Once upon a time, a long time ago, there was a new mother who wished for a successful venture with her close friend, who also shared her dream of one day owning the most beautiful maternity boutique in VanLand. They shared the vision, the motherhood, the love of all things fashionable and organic, and what seemed to be a complimentary skill set to make this dream come true. Yet, despite good intentions and hard work, a curse was set upon by evil, unknown forces (increased time lines, lack of funding, and what appeared to be a growing list of insurmountable challenges). At the strike of midnight, the once magical partnership that began in goodwill and glass slippers, resulted in a dire situation that resulted in the dissolution of a business partnership and ultimately, their friendship.
I wish I could say that this tale was untrue and wasn’t taken from my own personal experience as a partner in my first entrepreneurial adventure. Unfortunately, it is not an uncommon story for those starting a business partnership. However, through this vital learning experience, I can offer new business owners tips to consider before you enter a business marriage. Yes, I said marriage or in the end, it is a legally binding contract that requires both personal and financial commitment to make this relationship work.
So before poo-pooing the meticulous task of outlining the advantages and disadvantages of a business partnership, take the time to ponder the pros and cons. It may be the reality check your business needs.
Once a business concept is established and ready to pursue, you must determine whether you are prepared to operate the business entity as a Sole Proprietor, or as a Partnership. With the latter, there are obvious advantages to sharing the:
- Vision – “Two heads are better than one” can boost creativity and expand your horizons.
- Roles & Responsibilities – Sharing the time to get things done means more time to balance your business AND life.
- Accountability – A mutual personal investment requires each partner to take responsibility and provide the support necessary to dig you out of the trenches when faced with certain challenges.
- Start-Up Capital – Shared investment allows for more growth opportunity should your business become profitable, while sharing the risk alleviates the financial pressure during the start-up phase and during moments of hardship.
From a legal and personal perspective, the disadvantages of a Partnership can have longterm financial repercussions:
- Financial Negligence – If your partner is careless in how he/she manages the business’s finances, then you can be held financially accountable for your partner’s negligence; ie, you may have to dig into your own personal assets to pay off debtors with more than your savings (car, furniture, home).
- Termination of Partnership – Consider what will happen if your partner wishes to sever the business relationship, and how new partners are brought in; or if something should happen to your partner, what steps must be taken to carefully manage the dissolution of the partnership.
- Termination of Personal Relationship – Mixing business with close friends or family members may seem like the ideal option when putting your trust in a partner. However, when financial stresses and personal differences come into play, you are putting your personal relationship in jeopardy.
The Partnership Agreement
With a business plan and all partnership advantages/disadvantages considered, it is essential to enter in a Partnership Agreement. This legally lays out the specifics of each partners’ roles, assets, and shares (if any). In addition, a proper Exit Strategy should be considered should the business prove not be financially viable/profitable, due to lack of capital or pending bankruptcy, in which case it needs to be determined how losses are divided.
Ensure you have a good lawyer who can help you through this process as most of us are not fluent in legalese and need the assistance of a legal professional to avoid disagreements, misunderstandings and lawsuits.
Keep in mind that if you and your partner prepare your business properly for a more successful outcome, then your fairytale just might come true.
For more information, please review Small Business BC’s Starting Your Business Checklist.