Design a partnership for profit
- Josh Mehlman
- 1 February 2010
Photo credit: Getty Images
Starting a business with a friend or family member is an exciting time. You're full of optimism, ready to take on the world and already daydreaming about what to do with all the money that starts rolling in.
Peter Cleary and three mates started up merchandising and marketing company Zinc
in 2004.
"I think it's a bit like buying a second-hand car: if you're working with people who you worked with before, you understand their strengths and weaknesses," he says. "There have been challenges with people over the years, but the benefits outweigh the problems."
This approach was very successful. Zinc now has offices in Melbourne, Sydney, London and Hangzhou, and it earned $32 million in the 2008-09 financial year. Unfortunately, it doesn't always happen that way.
Business advisor Marc Harrison started
working with a friend three years ago after they both grew sick of the corporate life.
"I got into a deal where I thought, ‘We're probably not perfect partners, but it'll be OK as long as we both do what's right for the business'," he says.
"The problem is, both partners might have very valid courses of action, but they can't agree on which one to take."
Harrison now runs a solo consulting business and has recently launched Partnership Test, which helps potential business partners find out if they are compatible.
"I want to help partners learn about each other's values and future issues that might come up," he says. "I say, ‘Let's talk about it while we're still friends'."
So what are the best ways to make sure your partnership works?
1. Choose your partners wisely
Most people choose a business partner based on complementary skills.
"Unfortunately, if you have conflicting beliefs and philosophies about business, such as how to treat staff, you will inevitably have problems," Harrison says.
"If I were going to invest in a business, I would choose two people who can work together but don't have a complete idea of what they want to do, over two partners who have a great idea but can't agree on anything."
"Work with people you trust," Cleary says.
"If you can't trust them at the beginning, it doesn't matter how good the business is - don't do it."
2. Document rights, responsibilities and job descriptions
A basic partnership agreement creates an entity for tax purposes and sets out who owns how much of it. However, this provides limited protection if things go wrong down the track.
"[The partners] really need to discuss what each partner is going to contribute to the partnership and how and when they're going to get money
out of it," Anna Kyriacou says, founder of accounting and business advisory firm AKA Group.
"It doesn't have to be a 30-page legal document; it can be a couple of pages.
"For instance, you might have one party that is well off financially while the other is creative. Often they might agree that intellectual property is worth
as much as money - it's called a sweat-to-equity ratio. As long as they document it upfront, you won't have a problem."
"We were probably a bit too informal," Cleary says.
"We had shareholders' agreements and the legal documentation, but we didn't manage expectations of what people would do. We also didn't document performance issues, what to do if people didn't meet expectations. It's very hard to discipline someone or remove them from the business if they're an equity holder."
3. Get independent advice
When drafting a partnership agreement, each partner should seek independent financial and legal advice. "Otherwise, when it comes to relying on the agreement later, a partner might be able to argue that they signed it under duress," Kyriacou says.
"You can save yourselves thousands in legal bills at the end if you pay $1500 at the beginning. When the partnership dissolves, you can walk away as friends instead of arch enemies. Otherwise, it can get just as bad as a messy divorce."
4. Be pessimistic
Partners often fail to take into account what might go wrong, until it's too late.
"Usually everyone's optimistic, they think their biggest problem will be how to split the profits," Harrison says.
"Unfortunately, small business isn't that easy and problems always come up. Partners don't spend enough time talking about what they would do if things go bad."
"Consider what will happen if the company requires further funding later on," Kyriacou says.
"They might want to cap their liability at, say $100,000.
"It's also important to have exit clauses if a partner has to leave the company due to illness or family reasons. You should pre-define how the business should be valued if it goes to a sale, and make sure that both partners have to agree to wind up the company - this way you can avoid one partner forcing the other out."
5. Keep operational, directorship and ownership roles separate
In a smaller partnership, people often fulfil multiple roles: they might have a job to do within the business, be a director of the company and also own a percentage of it. To run the company smoothly, you need to keep these roles entirely separate in your mind, Cleary says.
"When we started the company, we all agreed, it doesn't matter who owns what percentage, it means nothing on an operational level," he says.
"Once a month we have board meetings for half a day, where it becomes crucial you put your director's hat on. You have to leave your operational hat behind, which isn't easy.
"Once a year, you put your shareholder's cap on, and that's just to decide the dividends.
"You need to have a culture where you're brutally honest and you have to call each other, to turn around and say, that was inappropriate."
Appoint an advisory board
Business advisors are valuable for any company, but they are particularly useful for a two-person partnership when the owners can't agree.
"They don't need to have any liability or formal powers in the company, just a quarterly meeting where they review papers on the business," Harrison says.
"It's a discipline for managing the business. Make sure it's someone who both partners agree would be good to consult on a split vote, and if it comes down to it, ask the board and follow their advice rather than going to the lawyers." #
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