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Partnership Planning

Topic: Entrepreneur Evangelist,Managing Your Business | Comments Off on Partnership Planning

Posted on November 30, 2009 by admin

Tug of WarEarlier this year, my husband and I took a small business workshop offered by a local certified public accountant.  He covered the ins-and-outs of both starting and growing a small business, starting with assessing the pros and cons of each type of corporate structure: sole proprietorship, limited liability company, corporation and various partnerships.  His (relatively tongue-in-cheek) advice was: “Whatever you do, avoid a partnership!”

Obviously that’s not realistic.  In point of fact, most successful serial entrepreneurs I know spend most of their early-stage ideation efforts in looking for the right partners to go in on a new venture together.  So the CPA’s follow-on advice (after ‘avoid partnerships’) applies: if you do go with a partnership, make sure you have an explicit partnership agreement — down to who is responsible for cleaning the toilets and who is responsible for dealing with collections and over-due clients.

This is also the subject of a recent post by the Executive Director of the Inc. Business Owners Council, Lewis Schiff: be sure you are prepared in the event that something happens to your partner.

The 3 D’s

While most people who do preparation on this front focus on the death of a partner, the far more likely scenarios are divorce or disability.  The implications of disability are pretty obvious, particularly if it is severe or prolonged.  Divorce, though, is a much stickier wicket, and begs the question: are you prepared to be in business with your partner’s spouse?

That’s a sobering thought, isn’t it?  But it’s one to seriously consider if you have a legal partnership.  And, depending on divorce laws in your state, some states require different approaches to a solution.  Our anti-partnership CPA was quick to point out that the State of Texas is a community property state, which means that if a parnter who owns 50% of a business gets divorced, unless there are legal provisions put in place to protect your business interests, suddenly half of that 50% is now owned by the ex.

How comfortable are you with the idea of suddenly being in business with your partner’s spouse? (And, in a worst case scenario: what if their divorce turns into a nasty legal battle?  Do you want your business in the middle of that?)

In Schiff’s article, he discusses a recent Inc. Business Owners Council event in New York City, where speakers discussed how to protect your business, and how to make sure you don’t wake up one morning to an unpleasant and entirely avoidable surprise.  Schiff was quick to point out that the audience was extremely uncomfortable at the idea of having these conversations with their partners, and yet they were also emphatic that they did not want to be in business with their partner’s spouse.

So the advice?  Deal with it before it’s an issue.  In an white paper written by Russ Alan Prince, Hannah Shaw Grove, and Ted Tafaro entitled “Unprepared for the Unthinkable,” the authors research reflects that only about 40% of business owners are financially prepared in the event their partner(s) dies, while only about 15% are prepared if their business partners are disabled.

The most important thing to remember is that any of the types of situations that need to be dealt with — death, disability or divorce — are highly emotional life events.  Waiting to try to deal with them at the time is asking for trouble.  In a small business, success is often heavily dependent on the involvement of the partners.  Any one of these types of events has the potential to radically disrupt the business; the last thing the remaining partner(s) also need is to try to “figure things out” about the partnership agreement at the same time they are trying to manage the impact on the business itself.

For as difficult a conversation as it is to have, it is far less painful for the partners to have the conversation during a rational, stable time, rather than waiting until there is a trigger event.  Everyone is much more likely to be reasonable and come to mutually agreeable terms before emotions are running high than if you wait.

And if you get knots in your stomach at the thought of having this conversation with your business partners, consider this: how much less comfortable would you feel broaching the subject for the first time at your partner’s funeral? Or outside their hospital room? Or when you show up at the office on day to find that your partner’s soon-to-be-ex has just moved into the spare office and is now planning to run their share of the business?

This is one of those times when an ounce of prevention is worth far, far more than a pound of cure.

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