Considerations Before You Form a Partnership

By Joe Curcillo

Daniel pushes back in his office chair, and he rubs his eyes.  He spent four hours on his computer drafting a proposal to a client. He realizes once again he has missed his family dinner, and will be going home after his children are in bed. At that moment his iPhone sounds a chirp. He glances down to see a photo of his partner holding a golf trophy with the message: “What a great day networking.”

It is at that very moment he realized not only was his partnership failing, but he now despises his partner who was once a friend.

Much like a marriage, a business relationship is a sensitive and delicate balance of personalities, obligations and commitments.  Many times, friends walk into my law office telling me of their dreams and plans for a successful business venture. Often, they will leave without wanting to pay legal fees. They want my blessing, but say “I don’t understand their dreams and how well they work together.”

Several years later, one of those two friends inevitably walks into my office to tell me how much they hate their partner and how the business is failing and they need my help to bail them out.

It sounds so much like a divorce, because it is like a divorce.  Dreams are what the world is built upon, and litigation is what tears it down.

How do you avoid being a casualty of a bad business partnership? The short answer is to take the time upfront to define your goals, your business plan, your obligations and your expectations in writing.

 

Why Do You Want To Partner?

Before you do anything, ask yourself why you are entering into the partnership. Many times, partnerships are born because the parties feel another person has something they lack. It may be because you do not have the capital.  It may be a skill you need to acquire, therefore partnering with the person who has that skill solves your problem.  It may be because the other person has resources yourself do you possess. It could be that another speaker brings your business marketing knowledge. It maybe that another has the online web seminar experience you lack. Ultimately, you need to evaluate what you stand to gain against that which you stand to lose.

In the case I mentioned above, the inventor could have developed a new product without having a partner. His insecurity and fear drove him to want to partner.  Do not undervalue the intellectual-property rights you possess when you decide to partner. Also, do not underestimate your own creativity and ability to create future valuable products.

Ask yourself, is the trade-off worth the risk. Surely you can get capital without giving away your enterprise ability. By taking on a partner, are you giving away half of your resources, money, information, or property? By hiring someone to do what you cannot do, it is risky than partnering with someone only to absorb their expenses and share possibly undeserved profits.

Another client has come to my office on a number of occasions to ask that I make adjustments to the ownership of his business. His lack of desire to put in his own capital – or leverage his assets – has put him in a position where he has offered people percentages of his business to avoid hiring. Over time, he sold pieces of his dream to his various would be employees or contractors. The last time we met several years ago, I realized he could not do math, as he was only 5% away from losing control of his own company. What he did not realize was ownership included all of his books and training programs. If he toned down his lifestyle slightly and chose not to give away shares, but instead contract and hire, his intellectual property would not be at risk.

Many times partnerships are formed because someone does not have sufficient confidence in their own ability to do it alone. Partner for the right reasons!

Get On The Same Page.

A viable partnership can be a great pathway to success.  One of the greatest partnerships was that of Orville and Wilbur Wright. Orville was the technical talent and engineer, while Wilbur was the one with vision.  Together they invented and created, but also, they kept accurate records.  It was the unglamorous methodical planning and record keeping that eventually led to the first plane capable of controlled flight.  With the same methodical planning and far from glamorous “working out the details” your new company can be capable of controlled flight.

So, how do you go about getting on the same page? Give consideration to those matters that are truly important to you and what you want to achieve.

Values.  Do you share common values with your proposed partner? Just like a good friendship, people are held together when they have a similar belief structure and purpose. Get to know what your proposed partner does for fun, and how they are otherwise committed to the community and society. Find out what motivates your partner. The closer partner’s value structures are aligned, the more aligned the company values will be.

Personality.  Get to know your partners personality. How do they handle themselves when confronted with adversity? How do they handle themselves when they are confronted with challenges? Do you complement each other? What will your working relationship feel like in five years? Ten Years? Twenty?

Contribution.  Discuss with your partner the plan contributions. Make sure you respect each other’s contribution to the partnership before it begins. I have seen partnerships where a partner values their community connections more than they valued the hundreds of thousands of dollars the other partner put into the company. Do not allow this disparity to destroy you as you achieve success.

Intellectual Property.  While in some cases it is safe to commit to a belief that you both maintain rights to any intellectual property you bring into the business, the waters get murky when intellectual property develops into something new. As you develop your talk, your training program or written and video material, how will you divide the new material when you part ways? For example, one of my clients developed a product for specific industry. He held the patent.  During the partnership that followed, he developed a new product rendering his old product obsolete.  When the partnership dissolved, he had to share the patent with his partner who knew nothing about the product, but did help market the product. Sadly, he could have modified the product on his own, and he would be sharing nothing. The marketing of the product rendered little profit during the partnership. The majority of the income came when a larger company acquired the product. The better solution would have been to delineate the expectations and rights in the future intellectual property prior to forming a partnership. Unfortunately, the partnership was formed based on the original product with no vision of a better mousetrap.

Research. Do your due diligence. Just like a major company will do due diligence before acquiring another large company, you should do diligence on your would-be partner. Take the time to find out whether your partner has delivered on promises and whether he is truly respected by current clients. Do not be afraid to ask for referrals. See if you can determine any of the financial information regarding his or her existing company. By doing all of this, you will avoid unpleasant surprises when it is too late to escape.

Dating.  Consider the possibility of dating before you get married. Maybe you can find a short-term project you can work on together to see how well you work as a team. Nothing is a better test of how well you can get along and produce results than actually doing it.

Make It Legal.

As you begin to consider a partnership, make sure you have considered the following before deciding to partner, or at least, prior to walking into your lawyer’s office:

  • Define the duties and obligations of each partner.
  • What is the percentage of Ownership?
  • Clearly define what each partner’s equity investment is going to be?
    • Cash
    • Labor
    • Intellect and invention.
    • Rainmaking and personal relationships.
  • How much time each partner will contribute
  • And, how each of the above will be measured.
  • Establish a decision-making process in advance
  • How will you be resolving disputes? (Yes, there will be disputes.)
  • What are the ownership percentages? (Sure, 50/50 sounds good, but then, either party can make decisions and bind the company without consent.)
  • How will past, present and future intellectual property rights be handled?
  • Do not expect the friendship to outlast the breakup of the partnership.
  • Define an exit strategy.

You must decide what business structure you and your partner desire.  This is best accomplished with the assistance of a lawyer and an accountant.  Almost all new small businesses with more than one member choose to be organized as general Partnerships, Limited Liability Companies, or Subchapter S corporations. These three are generally the easiest to navigate for small businesses.  Each has advantages and disadvantages with respect to structure, taxes and formation costs.

Final Thoughts… from a Lawyer.

Once you have resolved and addressed all your concerns, have it ALL reduced to writing so everything is defined; have a written and signed partnership agreement.

During the early stages of a company’s formation, affording a lawyer is very difficult. Sadly, if things go wrong, it could cost much more for a lawyer to clean up the mess. I believe you owe it to yourself and to your future to make sure your foundation is solid.

Recently, I dealt with a client corporation looking at possible criminal charges.  The company was formed using online forms and filing instructions. Sadly, they did not finalize documents such as the LLCs operating agreement or the correct corporate filings. Therefore, the individuals were at serious risk. I don’t see this happening in the speaking business, but in this litigious society in which we live, I must encourage everyone to get your business started on the right foot.  Getting started on the right foot includes personally, professionally, and legally.

Go, build a strong foundation, allow your partnership to fly, and take flight.

  • JOE CURCILLO is a speaker, consultant and entertainer who focusses on his passion for improving leadership, communication & culture with a Unifying Vision. After a 30 year career as an attorney, Joe is the author of the Best Seller Getting to ‘US’: Discover the Ability to Lead Your Team to Any Result You Desire, and Don’t be a Hamster: 30 Tips to Spark the Imagination of Busy People.