The 5 D's of Partnerships
Posted by Laddie Blaskowski on Aug 28, 2007
In the last several weeks, I’ve been approached by four or five different people who were very enthusiastic in telling me about their plans to go into partnership with someone else. In my experience, conversations about partnership typically start with the person saying something like this: “I know that a lot of people complain about partnerships, but this one is going to be different!” or “I’ve known Joe for years and we get along great!”
Unfortunately, partnerships are a lot harder to make work then most people believe. There are a whole slew of issues related to things such as ownership, money, decisions, life changes, levels of risk tolerance, etc. Now, I’ll admit I tend to be overly cautious about the partnership idea because (1) I once had a bad experience myself with a partnership; and (2) my father-in-law lost his shirt when his partner embezzled from their company.
However, there are a lot of extremely successful partnerships out there, so it’s possible to have a strong, smoothly functioning business with multiple owners.
It’s absolutely crucial when forming a partnership that you engage an attorney and have the partnership fully documented. But since problems can still arise, I’ve developed my “Five D’s of Partnership” to help people make informed decisions before signing on the dotted line. Once you’re clear about what each party is bringing to the table (to justify forming a partnership), you should thoroughly consider and answer the following questions, which deal with the most problematic areas:
How will decisions be made? Regardless of the percentages owned by the partners, everyone needs input on major decisions if the business is going to work. But it isn’t always feasible to bring everyone in on every single decision, so it’s good to have authority determined up front for decisions about money, minor purchases, customers, and vendors.
How will disputes be resolved? It’s common for partners to disagree about things like employees, risk levels or bank financing. If a majority shareholder always demands to win based on his or her number of shares, it’s sort of like a kid saying, “It’s my ball so we’re playing my way.” Not a healthy way to run a company. It’s better to have a process already in place for dispute resolution in the event disagreements arise.
What happens if a partner dies? The biggest issue here can be dealing with the deceased partner’s heirs and estate. Just because Partner Joe willed everything to his son Bob, it doesn’t mean the remaining partners want to be in business with Bob or that Bob is qualified to fill Joe’s shoes in the company. Key-man life insurance is a commonly used method to buy out the heirs and should be purchased at the onset of the partnership.
What happens if a partner becomes disabled? How will you define disability and for what length of time? Some medical conditions require may require weeks or months off the job, while others are more long-term or permanent. Having a partner away for a lengthy period can be devastating to a business, so it’s smart to plan ahead for the possibility. Buy-out provisions in your partnership agreement can address both levels and length of disability.
What if a partner gets divorced? If Partner Joe’s wife Betty sues for divorce and asks the court for half of his ownership, how do you protect the company? Would you want Betty to be part of the company, making decisions? A written agreement needs to be in place that allows the company to buy back the stock or, upon transfer to a new person, provides that the shares become non-voting shares.
You can have a strong, dynamic business owned by one or more partners but, as with most things in business, the better you do your homework and prepare ahead of time, the better your chances of success. If you address the Five D’s, you’ll be well on your way to having a solid agreement that can be put to paper.