Starting any business with a friend sounds like a good idea.
You’re both full of enthusiasm at the start. It’s great to have company along the hard, difficult road to the launch and running of the business.
However all too often the potential pitfalls that can arise in a partnership are overlooked in the keenness to get started.
What should you consider
Before you launch into your new joint venture it is worth having discussions around the following areas:
- How will profits be distributed?
- How will efforts be rewarded especially if there is a disproportionate work mix between partners?
- How will the business be valued if someone wants to exit?
- What happens if someone wants time off?
- What if a partner does something wrong e.g. incur debts on behalf of the business?
- Who will be responsible for regulatory matters such as filing the accounts and tax returns?
These are just a few, but not all, of the issues that need to be considered at the outset.
What has gone wrong
Over the years we’ve heard from many people who started a business with a friend or relation only to find things going wrong.
Here’s some examples of what they’ve said ….
- “What are my rights as a 50% shareholder?”
- “My Ex Business Partner has walked off with all of the funds.”
- “My business partner has claimed for wages of staff that do not exist.”
- “I want to leave the business but my business partner won’t agree to me going.”
Plan for the worse and hope for the best
Assuming that issues will resolve themselves is a dangerous game to play in business. If things do go wrong it is far too late as by then you and your business partner may be in dispute and not even talking making a resolution of the conflict all the more difficult.
Having an agreement up front would at least give you some basis for saying “well this is what we intended to happen in these circumstances” which is a far better starting point to debate any issues which may arise.
Partnership or Shareholder Agreement
Whatever the size and structure of the business e.g. partnership or limited company, it is essential to sit down before you start and set out in writing an agreement detailing your intention. Doing this doesn’t have to cost a fortune; there are many checklists and sample agreements available on the internet which would give you a good solid starting point for such an agreement.
The agreement should clearly set out how the business relationship will operate, the rights & responsibilities of each party, what would happen in case of a dispute, how the relationship can be terminated etc.
Once you have a draft agreement it’s best to have this looked at by a solicitor to make sure that nothing is overlooked. The signing of the document can then be witnessed and the document can sit in the filing cabinet never to be referred to although you’ll be glad it is there if you do need to dig it out at any time!
Being in business isn’t just about dealing with the interesting things that need to happen; the doom and gloom of dispute resolution needs to be raised at a time when the disputes are just a figment of the imagination.