Like any good relationship, the best business alliances provide for communication, expectation, and conflict resolution.
Many American business partnerships started as the humblest of organizations: Bill Hewlett and Dave Packard founded Hewlett-Packard in a garage. Same for Apple’s Steve Jobs and Steve Wozniak. And don’t forget Ben and Jerry, who opened their first store in a former gas station.
Are you looking to add your business to this list? Great. Just know that a partnership is a monumental step. It’s a merger of minds, goals, and wallets that calls for thoughtful planning–and a formal partnership agreement.
Who will it be?
Before getting down to the agreement paperwork, ask yourself these questions about your potential business partner:
- How can he or she enhance your business? What are the missing links in your business vision? A potential partner should have skills, existing alliances, or financial resources you lack
- Can you leave egos at the door? You each have key strengths. Can you apply them while always putting the firm’s best interests first?
- Are your values in sync? Do you share core management values and business ethics? You can’t disagree in this area
Choose your partnership structure.
Once you’ve made a partnership choice, determining the structure of your new alliance is the next major consideration. Several types of partnership agreements fall into the category of either a General or Limited partnership. For best results, work with your lawyer and accountant to identify each type’s pros and cons.
When you make a solid plan and review it with your partner(s), you gain assurance. Should things go awry with your relationship–even if the business itself is doing fine–you’ll have tangible guidelines to help resolve a problem or to dissolve the business entirely.
The following steps are essential for planning, creating, and implementing a successful partnership agreement:
1. Establish responsibilities. The best agreement nails down each partner’s expected leadership contribution. For instance, one of you may be the financial and operations mastermind, while the other is the creative and marketing guru.
2. Get out the spreadsheets. Define each partner’s initial financial contribution, percentage ownership, pay and bonuses, and how you’ll account for profits and losses in your compensation plan.
3. Set parameters on authority and expenditures. Along with responsibilities come boundaries: How many signatures will you need on a check? Who can hire and fire? Leave nothing to guesswork.
4. Know how you’ll deal with disagreements. A dispute settlement clause describes your joint approach to resolving differences. And while it may seem democratic to give both or all partners an equal percentage of decision-making clout, doing that runs the risk of a deadlock. Agree upon one partner having the ability to make a final call in each operational area such as human resources and marketing.
5. Make rules for adding, subtracting, or deleting. Create provisions for adding a new partner, buying one out, and dissolving the partnership.
6. Provide for the unexpected. If a partner becomes incapacitated or dies suddenly, have a quick-response plan in place to ensure the firm’s well-being.
7. Know your “end plan.” Who wants to think about the end of a partnership when it’s just beginning? Still, should you need to dissolve the alliance for any reason, you’ll need to divide the assets and make many other decisions. Plan for that now, so you won’t have to do it later amid chaos.
As is the case with any business milestone, your decisions have consequences. For the best possible outcome, each partner-to-be should consult with a lawyer and accountant. Then have an independent lawyer administer the formal agreement.
When you take the time to work through this checklist at the commencement of your partnership, you’re providing your team with the means to manage most any outcome.
As you build your new partnership, don’t forget the great alliance you already have with your M&T Business Banking relationship manager. Visit a branch or call 1-800-724-6070 to discuss your business plans.
This article is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.