Whether you’ve been building your business from the ground up for years, or you’re just getting started, there comes a time in every business owner’s career when they consider adding a partner, or co-owner, to their business. You may want to change the legal structure of your company, supercharge your operation for growth, or just spread out responsibilities, but whatever your reasons, adding a partner/co-owner is an intricate process that requires careful consideration and planning to avoid legal complications.
If you’re ready to bring a partner into your business, take these steps to protect yourself beforehand:
Do Your Research
Before entering a contract, take some time to do some sleuthing – in legal speak, your due diligence. Even if you’ve known this person for a long time, either in a personal or a professional capacity, it’s essential to do your research and consider whether they’re the right person for you to work with. There is no substitute for performing a thorough review of the person you are thinking of adding not only from a background check, but also examine how they do business.
Some areas to consider:
- Their communication style
- Their work history
- Their values
- Whether they’ve owned a business before.
If they have had other business partners, seek those individuals out and try to get references. Finding their prior business associates/partners and talking with them about their experience can provide invaluable insight as to whether or not this is a relationship worth entering. By doing this important research on the front end, you won’t be surprised later on down the line if your potential partner is actually a real jerk when it comes to working together.
Set Clear Expectations
Once you’ve established that your potential partner has good references and a communication style that meshes with yours, it’s time to set the stage for success. Clear communication of short- and long-term goals, expectations about work hours and business division, and the direction you want the business to take are all things that should be discussed long before you begin to draft a formal agreement. If you’re going to bring someone else on board, you need to ensure that their vision will line up with yours, that you’ll both be working to the same end goal, and that you possess similar values.
This may seem like a lot of extra and unnecessary work before you even reach the legal stages of drafting an agreement—especially if you’re eager to have someone else on your team. But rest assured, you want to choose your new partner carefully in order to protect your business, and careful vetting now can save you a lot of trouble in the long run. It’s a lot easier to walk away from a potential new partner/co-owner because of differences in values or business ethics before entering into an agreement, than it is to unravel a sticky situation once an agreement exists.
Once you’ve found the individual you want to add as a partner, protect yourself from any potential negative actions they may take by having a written agreement put in place. Depending upon your business structure, it may involve amending corporate by-laws, an operating agreement, or drafting a partnership agreement. Don’t be shy about this, even if you know the person well and are sure they would never do anything unfortunate. Clearly defining financial obligations like debt, capital contributions, voting power, insurance, as well as ownership roles, will always be beneficial for both parties in the long run. Negotiating and establishing a solid agreement that clearly defines each party’s responsibilities is an essential element of adding a partner.
One of the most important elements of adding someone is to establish an exit strategy. If one party simply decides it’s time to move on, as opposed to a divorce, death or some other unfortunate incident. it’s essential to plan ahead so you’ll know exactly what needs to occur in this scenario. The remaining partners/owners are often given the option to buy the withdrawing person’s interest, and you can lay out the buy-out terms beforehand in your agreement. Being able to set forth how the ownership interest will be valued, the payment terms, and any dispute resolution mechanisms at the beginning of the relationship tends to make things easier and ensure fairness in the advent of a person’s departure. Again, don’t be shy about discussing things that may seem like impossibilities now. Having an exit strategy that all parties agree upon is an essential part of protecting your business when you add a partner. We don’t all live forever; and, ensuring that the company and other owners can afford the payout through the purchase of key-person insurance can make everyone’s life easier when tragedy strikes.
Navigating the complex world of business relationships is exciting but can present complex and unique challenges, even for experienced business owners. As you look to bring someone else on board, make sure that you consider your choices carefully, and don’t rush into anything without weighing your options every step of the way. By taking it slow, preparing cautiously, and taking steps to protect yourself, you’re doing the best thing for your business in the long run.
If you need assistance or legal advice regarding a new partnership for your business, contact my office today.