Don’t Risk the Money You Put Into Your Partnership

Chris,

My best friend and I started a business a few months ago. I put up all the money (around $60,000) and he was supposed to do the work for the first year. His credit isn’t great and he didn’t have money to put in. He was supposed to bring in the work from the customers he already had and we would split the profit. After the first year, I would quit my job and handle all the admin, marketing, and books for the business.  He hasn’t brought in anything in 6 mos. He has been taking out money from the business to live on. We had a big blow up yesterday and I want out. Most of the money is gone. How can I get my money back? How can I get him out? Thank you.

Unequal Partnerships Rarely Work

Situations like this are among the most frequent calls I get. Somebody puts up money with someone who agrees to contribute labor as their contribution to an equal Partnership. Once things are set up, and a lot of money is spent, the other Partner fails to perform, and the troubles begin. I get 2-3 calls like this every week.

The saddest part is that it’s often good friends or relatives that jump into these arrangements and the relationships always suffer. ALWAYS.

The Best Advice

I would advise never getting into a situation like this. Think about it. You put up $70,000 to start a business with someone who has no money and bad credit. Is that a good potential business partner? Business requires discipline and financial sense. It doesn’t make sense.

But If You Must

You’ll be ready with the excuses. He’s had some tough breaks. She came from a pretty messed up family. He’s worked hard and is a good person. We go to the same church.

So, if you’re going to do it anyway, at least take a few steps to protect yourself.

Get a Partnership Agreement

It’s only too late when it’s too late. If the business is already going you can still get a Partnership Agreement. While it’s certainly advisable to get a Partnership Agreement before spending money and launching the venture, it’s only too late if the tension has already broken out. Once anger enters the picture, it will be very difficult to get your partner to sign an agreement that protects your money from them!

There are many things to cover in a proper Partnership Agreement, but by far the most important considerations are about money. You want to document how much money each party is contributing and how that money is to be treated in the future. For example, your initial contribution can be treated as a loan that needs to be paid back within a certain time frame. Or, you might say that your partner gets a small distribution of the profit until you get a portion of your money back.

You should be very clear about taking money from the business. Set rules. For example, if you put up money and your partner is supposed to generate sales, then your partner should only get a percentage of the revenue produced. Too often, the partner who did not put money in, wants a salary to “get by” until the business is “going”. (A problem with partners that have no money)

And, you should set some rules around how things are distributed if you decide to close the business. If you put up $100,000 to start the business and your partner never produces anything, if the business folds up, she’ll get half of everything! And, if there are liabilities, you’ll get stuck with ALL of them because creditors won’t be able to collect from your deadbeat partner. If the business folds or sells, after satisfying debts, you should state that you get paid back first and then you split what’s left. If will not work out like that unless you document it. (Because in a 50-50 partnership, your partner’s labor contribution counts as being equal to your money contribution)

How to Get Out of an Unequal Partnership

This can be difficult if you don’t have the aforementioned Partnership Agreement. If your partner takes money, changes the locks, sells off equipment, or does any number of nasty things to the business that was started with your money, the law is on your side, right? 

Not really.

First, the law sees this this as a business problem between you and your partner. You’d have to sue to assert your rights and make a claim against your partner. This is nothing like other sections of our judicial system.

You’ll need a lawyer. You’ll need a Business Lawyer. They do not work on contingency. Meaning, they won’t take their fee from the “winnings” if you prevail. And, worse, you won’t get lawyer’s fees from your partner if you win. Expect a Business Lawyer to ask for $5,000 to take you as a client. The total fees will be $35,000-$50,000 for a pretty basic case. And, even worse, business court cases take years. 2 years would be insanely fast. 5 years is common. Unending is not unheard of. 

What If the Tension Has Started and There Is No Partnership Agreement?  

This is where mediation can help. I’ve mediated some very nasty situations. If you get to the table before partners stop talking to each other, there is a very good chance we can work out something that both sides are happy with. Maybe it’s a buyout. Maybe we get agreement on the distribution of funds if we dissolve the business. Maybe we get cooperation for a period long enough to sell the business. Sometimes, the partnership can be repaired and go on to be very successful. There are lots of options. 

Mediation might cost you $1500-$2500. That’s not much to salvage even a small investment. People often come to me after spending $3,000-$5,000 on lawyers. Start with mediation. It’s very cost-effective. Just make sure you work with someone experienced in BUSINESS PARTNERSHIPS. (That’s all I do)

Here’s the key: Get to the table before you have the big blowup. Once that big argument happens, it’s very difficult to get the anger/hurt genie back in the bottle. Don’t wait.

And if you’re forming a new partnership, please talk to me about a Partnership Agreement. Once you have it, you’ll probably never need it. But if you don’t have it, you’ll need it for sure. I could point you to 1,000 people who would, sadly, confirm that.

Chris Reich
Business Partnership Mediator

“You put up $70,000 to start a business with someone who has no money and bad credit. Is that a good potential business partner?​”