If you have a business partner or plan on working with someone to build a company, do yourselves a favor and get things in writing.
I was having a conversation with a budding entrepreneur this evening and the topic came up about partner percentages, when to form the Corporation or LLC and setting the tone for who makes the decisions. Having been in a business relationship where the owner equity was 50/50, I have some experience there to pass along to those getting involved in business for themselves and doing it with a partner. This conversation came up right after my 10 year old’s middle school orientation which all ties in nicely.
- The principal says, “Tell your child not to give out their locker combination. BFF in middle school lasts for 1-2 weeks.” Point noted, I’ll have that conversation with my son.
- The young entrepreneur was explaining issues already coming to the surface with their business partner and their company has not even been formally setup. Nothing yet in writing to define roles or “what ifs”.
- My previous business partner (referenced in a previous post A tribute to a good friend, father and husband.) and I were 50/50 and it worked out pretty well. In his next business, which I was not a part of, he had two other partners with percentages changing over time based on capital and effort contributed. Here’s the rub.
When Bob (my former business partner) died unexpectedly, everything you should avoid came to the surface and continues to cause problems for the remaining business today. It turned out that being good friends with someone and working on words and handshakes vs. paper and legally filed documents only goes so far. When gone, you can no longer speak to your conversations, your handshake deals and your BFF relationships. There were conflicts and points of friction between these three but worked out in conversation and not necessary put into writing for future avoidance.
Stop and take time today to get things in order and done properly.
I hear this all a lot; “I don’t have time to get that stuff done, I’m too busy trying to get this business up and running” Look, things happen and more often than not the worst things are never planned for. It will be well worth it for you, your business associate(s) and your family or heirs if you take a day or two and get it all on paper. Work out your differences now and document the roles and responsibilities instead of glossing them over and saving that confrontation for another day.
Some things to agree upon and document whether your are legally incorporated or just planning on getting there.
- Get your ownership percentages documented. If you started it together and worked on it as a project, that doesn’t make you 50/50. The one who truly put in the extra effort and/or in some cases whomever put in the upfront capital or exposed themselves to risk, they are entitled to a different percentage in most cases. Be fair and avoid future resentment.
- Get your buy-sell agreement in line. Take the worst case scenario and document that actions to be taken. If your partner dies, do you want their spouse in the business with their share or do you want to buy them out and avoid that potential headache? If there are multiple partners and the spouse has to sell, how are the shares repurchased and how should they then be redistributed?
- Get your articles and corporate minutes up to date and current.
- Get your key-man insurance with the right beneficiaries. If your partner dies and the company is paying the insurance premium, should the spouse get the money or should the company be the beneficiary to pay for the spouse buyout? What is on the policy itself is all that matters and with no back up in your articles of incorporation or buy-sell agreement, you won’t have a leg to stand on.
- Document your responsibilities and primary functions. While it is easy to say, “I do a little of everything” and that may be true, but when there are multiple partners, each has their strengths and weaknesses and those should be documented early to avoid problems later.
Remember, just because you put it in writing doesn’t mean it has been carved in stone. You can always amend your business documents, but you can never create and execute them if a partner leaves or dies. Stop and document your future even though you don’t know what it holds.