Home Community Here’s How to Protect Yourself (and Your Business) From A Partnership Gone Awry

Here’s How to Protect Yourself (and Your Business) From A Partnership Gone Awry

by Muriel Vega

You’ve found your business soulmate — you’re ready to say “I do” and grow a company together. Growing a healthy long-term partnership requires trust, parallel visions and compatibility. While it may be all sunshine and rainbows at the beginning, you still need to prepare for the unexpected and place safeguards for you (and your partner) within an agreement before officially getting started.

Kim Bennett, JD, founder of virtual legal firm K Bennett Law, explains why you need to think twice about what legal entity you form with a partner, the safeguards that should be in place just in case the partnership goes sour, and the importance of knowing your own exit strategy.

“If people are very clear and communicate thoroughly with each other about how they plan to exit this business, you will have a better idea of one, how to structure your business, and two, how to deal when and if a potential conflict arises,” says Bennett.

It’s like a marriage — date your partner first

Before you decide to go into business together, get to know each other’s communication style and work ethic. Bennett says that a business partnership is like a marriage. Spend time getting to know your future business partner and then, when you’re ready, solidify that new relationship with a formal partnership agreement detailing the terms and conditions of the new business.

“While no one likes to think of the end, if you start with the end and you work your way back it really helps strategize your business and develop a solid partnership,” says Bennett.

She suggests doing background research on your future partner to avoid going in blind. What does their career past look like? Have they owned multiple businesses? Were those businesses successful (or not)? Did they partner with other people? If so, try to get references.

Pick the right legal entity

When you’re working with new founders, or even veterans with a few companies behind them, many often don’t think through potential issues that may arise that could end the partnership, says Bennett. If the partnership is not set up properly, when one partner chooses to exit it could mean the end of the whole company. For two or more individuals or entities forming a business together, the business may be formed as a partnership, limited liability company, or a corporation.

“Business owners should structure and form a business based on the business and partnership model, strategy and goals,” says Bennett. “Is it a short-term partnership? Maybe you want to consider a short-term business structure, like a joint venture. Do you plan to seek outside funding? What type of funding are you interested in raising? These are just a few of the questions that need to be addressed and included in a solid partnership agreement. As you answer key questions about your business’ model, strategy and goals, you will be able to choose the best entity for your new business. ”

Know your exit strategy

Keep in mind where you want the business to go and ensure that those long-term goals match your business partner’s. “If you know how you’re planning to exit the business (for example, passing the business to your family members or selling to a larger company), you will want to include terms in the agreement that reflect those goals and align with that exit strategy,” says Bennett.

It’s important to talk about these safeguards at the beginning of the partnerships since, when a dispute arises, it may be impossible to amend your current agreement.

Add withdrawal terms

“Think through every single thing that went awry in your last business relationship and plan for it in your next one,” says Bennett. “Once a partnership has gone awry and there are no terms to deal with disputes in the agreement, it might be really hard to figure out a way to reconcile with your partner.”

In the event that the partnership has grown sour and one of the parties is looking to exit, it’s important to have terms in the agreement that spell out how the parties will go their separate ways and whether the business will continue to operate.

Use a professional

When putting the agreement together, you want to make sure the terms are beneficial for all parties involved. “You want it to be fair. You want it to be mutual. When you’re dealing with two businesses doing deals, sometimes those terms aren’t mutual, but in a partnership, when there are two or more individuals working together to grow a business, it may need to be equitable,” says Bennett.

Form contracts won’t cover all of the details and safeguards needed to protect both parties, account for the unexpected, and set the company up for success. That’s why hiring a lawyer or field expert can be beneficial as they have seen it all and will know about provisions you may not think about.

Prepare for everything, but with an open mind

“You’re not going to be able to plan for everything,” says Bennett. “In the event of business or partner disputes, having well-drafted dispute resolution terms in your partnership agreement will be key. Having those terms  thoughtfully spelled out in your agreement will provide the framework to resolve issues when they inevitably arise.”

“Conflicts are going to arise,” says Bennett. “That’s just business. However, you can mitigate the impact those conflicts may have to the operation and ultimate success of your business by including and using the well drafted dispute resolution terms in your partnership agreement.”

If a dispute does arise, bring in a third party

If you don’t have a dispute resolution terms in your partnership agreement,“Consider bringing in a third party like an attorney, or a third-party arbitrator/mediator to help resolve that business dispute. You want to understand what your obligations are to the business and to the partnership, depending on how it was formed from financial obligations to legal obligations,” says Bennett.

“You may want to figure how you exit the business — and what that exit entails? What do you lose? Does the business own  intellectual property? Do any of the individual owners own intellectual property used by the business? Are you able to use the intellectual property in a future business? Are you able to operate in the same business after you have dissolved your current business? These are some of the questions that you need to think through at the point when a business relationship ends. Knowing your founders, forming the proper business entity and drafting a solid partnership agreement will guide these final decisions.”

Image via Thinkstock

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