Are you starting a business with a friend or former office mate? Partnering with someone you’re close to can be a great way to launch a business, but be aware: mixing business with family and friends can also be tricky. Here’s what you need to know to protect the business from potential landmines down the road.
When partnering with a longtime friend, colleague, or family member, you may be tempted to seal the deal with a simple handshake or over drinks. After all, if you’ve known each other for years and you both clearly want your business to succeed, what’s the point of wasting time with all the formalities and paperwork?
But here’s the problem with that: issues are bound to arise in any business arrangement, whether you’re friends or otherwise. Maybe you’ll disagree over how to spend your marketing budget; maybe your partner’s personal situation will change and he or she will need to return to an office job. If you haven’t agreed upfront to how some of these important decisions will be made, you can end up in a very difficult position.
This is where a partnership agreement comes in. It’s a document that captures what you and your partner agree to before going into business together. Creating one is a smart idea for any partnership situation, whether you’ve known your partner for ten years or ten hours.
A starting partnership agreement doesn’t have to be a fancy document, so long as it puts some of your early discussions in writing so you can refer to them down the road if needed.
Here are some of the things you should discuss before starting a business together:
Define who contributes what
It’s important to spell out who will be bringing what skills to the table. This means discussing everyone’s contributions in terms of:
- Working hours and commitment: who will work full-time, who will work part-time and manage other commitments?
- Cash: how much will each partner contribute in terms of cash?
- Other investments: what other things will partners invest? For example, will you use one partner’s garage for storage space or your spare bedroom for the working office?
- Customer list: will anyone bring their former clients over to the new business?
By discussing all these investments, no matter how minor, from the start, you can make sure that everyone feels like their contributions are valued and recognized.
Define who gets paid what
You’ll need to explicitly define how everyone will get paid. Will each partner be given a salary for their role in the business? Will you be paid based on your particular client projects? What if your business makes extra profits for the year, how will they be distributed? If each partner owns half of the business, will the extra profits automatically be divided 50-50 or will the distribution be based on the work each person did that year?
Money isn’t always the easiest thing to talk about, and close partners will inevitably have different financial situations, needs, and ideas on how everyone should be paid. That’s why it’s so important to discuss money matters upfront and specify them in the partner agreement. In addition, you may want to write in that the agreement should be reviewed and revised (if needed) on an annual or bi-annual schedule.
Determine how decisions will be made
All too often, decision-making and authority issues end up causing more partner disagreements than money does. People usually become entrepreneurs and seek out self-employment in order to have more autonomy. When you’re starting your own business, it’s only natural that you want to have a say in everything.
Talk about what kind of decisions need a unanimous vote and what are the types of day-to-day decisions that can be made by a single partner. Who’s able to make what decision? For example, do you need your partner’s approval to buy a new computer or an online advertising campaign? There’s no single right model that’s going to work for every partner relationship. Try to anticipate as many scenarios as possible beforehand and determine what decision-making structure will be the most effective for your business and everyone involved.
Discuss how you can terminate the agreement or business
When you’re just starting out, the thought of walking away from the business is probably the furthest thing on your mind. However, circumstances and plans easily change from year to year and it’s wise to discuss these situations ahead of time. What will happen to the business if one partner decides they want to leave? Can the other member(s) buy out that partner’s interest? Do you close the business? And if so, what happens to the trademarks, intellectual property, customer/client lists, and physical assets?
As with any legal or business formality, it’s always best to invest some time upfront getting things squared away, rather than waiting until something happens and you wish you had things in writing.
Don’t worry about dampening the excitement of launching a business with potentially awkward conversations (aka what to do if someone gets ill). These conversations will be a good testing ground to make sure the partnership relationship is strong enough to weather the day-to-day realities of running a business.
Editor’s Note: This was originally written by Nellie Akalp for FreshBooks.