No one enters a relationship with the intention of it not working out. So it is natural not to think about this when forming a business partnership, but this seems to be a significantly ignored part of planning.
Think about the hours and hours that went into planning for the type of service or product you will deliver, targeting who your potential prospects will be, how you will market the business, what your staffing needs will be, how you will capitalize the business, what type of entity you will be, setting up your website and social media campaigns and which accounting software you will use.
You have invested lots of time and sweat equity to make sure that you have thought about everything and minimized all of your potential risks and yet, like most entrepreneurs, you fail to consider (or worse yet ignore) the top risks that plague and ruin most businesses:
- What would I do if my partnership fails?
- How would I have the funds to buy out my partner?
- What happens if my partner or I want to voluntarily leave the business?
- How would we be able to continue financially if one of the partners became unable to work?
- What happens if the owners split up and wind up in court?
Luckily, most if not all of these problems are solved with two simple answers. Do not leave anything to chance–get it in writing! You would not rent your office space without a lease right? So use the same common sense when planning to deal with your partners.
Consult with an attorney. I know that many businesses have limited startup capital, but it is a LOT less costly to get understandings between the partners in writing up front during “the honeymoon period” than later on when you are fighting with your partner.
What do you need? Your attorney can help you with preparing a partner/shareholder agreement and an operating agreement. These documents address many of the questions I asked earlier. They also set out the duties and responsibilities of each of the owners so that there is no dispute later on and how the business will be valued if the owners split up, are disabled, or die.
Most important is that the cost of doing all of this up front pales in comparison to the legal fees you will incur due to litigation down the road.
Consult with an insurance professional. Yes, I know again I am recommending you spend money, but this might be the best money you ever spent.
Tip #1 recommended what to do to prevent problems, but you still need the funds to carry out your intentions. You may need capital to buy out your partner, to pay them if they are disabled or to hire someone to take over their duties. You may also need funds to pay their survivors for your partner’s share of the business if they die. Insurance is the best way to do this because you are paying very small amounts over the years compared to the amount the policy will return to you, especially if your business grows. Cash flow is ALWAYS an issue for businesses, and insurance is a very inexpensive way to address this problem.
The Bottom Line–most business startups fail, and most partnerships do not survive; so play the odds and plan ahead. Factor in the costs you need to protect yourself.