Business Partnership Advisor
Together, we can fix your business and partnership problems
Chris Reich, Business Luminary
Is It Time to Start Taking Money Out of a Business Partnership?
Money is the biggest source of tension in a business partnership. One starts taking money out and the other insists that they forego draws until the business is profitable. My opinion will surprise you!
Money Money Money!
Your business is just starting to gain a little traction. You feel relief as making the monthly payments, bills, payroll, and rent is getting easier. Then you see an entry on the bank statement for $200, cash withdrawal. What’s this? You find out your partner used the debit card to take cash from the business without talking to you. It’s your firm position that the partners should not take any money out of the business until the business is profitable. Your partner disagrees. He says that profitability is 3-4 years away and he’s not working for nothing for the next 4 years. I get the call. Who is right?
Getting Money Into the Hands of the Partners Is Important
I would never say that budgeting is not important. It’s a good idea to reinvest back into the business until the business gains enough purchase to be safely self-sustaining. On the other hand, when people work for nothing for too long, they start to feel discouraged unless there was an agreement drafted in advance that says something like, “Partners agree to forego taking any money from the business for the first year.”
If all partners can make it without taking money, and if there is an agreement in place, stick with it or all your agreements may break down.
If there is no agreement, even $100 per month is a taste of reward that can help prevent burnout. And burnout is a very bad thing. When a partner burns out, the partnership and the business are at risk.
It should be a goal to get money to the partners as soon as practical to do so.
Business Partnership Tips by Chris Reich, TeachU
Partner Pay Is a Cost That Must Be Considered
Let’s say that 3 people start a business of making and selling cookies. Bob works 4 hours a day making cookies. Jim cleans the kitchen-baking area, maintains the equipment and buys all the supplies which he picks up rather than has delivered to save money. Shawna delivers the cookies to local restaurants and visits 5 new places a day to sell cookies and gain new customers. Nobody gets paid.
Jim insists that they not take money out until the business sees a profit. At that point, they will equally divide the profits.
Shawna wants a commission for getting a new customer. She works hard and thinks it only fair to get a little reward for being the only one who actually brings in money.
Bob is having regrets about starting a business. When he worked for a bakery, he made decent money and had set hours. Lately he has been talking about hiring someone to bake cookies so he can get a part-time job somewhere to make money.
This is how serious partnership problems start. No one in this example case is wrong. They all have a different notion about partner pay. If their baker burns out, they’ll have a big problem. If the sales lady gets aggressive in her demands, it will cause a rift. If Jim digs in about not taking out money, the other 2 partners will turn on him.
But Chris, There Is No Money!
I understand that. Geesh, I’ve probably said those words 100 times this month. But you need to start paying something to the partners as soon as you can. Even a “Friday Fund” is a good start. Give $50 to all the partners and let them go out to dinner and feel good about what they are doing. Partner labor is a cost that must be accounted for even if you can’t pay much.
A business is NOT profitable if it has $100 left at the end of the month but the partners are not being paid for the work they do.
I especially support paying partners for production. In the sample case above, I’d try to pay the baker $20 for every batch, the purchasing person should get a percentage of the cost savings, and sales gets a little commission on each sale. This might amount to $100 per month for each of them, but it’s a start!
Once people get a taste of the money from their own business, they will want more! I told a friend once that the best beer you’ll ever taste is the one you have at the end of a long day in your own office at your own business.
At the Very Least, Make a Plan for When You Can Distribute Money
Even if money is so tight that none can be paid to partners, make a plan that clearly defines when money can be distributed and how much can be expected.
In the case above, we could say that when sales reach $1,000 a week, each partner will get a draw of $50/week. I’m merely trying to show how to go about this. The problem is exactly the same in a business taking in $500,000 a month! Partners get tired of working for a dream. They will burn out if they don’t see results in their pockets. It varies according to person but the principle is the same. Working hard for nothing leads to burnout! And, when people have different ideas about when money can be paid out, tension will arise.
There are three goals to getting money to the partners:
- Prevent Burnout
- Prevent Tension Over Money
- Align Partners on the Same Goals
Getting a partner pay plan drafted also opens up regular dialogue on the financial health of the business. I recommend partners meet and review the P&L EVERY month. When partners are very familiar with how the business is doing, there is less liklihood of tension arising over money.
And if you have tension in your partnership? Call me. I can help untangle the mess.
Chris Reich (530) 467-5690
“If there isn’t a cent to distribute to the partners, at least make a plan for when money can be distributed and how much a partner can expect. That will prevent a lot of trouble that seems to come up once a business starts doing well.”
Locking a partner out is a risky move. The locked-out partner has rights that if violated could entitle him to reinstatement and damages.
There are many things to cover in a solid Partnership Agreement. In this video, I’ll explain the items that need to be covered. You may have other items to include as well. Keep in mind that there are many ways to address each clause. My job is to offer you options and to help partners agree on how they want to address every line item.
Your Partnership Agreement protects your interests. Ideally you would go to a qualified business attorney and have the proper legal document drafted. But if you are putting it off because of the expense, you can get the key items on paper to protect you and your business.
There are times when you legally can and should lock your partner out of the business. But, those are rare circumstances. Locking your partner out, even if your partner is showing bad behavior, open you to potential liability.