Thinking about partnership? Don’t rely on a wink and a nod. By nutting out the details, you may save yourself a fortune.
You’ve been mates for years, you work together like a dream and you’re looking to expand, hence kicking around the idea of a partnership. Theoretically, the venture should go swimmingly, but unless you go into it with your eyes open, having asked all of the relevant questions upfront and documented things properly, you may be on a hiding to none.
Two experts in the field give us their top tips for avoiding partnership pitfalls.
HAVE A FORMAL PARTNERSHIP AGREEMENT
This one almost goes without saying. However, under Australian partnership legislation, there’s no requirement for partners to have a partnership agreement, which is fi ne, provided the relationship goes smoothly. But what happens if it doesn’t?
“If you prepare for the worst, you can achieve the best,” says Ian Dixon, legal practitioner director of Ai Group Workplace Lawyers. “It’s a commercial marriage and wise people prepare for the separation. There’s always happiness at the start, but if you go in blind it will lead to bitterness at the end.”
Trent Taylor, corporate and commercial partner at Holding Redlich agrees. “Hopefully a partnership agreement is something you’d put in the bottom drawer because, typically, you don’t look at these documents unless you’re in dispute,” he says. “But it’s important to document a partnership agreement and talk about all of the issues at the beginning, because it really is almost like a prenup.
“You’re going into serious relationship with these people. In a marriage, you might talk about whether you’re going to have kids and send them to a certain school, whether you’re going to travel and your goals. By documenting any partnership agreement, it forces you to ask the big questions from the outset. It’ll mean less inconvenient surprises once you’re in business together.”
WHAT YOU’RE PUTTING IN AND WHAT YOU’RE GETTING OUT
Frequently, people go into partnership assuming a 50/50 split, but don’t automatically assume that’s the best approach. A closer assessment of everyone’s input and output is warranted.
“That’s the simple model, but it doesn’t always work out,” Dixon notes. “One partner might put in more capital, another might put in harder yards, while someone else is silent. So, how does income get split? How is income even paid? Will you get a salary each week and divide the profit according to contribution?”
From Taylor’s perspective, in one way or another, money is almost always the sticking point. “You’ll have disputes because you’re making too much money or you’re not making any. If you’re making too much, you’re fighting over share. If you’re not making any, you’re fighting over somebody not pulling their weight. How do you manage that situation? Is there a minimum number of hours you’re meant to commit to the business, a minimum number of introductions or new work you’re meant to contribute?”
Which brings us to the next potential problem in a partnership…
WHAT HAPPENS WHEN YOU FALL OUT?
While we’d love to think that every business venture will be smooth sailing, disputes occur. While some will be relatively minor and allow you to get on with business, others will be of such a magnitude that you’ll need to pull the pin. In which case, your partnership agreement should account for such a contingency.
“Everyone will tell you, ‘No, we’ll talk it out’, and that happens for the first year, but after that you better have a mechanism,” Dixon says. “It could be anything from tossing a coin, to having an independent third party—a wise owl who’ll break deadlocks.” “Maybe someone gets the right of veto or a casting vote,” Taylor adds.
SOME DOS AND DON’TS
Do your due diligence on your prospective partner Don’t rely on the fact that you get on. Do some appropriate digging before jumping into partnership, making certain you trust each other.
“For instance, if one of your partners is a gambler, they might use partnership assets and you might be personally liable,” Taylor warns. “So, there’s a high degree of trust that you need to have with your partners.”
SET ASIDE TIME TO TALK BUSINESS
If you’re working side by side, it might seem like overkill to schedule regular business meetings with your partners, but it’ll be time well spent. “Oh, you must meet regularly,” Dixon urges. “At least monthly, with a full report of the business. There are numerous reasons for that, including that no-one can ever say they didn’t know. Everyone takes full responsibility, and you can see how things are trending—no-one gets to play the blame game.”
Remember to protect your assets One of the most important things for partners to remember is that they’re all jointly liable for partnership debts. “It means that if a partnership is entered into between individuals, and those individuals own assets like a house, vehicles or equipment in their name, then those assets could be at risk if the partnership fails and isn’t able to meet its debts,” Taylor explains.
“Try and keep the assets you don’t want to lose separate. Mortgage the beach house or the boat, but don’t use the family home,” Dixon suggests.
MAKE SURE THE AGREEMENT IS PROPERLY DRAFTED
No-one loves going to a lawyer, but money spent upfront can save a mint later on. However, on that front, care needs to be taken even when you do document the partnership.
“I’ve seen some clients have great success without documents, and they’ve traded for many years and never had a problem. Then, I’ve seen other people over-document things and get burned, because of the way the documents were drafted. Recently, I became aware of a conflict where a partner was able to create a dispute and then force the other partners to buy them out. It costs them hundreds of thousands and there was no restraint of trade. He could take their money and set up a new business in competition, and I’m pretty sure that’s the way he planned it.