Negotiating & Structuring The Deal

As financial markets continue to remain tight, individuals who are considering buying a business may look to doing so in conjunction with a partner.

In addition to the financial benefits of dividing the down payment requirements, partnerships can be excellent business structures when done right. By done right I do not mean the actual legal structure of a partnership but rather by having the right person as your partner.

Partnerships are very similar to marriages except that there is money involved at every stage and so business partnerships can in fact take even more than matrimony to be successful.

For the purpose of this blog, I will discuss partnerships where both individuals will be investing and each planning to be involved in the daily running of the business being purchased.

There are five major considerations to keep in mind if you are going to buy a business with a partner:

Shared Vision:

Before two individuals get into business, it is critically important that they each articulate their visions for the business and how they see themselves and the company over the next few years. Sharing their individual hopes and dreams with each other to be certain the parties are in concert is the only way to ensure their plans are aligned.

It is natural for there to be small differences of opinion however; if, at the onset, the partners are not in perfect harmony about how they envision the future, it is likely that the two individuals will never be on the same page about how the business should operate.

Before the reality of the business sets in, partners have to feel as though they can conquer the world together. Trust your gut: if the future relationship with the potential partner does not feel right in your gut, you probably should not walk down the aisle with them.

The Foxhole Syndrome:

Every business will go through various stages of growth, decline, good periods, legal issues, cash flow challenges and other difficult situations. It is generally easy for partners to get along when things are going well, but what about when the going gets tough? Is your potential partner someone that you would want in your foxhole? Will they be someone that will put the interests of the business before their own? Will they fight the enemy together with you? In other words, will they have your back?

Divide and Conquer:

A full assessment of the individual partner’s strengths and weaknesses must be undertaken. The ideal partnership is one where each party brings “need” to the deal. The goal is to have one plus one equal three.

The skill set of the partners should compliment each other, not be duplications, so that each one can focus on separate disciplines within the business (i.e. one handles sales, the other operations) and therefore the business can thrive by having an owner in charge of various areas of the company.

It is so important for the two parties to be open and honest with each other so that realistic expectations are set between themselves to avoid any unnecessary friction in the future.

Future Capital Needs:

In the event that the business requires additional capital in the future, are both partners in a position (at least at this point) to contribute additional funds? If not, that will potentially impact the corporate structure. There is a standard mechanism to deal with this issue which we will discuss in a future blog, but for now, it is a point that the individuals must address before they jump into business together.

Understanding The Difference Between Employee and Shareholder:

Business partnerships have two specific components: 1. the individuals each own a certain percentage of the business and 2. the partners can be employees of the business responsible for performing certain job functions. The two categories are, and must remain, completely independent of one another. Situations happen where one of the parties is either unable or incapable of doing their job and may have to be dismissed as an employee. That does not mean they necessarily have to sell their equity in the company. As such, while both partners may share in the profit distributions commensurate with their holdings, only one of the partners may in fact remain operational in the business and therefore entitled to a salary for their work. Having an understanding of these two separate disciples is crucial for the partners and moreover, having a very concise mechanism to deal with this possibility is fundamental to any partnership agreement.

As mentioned above, in a future post I will discuss the legal components to partnerships and the most effective remedies to deal with some of these matters, but for now, focusing on the intangible aspects of getting into business together is undoubtedly the first step to be examined. Looking at the relationship from a perspective of “what will life look like” after the partnership begins is a wonderful and critical exercise for the parties to conduct.

Partners have to be brutally honest with each other just as a future husband and wife should be BEFORE they say “I do” because just like a marriage that breaks up, a business partnership that fails can be very costly and painful.

Have a great week!

Richard Parker

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