Starting out any business with a friend sounds like a good idea.
You are both full of enthusiasm at the start. It is great to have company along the hard, difficult road to the launch and running of the business.
However all too often the potential pitfalls are overlooked regarding the issues that can arise with the running of the business in a partnership.
- How will profits be distributed?
- Who will be responsible for regulatory matters such as filing the accounts and tax returns?
- How will efforts be rewarded especially if there is a disproportionate mix between partners?
- What happens if someone wants time off?
- How will the business be valued if someone wants to exit?
- What if a partner does something wrong e.g. incur debts on behalf of the business?
These are just a few of the issues which need to be considered at the outset.
Over the years I’ve heard from many people who started a business with a friend or relation only to find things going wrong. Here’s some examples of what they’ve said ….
“What are my rights as a 50% shareholder?”
“My Ex Business Partner has walked off with all of the funds.”
“My business partner has claimed for wages of staff that do not exist.”
Assuming that issues will resolve themselves is a dangerous game to play in business. All too often little thought is given to all the things that could go wrong; when they do go wrong it is far too late as by then you and your business partner may be in dispute and maybe not even talking making a resolution of the conflict all the more difficult.
Having an agreement up front would at least give you some basis for saying “well this is what we intended to happen in these circumstances” which is a far better starting point to debate issues.
Whatever the size and structure of the business e.g. partnership or limited company, it is essential to sit down before you start and set out in writing a partnership or shareholder agreement detailing your intention. Doing this doesn’t have to cost a fortune; there are many checklists and sample agreements available on the internet which would give you a good solid starting point for a partnership or shareholder agreement. Such an agreement should clearly set out how the business relationship will operate, the rights & responsibilities of each party, what would happen in case of a dispute, how the relationship can be terminated etc. Once you have a draft agreement it’s best to have this looked at by a solicitor to make sure that nothing is overlooked. The signing of the document can then be witnessed and the document can sit in the filing cabinet never to be referred to although you’ll be glad it is there if you do need to dig it out at any time!
Being in business isn’t just about dealing with all of the interesting things that need to happen; the doom and gloom of dispute resolution needs to be raised at a time when the disputes are just a figment of the imagination.