Advance Planning Can Keep Your New Business Partnership
Amicable
By: Susan E. Wells
Starting a new business can be challenging! You may
be fortunate enough to have a friend or associate join your
business venture as your partner who can share both the risks and
the rewards in the planning and pre-opening stage as well as the
operational stage.
As you embark on your new venture, you and your partner may
operate under a number of assumptions:
- You both believe that each of you shares "your" vision.
- You both believe that each of your expectations for yourself
and your partner are the same.
- You both believe that your relationship with your partner will
endure and will be amicable indefinitely.
Unfortunately, experience has shown that those assumptions
are rarely accurate. Therefore, it is critical to discuss
with your partner what your respective visions of the business and
the future are, as well as what your respective expectations of
each other are. Without a meeting of the minds as to those
important issues - friction, disagreement and possibly litigation
will follow. This is particularly true when the business is
experiencing other challenges, such as inadequate cash flow.
Without a clearly written statement of the parties' joint
expectations and agreements, restructuring or even breaking up may
be hostile, lengthy and expensive.
Life events happen. It is important to determine, in
writing, what happens if one of you dies, becomes disabled, gets
divorced, experiences financial problems or ceases to be employed
in the business. Typically, the partner that is not
experiencing the event wants to buy out the interest of the other
partner, either because they are no longer contributing to the
venture or because that partner's spouse, children, creditors or
others may seek to participate in the business. Similarly,
the representative for the disabled or deceased partner wants to
liquidate his or her investment in the company. Upon the
occurrence of any of those "triggering events," the parties'
interests are obviously different from, and now adverse to, each
other. The "selling" partner wants a high value or
purchase price ascribed to his or her interest in the business and
the "buying" partner wants a low value or purchase price. The
"selling" partner wants to receive the purchase price as soon as
possible and the "buying" partner wants, and may frequently need, a
longer period of time over which to pay the purchase
price.
Had the partners agreed upon these matters in advance, when
either partner could eventually be the "selling" or "buying"
partner, their positions on those points would more likely be
similar or at least closer. Typically, the partners agree in
advance upon a value or purchase price determined in one of three
ways:
- The partners agree initially and then periodically upon a
specific dollar figure for the business as a whole or for each
percentage interest in the business,
- A formula for valuing the business is designated or
- An appraisal or formal valuation is required. In any of
those cases, you should consult with an accountant to advise you
which alternative is best for valuing your type of business and, if
a formula is the selected alternative, what formula would best
reflect the true value of the business.
Jay Miller, a Certified Public Accountant experienced in
consulting with new business owners as well as appraising
businesses, says, "Unfortunately partners rarely remember to
periodically agree upon the value of the business. So, if
that alternative is selected, I would recommend that the agreement
provide for a backup plan to be used if the partners have not
agreed upon the value for at least a year. Also, agreeing
upon a value is the least likely alternative to arrive at an
accurate value of the business. A formula based upon a
capitalization rate applied to the business' historical revenue or
net income more accurately reflects the value of the
business. Of course, an appraisal is even more
accurate. However, it is time consuming and can be
expensive." If the partners take the time up front to fix a
method of valuing the business that they both believe accurately
(or at least adequately) compensates them for their interests in
the business, hostile dissention and litigation may be avoided.
Being realistic about the possibility that you may not continue
your business partnership can help you save your relationship with
your partner and avoid litigation. A shotgun buy-sell
provision can be agreed upon in advance and is an orderly and
amicable means of one partner buying the other out. In a
shotgun buy-sell arrangement, one partner makes an offer to buy out
the ownership interest of the other partner. The second
partner then has the option to either accept that offer or turn the
offer around and cause the first partner to be bought out on the
same terms. A shotgun buy-sell provision is advisable under
some, but not all, circumstances.
Whether or not you and your partner agree upon a shotgun
buy-sell, you should consider and agree upon a means to resolve
disputes that may arise. That may entail mediation, which
employs an independent person to assist you in arriving at a
mutually-acceptable agreement, or arbitration, which uses an
independent person to decide the outcome, similar to a judge.
Usually arbitration costs less and is quicker than using the
courts. However, that is not always the case. There are
pros and cons to each of these options that should be considered by
both partners.
Although you may be starting your new business with limited
funds, you will ultimately save money by focusing on these and
related issues at the outset, before disagreements arise, and
signing an agreement that reflects your mutual understanding.
As Stephen Covey says, "Begin with the end in mind."
About the author: Susan E. Wells is a partner at the
Phoenix law firm of Jaburg Wilk. She assists businesses and
entrepreneurs with their legal needs, including both franchisors
and franchisees.
3200 North Central Avenue
. Phoenix . Arizona