Oh dear, it’s the end of a beautiful partnership: Angelina Jolie and Brad Pitt have filed for divorce. If “Brangelina” can break up, what hope is there for you if you have a partner in your small business? While the two stars may go through a nasty divorce, you definitely want to avoid a gruesome split in the event you and your business partner go separate ways.
After all, Brad and Angelina seemed like a perfect fit, just like you and your small business partner. They shared the same values and goals, worked as a team, built a thriving enterprise (their family and their charitable works). What happened?
Well, we may never know what soured Brad and Angelina’s seemingly perfect collaboration, but apparently they were smart enough to take a step to avoid a problem many small business partners forget. They developed a prenuptial agreement.
You, too, should have a type of “pre-nuptial” agreement if you take on a business partner. You need a buy-sell agreement and a written partnership arrangement.
After all, honeymoons don’t last with business partners as well as with romantic partners. Sure, it’s all rosy at the beginning of a business partnership, when you think you’re going to balance each other’s strengths and weaknesses, both put in equal amounts of time and money, and each contribute the same amount to the success and operations of the business.
But the ups and downs of running a business place real stresses and strains on virtually every working partnership. After a few years, it’s likely that one or both of you will change your goals, time commitment, have differing family demands, or just not deliver on the other’s expectations. It’s typical that each partner views their contribution as significantly more important than the other’s.
I can imagine some of your complaints:
“You don’t do the accounting any more. You leave your paperwork all over the place. I find notes from customers you haven’t told me about. You’re too demanding. You’re not responsive. When’s the last time you brought me a new customer? And not to be personal, but your performance in the board room isn’t exciting me anymore.”
If you intend to go into business with other people, even a spouse or a friend, you need to protect yourself and each other with a written partnership agreement. If you’ve already begun working with a partner, you still need to do this. If one partner doesn’t want an agreement – “I like to do business with a handshake only” – that’s a red flag. The process of writing up and agreeing to the terms of your relationship is, of itself, an important exercise in understanding your working and legal partnership. Don’t think you’re too busy to do this. It’s critical for the future of your business.
The best way to take on a partner is with clear-cut definitions of responsibilities and authority. It’s nice to believe you’ll make every decision together, but that’s not realistic. What are each person’s roles and tasks? Who, in the end, gets to call the shots? Put it in writing.
The most important partnership agreement is your “pre-nuptial” equivalent: a buy-sell agreement. A “buy-sell” agreement clearly spells out what happens, financially, if you stop working together – whether through choice, circumstance, death.
A buy-sell (or buyout) agreement details, in advance, how the company will be valued and how the departing partner, or their heirs, will be paid (for example, at once, over time, or with the proceeds of an insurance policy). A buy-sell agreement should also cover what happens if a partner becomes divorced, since part of their ownership interest could become the property of their ex-spouse. Let’s face it, even if you love your partner, you may not like your partner’s spouse enough to want to go into business with them.
It’s highly advisable to put a buy-sell agreement in place as soon as a partnership is formed. It’s more difficult to discuss these issues once personal situations arise. And it’s likely to be more fair to both parties if the terms are decided upon when it’s not clear who’s likely to leave or want out.
Remember, a messy “divorce” from a business partner is as difficult as a messy marital divorce—even Brad and Angelina’s.
Copyright, Rhonda Abrams, 2016
This article originally ran in USA Today on September 28, 2016