The Most Important Step When Starting a Business Partnership

You are starting a new business partnership. What’s the most important first step?

After the Business Plan, Before You Do Anything Else

You and your best friend have an idea for a business. You do some research and create a basic business plan. You line up the money you need to launch the business. Before you sign a lease, open an LLC, take the startup funds, or pull your business license, create your Partnership Agreement.

Very few business partnerships have Partnership Agreements in place. When problems arise, and they will, there is no document to govern the processes to fix issues. The relationship is stressed and it takes a toll on the business. All of this can be avoided with a solid Partnership Agreement.

Why Do So Few Partnerships Have Partnership Agreements?

That’s easy. When you’re starting a business with your best friend, you can’t imagine that you’ll get into such disagreement that you’ll be willing to crash the business. I think people are afraid that going through the process of creating a Partnership Agreement opens the door to negativity. It’s a jinx. If you get along great why start talking about not getting along? There are 2 reasons to work out a Partnership Agreement before you do anything else.

Creating a Partnership Agreement should be your first step when forming a business partnership for 2 reasons. First, the protection a Partnership Agreement affords makes skipping this step rather dumb. Second, the process of working out the terms of your Partnership Agreement will reveal potential problems and help you work them out before they happen in the real world.

Problems Will Working Out the Partnership Agreement Reveal

Few people give much thought to a Partnership Agreement. I believe it is the most important document in your business. Going the process of developing your Partnership Agreement is going to help you learn how to deal with potential problems with your business partner.

Dealing with Money, Specifically Partner’s Pay

Nobody goes into business planning to go broke. On the flip side, few people go into business planning to get rich. Talk with someone who plans to launch a new business, and they’ll probably say something like, “I just want to make a comfortable amount. I don’t want to charge high prices. I want to give a good product at a good price and make a living.” 

What does that mean? At what point will the partners start taking money out of the business? It’s important to define that point. Will you take money out when all the debt is paid off? Or, will you take money when the business shows a profit? If a partner needs money for something, is okay if she takes out $500 without your approval? Is it okay to use the company’s debit card to buy lunch?

Having this discussion with your partner and then documenting what you both agree to, will be a very instructional process. If you can’t reach an agreement, it’s important that you NOT go forward with the business.

What If Someone Wants Out?

What happens 3 years from now if you want to leave the business? Let’s say that it’s not making money and you are tired of working for nothing. You want to quit, your partner wants to go on without you. How do you separate? Must your partner buy you out? Do you take 1/2 the debt with you?

How you will handle a voluntary exit from the partnership is one of the most important provisions in your Partnership Agreement.

Disability

Becoming sick or injured is far more likely than dying. Few businesses prepare for that possibility. Let’s say that the business is just getting profitable. Both partners have worked very hard and now the future looks great. Then it happens. Your partner is diagnosed with a disease and will need to be off work for at least 6 months. Does the business keep paying salary? What if he will be out for a year to take care of a sick spouse? 

Nobody wants to be the evil partner who cuts off the paycheck when the other partner needs it most. It helps to get these kinds of circumstances defined in advance.

Summary

I haven’t listed all the things to cover in your Partnership Agreement but I have hopefully sparked enough concern for you to undertake the process. I conduct a meeting with business partners to walk them through the various circumstances that should be included in their agreement. Call me if you need help with the process.

The most important take away from this post is to avoid the mistake that most partnerships make. Have the conversation and create the Partnership Agreement. You’ll be glad you have the contract and the process will be the first test of your business relationship. Will it survive?

Chris Reich, Business Partnership Advice

“If you aren’t sure how to conduct your meeting about creating your Partnership Agreement, please call me. I have a simple process that covers the bases. It will save you a lot of money. If you can’t afford to have an attorney draft the final document, we can still write up an agreement that is legally enforceable until you get a formal document in place.”