As the saying goes “ If you fail to plan, then you plan to fail! ”
Not enough planning goes into starting a business partnership prior to its commencement.
THERE ARE TWO ESSENTIAL AGREEMENTS TO PUT IN PLACE BEFORE STARTING A BUSINESS PARTNERSHIP:
FIRSTLY, A BUSINESS PLAN COMMUNICATES OBJECTIVES, EXPECTATIONS AND OUTCOMES.
The plan usually covers all aspects of the business – the customer, suppliers, financial requirements, equipment, environment and commercial regulations. However, whilst this covers the business, what about the relationship between the partners themselves and their individual expectations of the other partners?
THE SECOND ESSENTIAL AGREEMENT IS THE PARTNERSHIP AGREEMENT.
A business partnership is no different to any other relationship – it consistently needs to be nurtured, reviewed, amended, accommodated, appreciated and acknowledged. And partnership breakdowns are no different to any other relationship breakdowns. They need to be managed effectively to minimise exposure to risk, legal and accounting costs and mental wellbeing. Good business relationships don’t happen by luck or chance. It takes an innovative, imaginative, organised, disciplined approach combined with good old fashioned hard work. Don’t assume your business is someone else’s responsibility. Take Proprietorship. If you don’t care – no one else will.
IGNORANCE OF WHAT THE OTHER PARTIES MAY BE DOING IN THE BUSINESS IS NOT AN EXCUSE.
If you are financially involved in a business and have given Guarantees, you need to be fully aware of what is happening with the day to day operation of the business. There needs to be transparency. There is no point after the event saying-
“I didn’t know what was going on.”
“I trusted my partner.”
“I thought he was doing the right thing.”
THE PARTNERSHIP AGREEMENT SHOULD SPECIFY OBLIGATIONS, DUTIES, RESPONSIBILITIES, PROFIT SHARING RATES, HOW PARTNERS WILL BE REMUNERATED AND WHO WILL ULTIMATELY BE IN CHARGE.
The Agreement should cover the following areas; death, disagreements and conflicts, (and how these conflicts should be managed), divorce, disability and succession. What happens when a partnership comes to an end or one partner wants to leave? How will partnership assets be valued? How will payment be made and over what time period?
HAVE REGULAR, OPEN AND FORTHRIGHT MEETINGS ON HOW THE BUSINESS IS PROGRESSING.
All partners should be aware of the financial position of the Business, especially in today’s environment of Cloud Accounting. By the time you get your last year’s financial statements from your Accountant, perhaps well after the end of the financial year, it may be too late!
BUSINESS WILL EVOLVE AND CHANGE
Whether it is the father and son on the family farm or two friends in an engineering business, there is usually implied understanding of what’s going to happen, but very little formal communication of how the business might transition and evolve over time. You need to be flexible enough to move with the times but there should be an agreement in place which covers each partner’s expectations. The courts are littered with examples of where people have taken their parents, siblings, children or friends to court to claim their rightful dues.
A knowledge and understanding of what each party bring to the business relationship is paramount. Are your values the same, do they have the same work ethic? Ensure everyone is accountable? Do they have integrity? Do you trust them?
Ensure ownership of the business and its assets are owned in the most appropriate structure to protect them from external creditors. Protect your private assets from exposure to the business where possible. Be aware you are liable for all partnership agreements, known and unknown.
IT’S NOT POSSIBLE TO ELIMINATE ALL ISSUES ASSOCIATED WITH A PARTNERSHIP BUT WITH OPEN EYES AND CAREFUL PLANNING THE REWARDS CAN BE VERY FRUITFUL AND ANY NECESSARY PARTING SHOULD NOT BE BITTER, PROTRACTED OR COSTLY.
Remember – Today is not too late to put the right Partnership Agreement in place.
Please get in touch for any questions you may have regarding partnership agreements or starting your own business – our experts will be happy to assist you!
Jim Adamson, Principal – RSM Australia