In many cases two or more individuals will join together to buy a business. When this occurs a partnership is formed.
Partnerships can have a great many advantages. They can also have numerous disadvantages. Smaller businesses operate by the “seat of the pants” method of decision-making. As a small business owner you will make a lot of the day-to-day decisions based on “it feels like the right thing to do”. What merchandise to buy for resale, what advertising to do, which individual to hire as an employee, what color to paint the walls, buy an old truck for delivery or lease a new one and the list goes on and on.
If you are a sole proprietor then the decisions are all yours, if you have a partner(s) the decisions must be validated by a group of people. It is critical that a “partnership agreement” be put into place prior to acquiring or starting any business, be it large or small. It is very easy to write an agreement when everyone is pleased with one another and working as a team. It is almost impossible when there is animosity or bad feelings amongst the partners. A partnership is just like a marriage, very easy to enter into, very complex and painful to terminate. Nothing will destroy a business quicker then squabbling between partners.
Partnerships may take care of some of the disadvantageous that I have outlined previously that are inherent in owning your own business. Partnerships however, have their own unique challenges and opportunities.
It should be recognized that partners do not have to have an equal share of the business. It is not uncommon to have one partner with more shares than another partner, hence the identification “Junior Partner”. Always remember that if there are two partners and one has more than 50% of the business, that partner will have total control of the company.
Today you have met your potential new partner. He is a very nice person, mild mannered, intelligent, easy to talk too. You have decided that he would be a pleasure to work with. But what happens to the business if something was to happen to him? Who gets control of his shares? Could you work with this new individual? Does your partner have some expertise, contacts or possibly a license that are critical to the survival of the business? All of these items must be considered before entering into a partnership arrangement.
One area where animosity between partners develops very quickly is when one partner, because of his duties and responsibilities ends up spending many more hours working on behalf of the business than the other partner. If it is a 50/50 partnership then the workload should be as close to 50/50 as is reasonably possible. This at times can be very difficult to accomplish. If there is going to be a work load misbalance due to circumstances beyond anyone’s control it is important that you make sure that there is a very good understanding between everyone involved and that includes spouses or significant others. It will not help an unbalanced workload situation if you and your partner are in agreement yet every time he goes home his significant other gives him a rough time for working more than his partner. Put yourself in his situation and try to understand the problems he may be facing at home. In some cases these situations, if temporary, can be resolved with some sort of additional benefit at the end of the misbalance e.g. a cruise, paid for by the company, for the partner and his spouse that worked the extra time. Other things that might help, can the company provide a baby sitter so that the spouse can get out, or someone to cut the grass or shovel the snow if the partner is too busy working on behalf of the business that you will both benefit from.
In any and all partnership relationships it is of the utmost importance that the partnership agreement be resolved prior to any investment. |
There are three major types of partnership transactions when it comes to acquiring, or becoming involved in a business:
- Two or more individuals join together to acquire a business.
- A current business owner looks for a partner.
- Owners of independent businesses create a partnership to merge their independent businesses into one.