Starting an independent business is fraught with uncertainty and risks. As an entrepreneur, you have many things to think about such as day-to-day operations, hiring employees, and how to finance your new venture. Even though you may be familiar with your chosen industry, you may not want to go it alone. That’s why many people choose to go into business with a partner to not only help run the business but to also bring in expertise that will make running the operation easier. Even so, running a company as a partnership is still fraught with perils. Here are five points for which you should be prepared.
A prime reason for going into partnership is to share the duties of running a business. No matter how well the relationship works at first, you should always be prepared for what could happen if one or more of your partners leave the company. Sometimes the cause is unforeseen, such as a change in a family situation whereas at other times, your partner just seems to lose interest. You must remember to be prepared for the legal aspects of having one fewer partner or of replacing one partner with another. According to The Watson Firm, “a written exit strategy must be agreed upon by all partners. Unless it is in writing, if one business partner wants to leave the company, the business may be forced to immediately dissolve.” Make sure that exit strategies are spelled out in your initial partnership agreement.
As with employees, one of your partners could become disabled due to injury or illness. While you may have to find someone else to fill your disabled partner’s shoes, you should also plan for a source of income for him or her. You have a couple of options. One is a disability insurance policy that will augment any disability payments that your partner may receive from the social security administration. Another option is including a provision in your initial buy/sell agreement that will provide for a partner to be justly compensated in the event of a disability.
Drug addiction can happen to anyone, including business partners. According to The Recovery Village, “the opioid epidemic has taken the United States by storm, and many people are dying from overdose every day with a high number related to heroin abuse.” If you know that your partner is abusing substances, try to get him or her into treatment as soon as possible. Make sure you have health insurance in place that helps pay for addiction treatment for heroin and other drugs.
Divorce not only affects your partner’s separating family, but it can also affect your operations and your bottom line. Divorce has ripple effects for you and your other partners that could result in diluted control of the business. Include a provision in your buy/sell agreement that requires the spouse of a partner to relinquish legal interest in the company in the event of a divorce. According to Kennedy Law, “if your business doesn’t have a buy-sell agreement in place that requires the former spouse of a partner to sell his or her interest in the company back to the partner spouse in the event of the divorce, a partnership of two could become a partnership of three. The former spouse of the original partner could get a voice in the operation of the business as well as a share of the value of the company.”
Ideally, if your partner passes away, there will be someone willing to step in and take over in his or her place. However, surviving spouses or children may not have the necessary experience. Include succession provisions in your initial partnership agreement to cover this issue.
Although the five deadly D’s will cause difficulty no matter what, you can mitigate the consequences through planning. Include provisions for each of the D’s in your original partnership agreement and its buy/sell provisions to make transitions smoother.