S. Eric Bass

As an attorney, I often meet with people ready to form a new business partnership. The partners have usually made many plans for the business, but have not always carefully considered how to structure their relationship.  Before finalizing your commitment, you should know that forming a business with a partner in some ways is like a marriage.  Good partnerships and marriages tend to start off by addressing critical questions upfront and leaving either relationship can be complicated if it doesn’t work.

These are the three most important questions I always ask my clients looking to start a business with a partner, regardless of the type of business or entity they are looking to form.

What are the expectations of each owner?

All partners need to be very clear about their expectations:

• What is each partner contributing to the business? Is it money, expertise, “sweat-equity,” other assets, or some combination?
• What does each partner expect to receive for those contributions in terms of ownership? For example, do they expect a share of profits (this can be different from their percentage of ownership), a salary, control of the business, or something else?
• What happens if the business needs more money in the future? How will the partners contribute more assets if needed?
• If the business is sold, grows, or otherwise experiences a significant change, what should each partner receive as part of that transition, if anything?
• Who gets to decide whether to bring on new partners?

How will management decisions be made?

Ownership does not always mean control.  Partners need to discuss and decide how they will make decisions and work together.  Even “silent” partners usually want some veto powers.  All the partners should be clear on what authority they have (or don’t have) regarding the operation of the business.

• Who will make the day-to-day operations decisions?
• What amount of “say” does each partner have in management?
• What major decisions will require unanimous, super-majority, or a majority consent of the partners?
• If there is any deadlock on a decision, how can the partners resolve it?
• How will the business managers be replaced if that is needed?

What happens if a partner leaves or things don’t work out as planned?

Eventually, one or more partners may exit the business.  They may retire, die, move, or simply want to try something new.  We sometimes also see that an unhappy partner will simply stop participating or, even worse, actively work against the business.  It is best to address how to handle these issues while everyone is getting along.

• If a partner dies, becomes incapacitated, or may lose ownership through bankruptcy, divorce, or any similar issue, the other partners should typically have an opportunity contractually to buy that partner’s ownership. If that is the case, the partners need to discuss how a value for that owner’s interest will be determined, how it will be paid, and which other owners may have the right to buy it.
• If a partner stops doing the “things” required or commits some “bad act” against the business, should the other partner(s) have a right to force that person out of business? If so, what should that partner be paid for his or her ownership interest? Conversely, should the payment be discounted for the bad behavior?
• If a partner leaves the business, should that person be obligated not to compete or solicit the business’s customers for a specific time?

Conclusion

While the above matters don’t address every possible scenario, these questions prompt helpful discussions and test the partners’ initial commitment and ability to work together.  Additionally, engaging an impartial third party with knowledge and experience with these matters can help show them the many possible ways of overcoming these hurdles, saving them much potential stress and heartache.  Please be sure to remember these three big questions in any partnership you think of starting.  Get some answers that you are VERY comfortable with from your partners before moving forward.

S. Eric Bass is an attorney at Venn Law Group who holds both a law degree and MBA, providing him with a wealth of knowledge and insight regarding the challenges business owners face. He has more than 18 years’ experience in the areas of mergers and acquisitions, succession and exit planning, business partner agreements and issues, business formation, franchising, contract negotiations, strategic planning, and employment issues. Eric was recognized by U.S. News – Best Lawyers for 2019-2020 and The Best Lawyers in America in Employment Law – Management for 2019-2021.