In many ways starting a new business venture is the functional equivalent of a marriage between business partners. In a recent article, Valerie Khoo outlines the Perils of Business Partnerships and discusses the following seven stages for consideration when contemplating a potential business partnership:
- Stage 1: Pre-Marriage Counseling. This is the preliminary stage in the relationship between prospective partners when the partners should discuss expectations and consider preparing the equivalent of a “partnership pre-nup.” Such a documents looks to the eventual end of the partnership and can provide procedures for one partner to eventually buyout the other. This is commonly accomplished via the preparation of a buy-sell agreement.
- Stage 2: The Honeymoon. This is the time after the business has first begun operations when the relationship between partners is smooth. It is a great time to better define roles and to document job descriptions while the business operations are first developing.
- Stage 3: Negotiate Blended Families. Partners should be aware that the financial and family affairs of one business partner will have significant impacts on the other. The operating agreement or other partnership documents should be structured to address issues resulting from changes in the financial/familial status of the partners such as in the event one partner incurs massive personal or family debt or faces other common life events such as divorce or disability.
- State 4: In Each Other’s Pockets. Running a business takes commitment and is extremely time consuming. Business partners commonly spend more time together then they do with their respective spouses or family. This can serve to strengthen the working relationship between the partners. However, partners need to know when to draw the line as the constant interjecting of one partner’s personal issues into the business can be a drain on the partnership.
- State 5: The Seven-Year Itch. In the event the business is successful one or both partners may have entrepreneurial desires to pursue other business opportunities. This may result in a partner’s loss of focus or lack of dedication to the existing business. This is the time the partner should consider the impact and consequences of starting a new venture, with or without his/her current partner. The partners should consider including provisions in the operating agreement or partnership agreement that contain restrictions regarding the formation of potentially competing business ventures.
- Stage 6: Counseling/Coaching. If there are issues developing between partners, whether it be from family/personal issues or the seven-year itch, business partners may need to seek business counseling or engage a consultant to help them work through these issues. The goal is to resolve issues before they have a negative impact on business operations which will likely serve to escalate the issues.
- Stage 7: Divorce or Happily Ever After. Maintaining a successful business takes enormous commitment and compromise. The failure or success of the business will largely depend upon your choice of partners.
Considering these stages in advance of entering into a business partnership will help you evaluate your potential compatibility with a prospective business partner. In addition, consulting with an attorney can be helpful in discussing the relevant legal issues and structuring the appropriate agreements to reflect the respective rights and obligations of each partner. If you are considering forming a new business or would like to discuss legal issues facing your existing partnership, please contact our Business Law Group partner, David A. Closson at [email protected].