I AM NOT A FAN of most partnerships. You can prove me wrong by reminding me of Hewlett and Packard, the great electronics combination, which has prospered far beyond the dreams of the founding geniuses.
Sears and Roebuck did not have a real partnership. Sears was the dynamic salesman who sold the watches and Roebuck was the watch repairman who cleaned up the mess that cheap products tend to create.
To put it another way, Sears led the circus parade, riding the steam calliope, while Roebuck was the man with the shovel and broom who followed the parade. Putting Roebuck’s name over the door was cheaper than hiring a full-time watch repairman.
There are parallels in our industry. Instead of hiring your first great mechanic, you make him a partner.
I am not saying you cannot form an exciting and successful partnership, but I believe you should approach this business model with the same caution you would use approaching a rabid skunk. Good partnerships are formed in an attorney’s office and bad ones are formed in a saloon. This quite frequently happens on the night both partners are fired or laid off.
What little planning there might have been was misted by the alcoholic haze of the new partners and probably was guided by that famous partnership slogan, “Misery loves company.” Partnerships formed by adverse circumstances usually go downhill from there.
Marriages may be made in heaven, but partnerships are not. Both benefit from carefully worded prenuptial agreements. In the case of a partnership, that prenuptial agreement is called a partnership agreement, but the purpose is similar.
It is easy to get married, it is easy to start a partnership. Both are equally difficult to dissolve if there is not an agreement in place defining how they will evolve, how they will operate and how they will end if the partners fall out of love.
Despite my nay saying, you can improve the odds that your partnership will succeed. At the start of the partnership you need an attorney who has experience in forming partnerships for small contractors or small service businesses.
Fundamentally, it is important that you define who will be putting what assets into the business in terms of cash, shared tools and equipment, and the division of responsibilities and energies.
Second, it is important that it be understood how the hours of effort and the day-to-day decisions will be divided so that there is an immediate level of comfort in the decisions of both partners and the manner in which compensation will be drawn.
If you are thrilled at the thought that your partner may someday drive up in a new truck and announce, “I just bought me a new company truck for the business,” then I think you are about to enter a partnership that has high possibility for success.
Finally, it is important that you define at the beginning how the partnership will terminate when one partner falls out of love with the arrangement. The most common way to terminate a partnership is to exercise a buy-sell agreement.
Partner “A” will declare he is fed up with the relationship and he wants to end the partnership. This doesn’t mean that the individuals involved do not like each other, although this quite frequently happens. It may be that the two families involved do not fit or that the partners can’t agree on a reasonable arrangement for splitting up the work and rewards or profits and losses.
This end of the trail buy-sell agreement should clearly define the rules of disengagement. The alternatives are few. The corporation has been a failure and the division is not of wealth but a division of remaining assets, debt and unfinished work. How will the company be sold? At public auction? Through the action of a bankruptcy court? By selling the company to one of the partners? By selling the company to a third party? All these alternatives, and more, are possible.
Quite frequently the most important legal element of the partnership startup is to clearly define the buy-sell agreement.
For example, if Partner “A” declares that he would like to terminate the partnership, then Partner “B” names the selling price. Partner A, who has declared he would like to terminate the partnership, has the option upon hearing the selling price given by “B” to either buy the dissolving company for that price or to sell it to “B” at his named price.
It becomes important that the partner setting the selling price works hard to set a fair termination value, because he may end up having to buy for that price rather than to sell for that price.
We practiced a form of this buy-sell in our home. The rules for splitting the last piece of dessert had one son making the cut and the other getting first choice of the pieces.
At the end of the romance, it is important that you have good professional advisers who understand the rules of buy-sell so that the contract can be terminated and the participants at least remain on speaking terms.
One final thought. In an unsatisfactory partnership the true business control deteriorates into management by negatives. The “no” vote always controls and stops progress.
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