Costly Mistakes to Avoid When You Have a Partner in Business
Starting a business on your own can be a daunting task. It requires a lot of energy. The good news is you do not need a meeting every time you make a major decision. You are the boss, owner, president, manager, CEO, employee and shareholder all wrapped up into one decision-making machine. You have no excuses because you are in charge. The key is to be accountable for your decisions and notice what is working and what is not working and move forward towards success. There is no need for a buy –sell agreement (used when you have a partner in case one wants an early out). Life is pretty simple (as much as it can be when you are running a business).
Now bring in a partner. For the purposes of this article there are two types of partners:
Partner #1: Your spouse or life partner.
Partner #2: An outside partner, friend, business associate, investor…
In the case of partner #1, it can be a challenge. Let’s assume your spouse or life partner is ACTIVELY involved in your business. They are involved in decisions; they do work with you and share in the results. Divorce rates are high enough as it is, and adding the stress of running a business can be difficult. Even though I have been married for 14 years, my wife De Ann is a classical violinist and is not involved in running the business. Yes, she listens to my highs and lows and will give some advice (sometimes unsolicited) and she is not involved in marketing, hiring or investment decisions. She knows I get paid every two weeks like the other employees. If you are running a business together over the years I have seen a few work and many that did not.
Be clear on roles and responsibility. Create a job description for what you are responsible for to avoid blaming the other for tasks not completed.
Determine a daily and weekly meeting time and the format of which to report to each other your results and updates. This will allow you to have some sense of a relationship outside of your work so you don’t end up discussing the business all the time, especially at family time.
Establish a monthly and annual budget for the business and a personal budget. Being in a relationship it is too easy to rob the business of profits to pay yourself extra because you are not on a personal comprehensive budget. Both agree how you would each like to be supported in the business. Make sure to take time to acknowledge your partner for a job well done. Work on your strengths and outsource your weaknesses. There is no sense in spending a lot of time on your weaknesses. There are times we all do things that we are not the best at, but spend a majority of your time on your strengths.
With partner #2, you really need to be on the same page and legally protect yourself. It starts with capitalization. What is each person going to “put” or capitalize in the business? Usually this is a very loose conversation and when I meet with the partners I ending up having to help the partners determine who is capitalizing what. If one person is the “money partner” and
the other is doing the labor, typically it is not clear if the “money partner” is loaning the business money, which means he is not a partner from an ownership point of view or if they are capitalizing the company with the money. If you capitalize the company with $10,000, that means you are giving that in exchange for stock ownership and it will NOT be paid back. It is not a loan.
Some people attempt to have it both ways; they want both the ownership and the money paid back. Unless you determine that $2,000 of the $10,000 is for capitalization and the other $8,000 is a loan, it does not work that way. You must be clear. I have ruined a few partnership opportunities because when I started asking these questions it was easy to tell this “tough” conversation never happened yet. The talk was all about how much money everyone was going to make.
Be clear on capitalization by each partner. If services, you may have a taxable event so check with your accountant. If any part is a loan determine when the loan will be paid back and have a fixed schedule. Get a buy sell agreement. This is an agreement that will basically tell you the steps for a partner to leave and how to evaluate their ownership in the company and when and how payments will be made. It is like a prenuptial agreement for business partners. Plus, it comes into play is one partner dies and you need to pay their estate. It will involve a term life insurance policy on each partner.
Be clear on roles and responsibility. Create a job description for what you are responsible for to avoid blaming the other for tasks not completed. Work on your strengths and outsource your weaknesses. There is no sense in spending a lot of time on your weaknesses. There are times we all do things that we are not the best at, but spend the majority of your time on your strengths.
Create a time to meet and report to each other on a daily basis and at least a weekly basis. When you open a business credit account, require two signatures for any checks over a higher amount for your business. That may be $1,000, $2,500 or $5,000. That means you or your partner could write checks for under $1,000, but once it is over that level it requires both signatures. This can help prevent one partner from cleaning out the account. Take the same approach with business credit cards to agree to certain limits. If only one partner is on the account, you as the other partner have less control and you MUST be on top of the books and numbers weekly if not daily.
Be clear on authorized expenses. Is your cell phone, car payment, and other expensive to be picked up by the new business or not? Be clear on expectation of hours worked. Many times one person is working many more hours thanthe other, agree ahead of time.
Does one person need an income sooner than the other? This can be a source of stress that can create real problems quickly. Determine when you expect to pay yourself. Don’t make the mistake of paying too much out too early and having to get more capital or put the business in jeopardy too soon. Do you trust each other? If you have not known each other for a long time, do background checks on each other. Don’t just believe someone’s story. If they are too private and don’t agree, there’s probably a reason for that.
Communicate if you are going to do something outside the main operating company that is another source of revenue, especially if it may be considered related to the main business. Your partner may have an issue with why you are not bringing that other source of revenue to the company to be split between you (if 50/50 owner). As you can tell, having partner #2 brings a lot more issues and risks to the table. Yet, just ask the Google founders, the rewards can be life changing!
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