SubscribePartnership Nightmares
Sep 02, 2008
Partnership is the topic of this month's feature article, "How Do I Find the Right Business Partner", in my newsletter, Small Business Leader. If you're not aleady on the mailing list, drop me a note (see Contact page) and I'll make sure you receive the article.
One of the important partners you'll want to have in your business is a good business lawyer. As guest blogger this month Nina L. Kaufman, Esq., Ask The Business Lawyer. shares some of her experiences working with small business partners. Consider this a heads up on what to avoid.
Nightmares with Business Partners
By Nina L. Kaufman, Esq.
Do you remember those early adrenaline rushes of "first love"? Your heart would thump loudly. Your hands got sweaty. Entrepreneurs often feel that way about working with a business partner. Your brains race with new and creative ideas for how to grow the company. You burn the midnight oil churning out business plans, marketing schemes, and new client work. You feel exhilarated -- and terrified - all at the same time. But lurking in the background is the possibility that the rug could be pulled out from under you. How can you make sure your "happily ever after" doesn't turn into a horror flick?
That's where planning and partnership agreements come in. Successful business partnerships don't just materialize with the wave of a fairy godmother's wand. You need to make sure you have a common understanding when it comes to work ethic, distribution of profits, and end goals for the business. No handshake can cement any of that. A partnership agreement ensures that you are (literally!) on the same page when it comes to the "3 M's": management of the business; money distributions between the partners; and moving on when you can no longer stay in the business (for whatever reason).
Here are three business partner nightmares that you will really, truly want to avoid . . and can, with a good agreement:
(1) Management Nightmares: The Tale of the Lazy Partner. Three people started a restaurant together: the chef, the maitre d', and the office manager. Their partnership agreement consisted of notes on the back of a napkin. They all worked hard on building the restaurant and trying to attract clientele. The restaurant's popularity took off, meaning they all needed to work very, very hard. Except the maitre d' wasn't interested in working so hard. He started to slack off, but still demanded his one-third cut. Without a partnership agreement, the chef and office manager were hamstrung.
(2) Money Nightmares: No Good Deed Goes Unpunished. Two longtime friends started a graphic design company together. One was single; the other had a mortgage, three kids to put through school, and a bad credit history. The company did okay, but not enough to give ample draws to the partners. For professional reasons, Single Guy obtained credit cards for the partners (with his personal guarantee). Mortgage Mom would put personal expenses on the card, claiming that she had no other lines of credit to use. Because she was a friend, Single Guy begrudgingly allowed it. But during an economic downturn, Mortgage Mom refused to curb her personal spending, leaving the company unable to pay Single Guy. Without a partnership agreement setting out issues of distributions to the partners and permissible expenses, the friendship ended up fatally poisoning the business relationship.
(3) Moving On Nightmares: No Way to Get Out Gracefully. Deena and Nili started a clothing business. Their immigration attorney drafted their partnership agreement, which didn't cover partner disputes. Deena was the money gal; Nili had the ideas and the schmooze skills. Or so Deena thought. After pouring in many thousands of dollars, Nili was running through the funds like water. When Deena tried to put the brakes on the spending, Nili was furious and accused Deena of breaching the agreement. Their fights were the stuff of legend. Because the partnership agreement was silent about how to handle ownership disputes and buy-outs, Deena and Nili had to go to court to dissolve the company.
Business partner nightmares can knock the wind out of your sails and the money out of your purse. You can avoid the vast majority of them by having a written partnership agreement in place. Make sure it's prepared by a competent business/corporate attorney and not just downloaded from the Internet. You will also want to have regular meetings with your partner(s) to make sure you continue to work on the business (not just in it) together. For, as Antoine de Saint-Exupery said about love, a succesful business partnership "consists not in gazing at each other, but in standing shoulder-to-shoulder gazing in the same direction."
© 2008 The Legal Edge LLC. Nina L. Kaufman, Esq., is a business attorney and the President of Ask The Business Lawyer, which offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "Words to the Wise" ezine, visit www.GreatBusinessLawTips.com or contact tips@askthebusinesslawyer.com This article is for your general information only and is not intended to substitute for the specific advice of legal counsel.
One of the important partners you'll want to have in your business is a good business lawyer. As guest blogger this month Nina L. Kaufman, Esq., Ask The Business Lawyer. shares some of her experiences working with small business partners. Consider this a heads up on what to avoid.
Nightmares with Business Partners
By Nina L. Kaufman, Esq.
Do you remember those early adrenaline rushes of "first love"? Your heart would thump loudly. Your hands got sweaty. Entrepreneurs often feel that way about working with a business partner. Your brains race with new and creative ideas for how to grow the company. You burn the midnight oil churning out business plans, marketing schemes, and new client work. You feel exhilarated -- and terrified - all at the same time. But lurking in the background is the possibility that the rug could be pulled out from under you. How can you make sure your "happily ever after" doesn't turn into a horror flick?
That's where planning and partnership agreements come in. Successful business partnerships don't just materialize with the wave of a fairy godmother's wand. You need to make sure you have a common understanding when it comes to work ethic, distribution of profits, and end goals for the business. No handshake can cement any of that. A partnership agreement ensures that you are (literally!) on the same page when it comes to the "3 M's": management of the business; money distributions between the partners; and moving on when you can no longer stay in the business (for whatever reason).
Here are three business partner nightmares that you will really, truly want to avoid . . and can, with a good agreement:
(1) Management Nightmares: The Tale of the Lazy Partner. Three people started a restaurant together: the chef, the maitre d', and the office manager. Their partnership agreement consisted of notes on the back of a napkin. They all worked hard on building the restaurant and trying to attract clientele. The restaurant's popularity took off, meaning they all needed to work very, very hard. Except the maitre d' wasn't interested in working so hard. He started to slack off, but still demanded his one-third cut. Without a partnership agreement, the chef and office manager were hamstrung.
(2) Money Nightmares: No Good Deed Goes Unpunished. Two longtime friends started a graphic design company together. One was single; the other had a mortgage, three kids to put through school, and a bad credit history. The company did okay, but not enough to give ample draws to the partners. For professional reasons, Single Guy obtained credit cards for the partners (with his personal guarantee). Mortgage Mom would put personal expenses on the card, claiming that she had no other lines of credit to use. Because she was a friend, Single Guy begrudgingly allowed it. But during an economic downturn, Mortgage Mom refused to curb her personal spending, leaving the company unable to pay Single Guy. Without a partnership agreement setting out issues of distributions to the partners and permissible expenses, the friendship ended up fatally poisoning the business relationship.
(3) Moving On Nightmares: No Way to Get Out Gracefully. Deena and Nili started a clothing business. Their immigration attorney drafted their partnership agreement, which didn't cover partner disputes. Deena was the money gal; Nili had the ideas and the schmooze skills. Or so Deena thought. After pouring in many thousands of dollars, Nili was running through the funds like water. When Deena tried to put the brakes on the spending, Nili was furious and accused Deena of breaching the agreement. Their fights were the stuff of legend. Because the partnership agreement was silent about how to handle ownership disputes and buy-outs, Deena and Nili had to go to court to dissolve the company.
Business partner nightmares can knock the wind out of your sails and the money out of your purse. You can avoid the vast majority of them by having a written partnership agreement in place. Make sure it's prepared by a competent business/corporate attorney and not just downloaded from the Internet. You will also want to have regular meetings with your partner(s) to make sure you continue to work on the business (not just in it) together. For, as Antoine de Saint-Exupery said about love, a succesful business partnership "consists not in gazing at each other, but in standing shoulder-to-shoulder gazing in the same direction."
© 2008 The Legal Edge LLC. Nina L. Kaufman, Esq., is a business attorney and the President of Ask The Business Lawyer, which offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "Words to the Wise" ezine, visit www.GreatBusinessLawTips.com or contact tips@askthebusinesslawyer.com This article is for your general information only and is not intended to substitute for the specific advice of legal counsel.