a legal advisor can make all the difference in making a good relationship better, and preventing train wrecks before they happen. Here are some things to do BEFORE going into business with someone:
1. Get a credit report and a financial statement and possibly even a background check--even if the potential partner is someone you know socially. The more you plan on investing in this joint venture (in time or money), the more important this becomes. Credit reports give a running history of a person's actions with money and monetary promises. Does your prospective partner have a trail of broken financial promises? This is extremely important to know before you're in business with someone. I've had 2 clients just in the past year that lost about a half of a million dollars each because they failed to do this very thing with people they knew socially.
2. Get a lawyer to help you structure the legal agreement between the partners. Just like a marriage counselor would strongly recommend that certain topics be discussed before saying "I do", an experienced lawyer will have lots of wisdom about the kinds of things that should be nailed down in writing before there's a lot more at stake. If you're already in business and haven't gotten the following things resolved in writing, get your partner(s) and yourself to an attorney to get them taken care of a.s.a.p.
3. Get certain aspects of the relationship in writing. Here are just a few things that are too important in a business relationship to leave undiscussed or unwritten, and with the help of attorney:
- What are each of us going to put into the business & when (money, time, certain tasks)?
- When and how is money going to come out of the business? Are there any salaries or is one or some or all of us waiting on profits, which could take days, months, or years?
- Who makes what decisions? Which ones are yours? Mine? Ours?
- How do I get out if I want out? (You can have an agreement that will create a predetermined and mutually fair way for one partner to be bought out.)
The bottom line is getting a prospective partner's financial history and, if that part is acceptable, getting everyone's expectations for money, time, control and exit strategies on the table and in writing. If you do that, you'll keep lots of avoidable problems from killing your business once its underway. Getting a good CPA involved from the beginning who will keep all the partners informed about the state of the business is also very helpful. Partnerships can be a great thing, but only fools rush in.
T. N. Freeman II - Law Offices
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