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Five Critical Things to Think About When Forming a Partnership

On Behalf of | Jul 20, 2017 | Business Management, Partnerships

We work with a lot of business owners on setting up business partnerships, establishing them, and making sure they function correctly. We are helping them by trying to align the partners, to make sure the economic interest works, and to maximize everyone’s wealth and value creation.
What are some things you need to think about in creating a partnership? What are the pitfalls? What are you on the lookout for when you are negotiating and setting up your partnership? What are the things that you must cover to make sure that you don’t end up in litigation or in an unexpected place?

#1 How do you exit a partnership? Once you are in, how do you get out? Have you worked out an exit plan? We often talk about the fact that partnerships go in unexpected directions, and it is hard to predict all the twists and turns that a partnership could go through. How do you deal with the fact that life is going to change, and that, in the future, some partners may want to leave the agreement? Have effective procedures for changing the lineup of partners and owners, whether those changes are coming from death, disability, divorce, disagreement, or inevitable life changes.

#2 Expectations may be different. Individual partners may want different things, and one thing we often find is that there are hidden expectations and ideas. Their unspoken thoughts are different. People are coming in from unique perspectives, and because of that, may have different perceptions. We must deal with that up front by planning ahead: Talking, discussing, writing out plans, and making sure that everybody has the same goals. Going into a partnership without considering everyone’s expectations can lead to real trouble.

#3 How are you compensated? How do you pay partners for the work they have completed? To avoid problems down the road, this must be discussed upfront, especially if there are differential inputs. Is one person putting in more capital? Is one person putting in more hours? Will those hours and capital require exchange over time? How do you make an effective compensation system that is fair to everyone? Disputes can happen when partners feel that they are not being properly compensated.

#4 Liquidity. How are you making sure that people can get in and out of the partnership? We talked about the fact that people are going to change and possibly leave, but how do you make sure that they get paid when they do? Often, a partnership interest in a privately-held company is not very valuable, because there is no market for it. Come up with ways to fairly treat your exiting or changing partners. Have liquidity systems in place.

#5 Changing rules. What if things evolve? How do you change the rules of a partnership or how it works? How do we determine how compensation systems work? We need to have flexibility in the partnership, but we also need to have ways of changing and evolving that are fair to all. It is necessary to have some kind of voting system or another way of making sure that change happens smoothly and correctly.

What has been your experience with partnerships? What problems have you seen? What are you trying to avoid? Join the discussion and share in the comments below.

This posting is intended to be a tool to familiarize readers with some of the issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity. Bas van de Wiel.

About the Author

Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call 407-517-0064.

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