[dropcap]T[/dropcap]here are many reasons why you may choose to open a business with a partner. There’s obviously the financial convenience of splitting startup costs, but a business partner may also bring industry knowledge, connections, and support. However, it’s not a decision to take lightly. The internet is full of cautionary tales regarding people with fake identities and scam artists. Before entering any contractual relationship, you need to take some steps to protect yourself.
Due diligence
What do you really know about your prospective business partner? Remember that, as an individual partner, you are responsible for the Even if you are close friends, due diligence should not be overlooked. Things like outstanding debt or a history of litigations can ruin your dreams of a successful business. Checkpeople.com offers you the possibility of running a fast and cheap background check. Depending on the results you get, you may choose to move forward with deeper screening (such as a credit report, which needs to be conducted by a licensed Credit Reporting Agency and for which you’ll need your potential partner’s written consent).
The due diligence process also contemplates reviewing all the legal documents needed to establish the reliability and legitimacy of the partnership. These include:
- Business name and address
- Stock information: number of shares, share designation and share value
- Business objectives
- Business structure: define how you will incorporate and why.
- A comprehensive business plan that includes funding sources,
According to The Partnership Initiative, these are the most important points to consider before entering a partnership:
- There’s a need to approach the business from a partnership perspective (for example, you lack sufficient time or money to proceed on your own).
- The potential partner adds value and impact
- You have sufficient financial resources
- There’s enough internal capacity to carry out the project
- You have assessed the risks and repercussions
Sign a Partnership Agreement
If your partner is also your friend or family member, it may feel uncomfortable to ask for a signed agreement, but it’s the best way to protect your business and your relationship. Unclear expectations are one of the most common reasons why partnerships fail. In the agreement, detail an exit strategy for both parties. Also, make sure that it shields you from your partner’s debt. Some other things to include are:
- A clear definition of roles and responsibilities: create thorough job descriptions as if you were hiring employees. Establish things such as schedules, paid time off, compensation, and expected outcomes.
- Each partner’s contribution to the business: how much is each of you contributing? How does this affect the businesses share distribution?
- Determine how decisions will be made, especially if there is no consensus. A good idea is to include a third person whose opinion helps untie a difficult argument. Clearly define who is able to who can incur debt on behalf of the business.
- Dispute resolution strategies: litigation is costly and time-consuming, so define alternative dispute resolution methods that make you both feel comfortable (such as mediation or arbitration).
While the most important purpose of a partnership agreement is to clarify expectations, it is also legally binding. Ask an attorney to check your agreement and make suggestions if you have doubts.
Have a Clearly Defined Exit Strategy
An exit strategy covers what happens if one of the partners is no longer able or willing to continue with the venture. For example, it defines what happens with your shared assets if one of you dies or becomes physically or mentally disabled. It covers other life events that can impact the partnership, such as a divorce in which your partner’s assets may change hands to an angry ex-spouse. It helps you define what happens if you are no longer comfortable working together, or if one of you wants to resign for personal reasons. Your exit strategy also defines how the profits are split in case you decide to sell the business. Hiring an attorney or tax professional to help you with this step is highly recommended, as there are several legal and financial issues to consider.
Choose the Best Insurance Coverage
Insurance is the best tool for risk mitigation. A good insurance policy provides coverage for unexpected situations that can put your business in serious danger. For example, regardless of the terms defined in your exit strategy, it can be really helpful if a partner dies or is permanently disabled. To learn more about choosing the best insurance policy, visit this website.
Opening a business is both challenging and exciting, and doing it with a trusted partner can help you succeed faster. But it is a sensitive decision that requires time.
