Setting up a business in partnership? Before you carried away with the euphoria and excitement, there are some things you need to consider. Many partnerships start wonderfully and later turn sour due to misunderstandings, differing expectations or change of personal circumstances. Dealing with these possibilities up front will save you a lot of potential grief.
“Many hands make light work” ~ John Heywood
You have probably thought about the benefits of going into partnership – your partner may have complementary skills or be sharing the cost of setting up the business, or quite simply that it will be easier if another person shares the load with you. All valid reasons for a partnership, but here are some other considerations:
#1 – Choose the right Business Structure
Most people use the term “partnership” loosely when it comes to business but understanding the actual structure of your business is important. Will you set your business up as a company or as a partnership? In a partnership, each partner is “jointly and severally” liable for any debts incurred by the partnership which means you are liable not just for your share, but all the business debts. Using a company structure instead would limit your liability but the trade off is that companies are more expensive to set up and more onerous to maintain administratively. Make sure you understand the pros and cons of each structure to determine which suits you best. Seek professional advice if necessary.
#2 – Consider the value of your respective contribution
A partnership is often formed because partners bring different skills into a business. How these skills are valued can be tricky but should be considered. Resentments can arise later when one party feels the other isn’t pulling his or her weight. From a practical point of view, the nature of certain skills may mean that one person contributes more physical hours to a business. Is this reasonable? Is this understood by and acceptable to all parties? How will any imbalance be dealt with? Discuss what each partner’s expectations of the other are.
#3 – Have guidelines for management disagreements
Everything may work smoothly at the beginning. There is agreement, values and visions that align, but it would be prudent to assume that this will not last indefinitely. Eventually something will crop up. This could be anything from day to day issues to the future direction of the business. Consider these possibilities at the start. It’s a lot easier to manage disagreements if you have some guidelines in place. How often will you discuss strategic issues? How should difficult issues be raised? What happens when you disagree?
This is a classic “too hard basket” item that gets swept under the carpet, but it is also one that has potential to derail everything so ignore at your own risk.
#4 – Clarify your exit strategy
What happens if one partner wants to leave or retire? Set out terms that govern this scenario and look at it from both sides i.e. assuming you are the one that wants to leave, or you are the one that is staying. Would you be comfortable with the terms in either scenario?
Part of your business planning process should include dealing with the issues raised here as well as considering others that may be unique to your partnership. If for example, your partner is also your spouse, or a family member, there may be even more to discuss and consider. Ensure everything is documented. There is nothing worse than fuzzy memory when something goes wrong.
If you have been in a business partnership and have encountered issues not covered in this post, please do share them in the comments!
- WARNING: Read This BEFORE You Get Into That Business Partnership! (bizsetup.wordpress.com)