Business Marriage Counselling - Getting along with your Partners

Being in business with other people is a lot like a marriage. It can be wonderful for all concerned, but it can also be a disaster. Disasters can occur because the people are incompatible, or have different expectations. Financial pressures often bring out the worst elements in partners. However, nobody want to talk about the possibility of divorce before the wedding.

A successful business, like a successful marriage, is more likely if the players go in with their eyes wide open: they know what they want, and how they want to get there. If they can settle the basic elements of the relationship up front, they don't have to fight about them later. This should be set out in a comprehensive agreement.

Every business is different, but there are a lot of common concerns. Listed below are a few of the points to consider. Although the word "partners" is used, these points also apply to shareholders in a small corporation.

Goals. Make sure the partners share common goals. If one partner wants to take out the profits as soon as they are earned, and the others want to reinvest them in the business, there will be trouble. A partnership agreement can be used to set out in advance what will be done with profits, so there is no misunderstanding.

Who owns how much? Make it clear how much of the business each of the partners owns. Are the partners equal? If not, what's the split? The division of ownership of the business does not have be the same as the division of profits.

What do the partners have to contribute? A business usually needs some money to get started. How much do the partners have to pay to get in? Is this money that stays in the pot, or is it a loan to the business, to be repaid as soon as possible? This point can be crucial where the partners make unequal contributions. Some businesses operate with a combination of active partners, who operate the business, and silent partners, who put up the money but don't get involved day to day. Consider when the money gets paid back, and whether the shares of profit are the same after payback as before.

How are partners paid, and for what? There are generally three things kinds of things that business people bring to a business, and they get rewarded in different ways. Recognize and reward different kinds of contribution appropriately:

Capital. Businesses need money. A partner who brings money in wants a return on his investment. The higher the risk, the more he wants to be paid and he'll want a lot more than a safe investment in government bonds would net him. This kind of partner will want interest on his money, the eventual return of his money, and a piece of the action (equity ownership) on top. Partners investing other assets (e.g. equipment, patents, etc.) should have their investments valued as capital as well, and rewarded in the same way.

Time. Businesses need people to operate them. Some of the partners will be putting in time and expertise, and their contributions may not be equal. Some may put in more time up front, and others more later on. Working partners should have the time they spend valued, even if the business can't pay salaries in the early days. The hours worked should be "banked" and taken into consideration later on. Consider setting a nominal hourly or weekly rate for working partners, as compensation for their time.

Risk. Business owners often have to incur significant personal liabilities to get their businesses started. In an unincorporated business, the partners are personally responsible for all of the debts of the business. If the business is incorporated, there can still be personal liability required, for bank guarantees, lease guarantees, and the liability of directors for unpaid wages, source deductions, and unpaid sales taxes. This risk should be rewarded, especially if it is shared unequally. For example, a wealthy partner may have to put his house up as security for bank loans. Risk is ultimately rewarded by a share of the profits. It can also be rewarded by the payment of a guarantee fee, which could be a monthly payment of a percentage of the amount of money at risk.

Taking all of these factors into account will allow the profits to be divided equitably, even though the contributions of the partners change over time. If a straight percentage of profits is agreed to at the beginning, chances are some of the partners will resent this later, when the relative contributions to the business change.

Who gets paid when? The order of payment of profits has to be considered. For example, profits will normally have to be applied first to pay for the owners' wages (so they can eat), then to pay interest and retire the principal on loans from partners. Only after that are the ultimate profits divided between the partners. Decide (or set up a procedure for deciding) when the profits get paid, and in what order.

What if the business goes under? There should be agreement on how losses are shared. In a partnership, losses are shared equally unless the parties agree otherwise. In a corporation, you lose what you invest, but not more unless you agree otherwise. Mutual indemnity clauses should be built in, so that after the dust settles, the losses get divided fairly.

Employment The employment of partners in the business should be covered. Otherwise, a minority partner could get frozen out. Consider setting maximum and minimum salaries, so that a partner is assured of being employed, and so that the majority partners can't scoop out the profits by paying themselves excessive salaries.

Death on Disability of a partner If a partner dies, his estate will want to be bought out. If he was a working partner, the surviving partners may want to bring in a new partner. Agree in advance about how to value his share in the business, and on the terms of purchase. Life insurance can be used to provide the necessary cash, but this has to be carefully structured for maximum tax effectiveness.

Disability is another matter, and is more expensive to insure. The other partners don't want to have to keep paying a salary to a disabled partner if he isn't contributing, especially if they have to hire someone new to do his job. The disabled partner still needs income, and needs his investment back. Get some disability insurance if possible, and make sure that the buy out is over a long enough period that the payments won't bankrupt the business, or the other partners.

Corporate divorce. For a lot of reasons, partners may need to go their own ways. How this is done should be agreed in advance. There is an almost infinite variety of options:

- Some agreements allow partners to sell to third parties.

- Some require a right of first refusal before sale.

- Some require the third party to offer to buy everyone out.

- Some allow the selling party to name a price, and the others decide whether to buy or sell at that price.

- Some set the price at a multiple of sales or profits

- Some require an appraiser to set the price.

In every case, the agreement should set out how the price is determined, and how it is to be paid. It is often impossible to come up with an all cash deal, so the agreement should call for payment over time. The most important thing is to have some enforceable clause to deal with buy/sell rights. Just having a clause in the agreement is usually sufficient to bring the parties to the table to work out a deal, and the actual clause in the agreement rarely gets used.

A good partnership agreement takes some time, and some expense, to work out. However, it forces the partners to look at the essential points of their relationship at the beginning. If they can't work out an agreement that satisfies all parties at the start, they certainly won't be able to when things go sour. Working it out in advance can save a lot of time and trouble down the road, and it makes an unhappy "marriage" much less likely.

These articles are provided as general information only, and should not be considered to be legal advice. For advice on a specific situation, please see one of our lawyers.