Business partnerships are a great idea because all the groundwork that is needed to establish the business will be divided between the partners.
People opt to partner with their friends, spouses, siblings, and other relatives because of their existing relationships.
With a business partner, an aspiring entrepreneur will have someone to share and execute ideas with.
Partners can also rely on each other’s varying skills which can ultimately benefit a dynamic business. Consider entering into a strategic partnership with a complementary business to leverage each other’s strengths and expand your market reach.
A written contract or partnership agreement can help strengthen the roles and responsibilities of each partner.
Doing this ensures that each partner’s skills will be used in the right aspect of the business. There are sources from which you can obtain a business document template to help you draft a partnership agreement.
Unfortunately, business partnerships could go south for various reasons, including disagreements over business operations, finances, and general disputes.
Unless an agreement dictates each person’s roles and responsibilities, business partnerships could have bitter endings and may even involve a harrowing legal battle.
So, even if your business partner is a close friend or family member, it’s best to be prepared for the worst and protect yourself and your interests in the business. Here’s how:
Understand Your Business Partner
Take time to learn your partner’s work ethic.
Objectively analyze your partner to know their willingness to make sacrifices for the success of your business. This includes whether or not they can put in the hours as you start the business.
It’s also advisable to do a background check of your partner to be clear on whether they’ve been in business or other partnerships before and how the businesses they’ve been involved in performed.
As much as you can, get references if your future partner has been in other alliances. This way, you can get a better view of their character and overall work ethic.
Have A Partnership Agreement
A partnership agreement is a document that outlines the responsibilities, obligations, liabilities, and other terms and conditions of each partner.
The partners should prepare and sign the contract before they begin any business engagements.
It’s advisable to hire an attorney to help you draft an agreement. The document will help establish liabilities and boundaries. You can even contract a company dealing in business formation services for guidance. As per this post on Incfile alternatives by SmallBusinessHQ, some of these companies even provide access to dependable lawyers.
With a partnership agreement in place, disputes or disagreements can be resolved amicably.
The agreement should contain the following:
- How disputes will be handled if partners disagree on business-related matters
- What will be done if one of the partners dies, is incapacitated, or chooses to walk out of the partnership
- The contributions of each partner to the business
- What happens when the partnership is dissolved
- The processes of handling profits and compensation
- The extent to which each partner can make decisions for the business
Be Clear About Compensation
As business partners, you should consider and agree on how profits and losses will be allocated, whether they’ll be divided into equal shares or proportional to the contribution of each partner. You should also be able to define profits and how business assets will be designated.
Be Strict About Debts
When it comes to debts or applying for business loans, it’s best to establish strict and clear limitations in your partnership agreement.
To protect your assets from the partnership’s liabilities, you can either set up your business as a limited liability company (LLC) or get a business liability insurance policy.
Financial matters, especially when it comes to debts and liabilities, can be a very contentious aspect of any business.
It’s one of the main reasons why business partners have a fallout. So, in this matter, it’s better to be safe than sorry.
Uphold Professionalism
Whoever you choose to work with, whether your spouse, close relative, or friend, look at them through a professional lens.
Put your personal relationship aside and keep the interests of the business or partnership in mind. It may be difficult, especially when emotions and business matters clash but when it does come to that, make sure to keep relations civil and professional.
Allow yourself and your partner to cool off and rethink the situation calmly.
As much as possible, always refer back to the partnership agreement and be guided by the liabilities and responsibilities established in it.
Have An Exit Plan
Since a partnership is basically a contract, it’s something you can enter into and exit at any time.
Hence, you must also have a sound exit plan. The exit process should be defined in the partnership agreement.
An exit plan is essential to protect all you have toiled for in the business in case disputes arise and the relationship with your partner is compromised.
The exit plan will make the process easy if you resolve to separate from your partner or liquidate the partnership altogether.
Bottom Line
As mentioned earlier, business partnerships are great. However, you need to take your time before you enter one.
Even if your business partner is someone you trust and have known for many years, it’s best to prepare for the worst and safeguard yourself and your assets from liabilities that may be borne from the negligence and mistakes of the partnership.