Business Insider

C. Norman Beckert: Proceed with caution in forming partnership

When a client visits with SCORE and the subject of having a partner is posed, we start by asking why the client wants a partner.

Many partnerships are hugely successful because the partners leverage the skills and experience that each of them brings to the business. Key elements of success include integrity, mutual respect and ethical behavior.

If a partner is to be a part of your business, first we insist that a partnership agreement be developed.

Next we question your need for a partnership. Does your prospective partner bring skills that you don’t have? The partner’s marketing and sales experience, say, might complement your strength in financials and operations. Might your partner have a source of funds to meet startup and operating funding?

There are alternatives to acquiring the skills a partner may offer. You might consider having the prospective partner as an employee, hiring marketing and sales help, and outsourcing accounting services. You can end a contract or terminate an employee, but you can not you cannot force an owner, such as a partner, out of the business. You must negotiate a settlement of ownership rights, if possible.

How profits are to be divided is a checklist item. So are decisions such as who will oversee sales and marketing, accounting, hiring and firing and community relations. When disagreements occur, a written agreement can provide a solution but can also become the beginning of the end.

We have seen many business situations where the partners are no longer able to work together. The partners cannot agree on strategic direction, or one of the partners wants to pursue other interests, or relocation, illness, divorce or death have occurred. Money is often the common denominator that needs to be resolved. A partnership agreement should provide the direction needed to satisfactorily dissolve the partnership.

The provisions of a partnership agreement should answer these questions:

What is each partner’s ownership position?

How will profits and losses be shared among the partners?

How will the death of a partner be handled? All partnerships end upon the death of a partner; a new partnership can be created to continue the business.

How will partners will be compensated? How will they share overhead costs?

How will conflicts between partners be resolved? Mediation? Arbitration?

What impact will a partner’s retirement have on the firm? Will the partner be paid? Might there be continuing work-related responsibilities? How will overhead costs for the retiree be handled?

Who has authority to set prices for goods or services, hire and fire, enter into contracts, withdraw funds, purchase new inventory or write off old inventory?

Since the agreement is so important, we urge our clients to have an attorney review a document the partners may have drafted or to compose a document in their behalf. It will be money well spent.