I meet and work with about 200 entrepreneurs a year who are interested in starting a small business. Every time I have a meeting with two or more people involved in the same venture, they always say the same thing:
“Jane and I are staring a XYZ Shop on the north side of town. I have the funds for the down payment and she has the skills and expertise. We are going to split the profits 50/50.”
To this I typically offer the following rules of a partnership:
- Never split the ownership of a business into equal shares. Why? Because nobody has veto power. When you have an equal number of owners (2, 4, 6, etc) votes for important decisions regarding the business can become deadlocked and business that can’t make decisions die quickly.
- There are extraordinarily few cases where 50/50 would be an appropriate split. If you are going to partner with someone do the following exercise. Take a clean sheet of paper and draw a line down the middle. Then write you name on the top of one side and your partners name on the other. Under your names write all of the things tangible (money, equipment, etc) and intangible (skills, technology, etc) that you bring to the business. 99% of the time you will find that one person has a list a mile long and the other is “riding on the cart while the other is pushing”. Use this list to promote discussion about what the appropriate ownership split should be.
- If you still decide to partner with this person you both have to sit down and discuss expectations. Conflict in a business partnership arises because you expectations and your partners differ. By discussing before hand the vast realm of possible situations you can set your expectations at the same level and write them down on paper.
- Which brings up to an operating agreement (or partnership agreement) or the rules that the partners must live by. At a minimum this agreement should address what each persons investment is, hours of work expected each week, salaries (if a corporation), share of profits, what happens if one partner wants to sell or quit or dies, and the size of financial obligation one partner can take on in the businesses name without the others signature (referred to as Agency Law).
As you can tell these are big issues. Partners who don’t have a serious discussion and implement an agreement eventually fail. A business partnership is a lot like a marriage or having you best friend as a roommate. Initially, everything is rosy and you both agree on everything…then the minute details of life (or in this case business) rear their ugly head. Prepare for that eventuality and set your expectations out on paper so that you can go back to it when disagreements arise. As they say “The most faded ink is better then the best memory”.