I’m Melinda Emerson and each week as Small Biz Lady (AKA @SmallBizLady), I conduct interviews with small business experts on my weekly Twitter talk show #SmallBizChat. This is excerpted from Nina Kaufman (AKA @ NinaKaufman on Twitter), an award-winning business attorney, columnist and blogger for Entrepreneur online, and author of The Entrepreneurs Prenup: How to Choose a Business Partner Who Won’t [BLEEP] You. She demystifies legal mumbo-jumbo in business partnerships so you save time, money and aggravation. Forbes named her one of the “30 Women Entrepreneurs to Follow on Twitter”. She reaches thousands of entrepreneurs with her legal services, professional speaking, information tools, and LexAppeal weekly ezine. If you are interested in knowing more about Nina, visit www.AskTheBusinessLawyer.com
SmallBizLady: What are three main reasons for starting a business with a partner?
Nina Kaufman: There are three main reasons why you’d want to bring someone else into your business. First, entrepreneurship can be a lonely ride. When you share with someone else, you get the benefit of having a cheerleader, cattle prod, an extra set of eyes–all wrapped up into one. Second, there’s no way that one person can know and do everything well but a business needs to grow and succeed. By bringing someone else into the business, you expand the range of skill sets, opportunities, and possible sources for financing. Finally, where else would you get someone to work for free, if not for “sweat equity”? But it’s not a decision you want to make lightly. Sometimes, if you can get what you need by hiring an employee or consultant, you’re better off.
SmallBizLady: How can I tell if my “intended” partner is really the right partner for me?
Nina Kaufman: Just as you wouldn’t marry someone you met right after the first date, you want to make sure you’re taking the time to really get to know your “intended.” As noted in my New York Enterprise Report article, “How to Choose a Business Partner,” (http://bit.ly/9fK0Hz) there’s a lot that goes into a strong business partnership. Do you have compatible communication and leadership styles? Are you on the same page with your values and your vision for the company? You won’t just find this out over a cup of coffee in a Starbucks. Ideally, you want the opportunity to work together on smaller projects to see if they really “walk their talk.”
SmallBizLady: What are the top three legal areas that tend to get business partnerships in trouble?
Nina Kaufman: The three areas that I see most often were business partnerships flounder are in the management of the business, money issues, and what happens when a partner needs to move on. As to management, what roles do you in your partner play in the business? Is there a fair division of labor between you? Are you each equally skilled in your respective areas of expertise? If management is lopsided, it can breed resentment. Money–well, that should come as no surprise, as that’s the number one issue that affects personal relationships. Do you each get an equal amount? How will you value what each contributes to the business? What happens if the business can’t afford to distribute what each of you needs for your personal expenses? Finally, as to moving on, there can be any number of reasons why someone needs to leave the business. You need to be honest with yourself and your partner if your personal needs and goals change. And, of course, you need an orderly transition should you decide you’re not in this business “until death do you part.”
SmallBizLady: Do I really need a written partnership agreement?
Nina Kaufman: Yes, you do. Business partnerships are as much about business as they are about partnership. It’s smart business to put things in writing, especially when there are so many variables involved, as there are with business partnerships. And, not to be morbid, but at some point, you’re going to die. See my blog post, “Because Death Is Inevitable,” (http://bit.ly/aCbum0) for more insight.
SmallBizLady: What are buy/sell agreements?
Nina Kaufman: Buy-sell agreements are the legal terms among multiple owners of a business that cover the circumstances, price, and procedure for buying or selling an interest in a company. In essence, buy sell terms outline your “exit strategy”: how, when, and how much you can get when leaving a company. What and how you get paid can vary depending on whether you’re leaving because you die, become disabled, get divorced, have a change of heart, or get caught with your hand in the company till. Buy sell agreements aren’t the whole story, though, when it comes to business owner contracts. You’ll also want to address the contributions each owner or business partner makes to the company, like money, intellectual property, or customer/contact lists.
SmallBizLady: Why are exit strategies so important?
Nina Kaufman: When you go into business, you need to begin with the end in mind. It sounds odd, but if you’re going to invest years of your life and thousands of your dollars, wouldn’t you want to be sure you’ll reap the benefits you want when the time comes? Without a planned exit strategy, a partner could leave, and destroy your business by using a company’s intellectual property and client list. If your partner dies, you could end up in court fighting his or her spouse over the value of the company. If you have a change of heart and want to live out your days as a Buddhist monk, you need to be sure there is a clear and smooth way for you to leave the business.
SmallBizLady: I’m doing business with a friend/brother/sister/cousin. Why do I need a written agreement?
Nina Kaufman: When you go into business with friends, you bring a special asset to the business: your friendship. That friendship needs to be protected at all costs. And we make a lot of assumptions when we are dealing with friends. We assume that they will be forgiving of our foibles when we lose a client. They assume we will forego getting paid for a month because they had a personal emergency and needed a larger draw from the business. Placed in a business context, our assumptions could be totally wrong. While it seems counterintuitive, you need to be extra vigilant in negotiating and preparing a partnership agreement than you might with an ordinary business colleague. After all, you have a friendship to protect.
SmallBizLady: What’s considered a fair split of profits (or management control)?
Nina Kaufman: The short answer is: it depends. “What’s fair” can vary with the circumstances. What is the relative skill level of the partners? What does each bring to the table in the way of intellectual property, capital, contacts, potential business, and skill sets? Will both be active in the business? Will both be working full-time in the business? They both intend to spend the same length of time working with the business? The factors get more complicated if you have investors in the mix, as David Ronick points out in his blogpost, “Working through the Numbers on Ownership.” (http://bit.ly/aApvEu). Your professional advisors can offer suggestions.
SmallBizLady: What can business owners do to diffuse tensions and legal issues between them?
Nina Kaufman: Very often, tempers flare–and legal issues arise–when business partners stop communicating with each other. It’s something that I encountered in my own business partnership. Over time, my partner and I each worked in our little silos of activity, and stopped focusing on building a business that met both of our goals and needs. It was the beginning of the end. In retrospect, we probably would have benefited from “business partners therapy,” or some kind of regular session with an outside consultant to keep us focused on the bigger picture. Having regular retreats to make sure you’re working on the business, and not just in it, can do wonders.
As I mention in my program, The Entrepreneurs Prenup: How to Choose a Business Partner Who Won’t [BLEEP] You (http://bit.ly/bXbU5A), you need to do more than just accept someone’s say so that they’ll be a good business partner for you. Do your due diligence. If you choose a business partner who has prior bankruptcies were criminal convictions on his or her record– regardless of whether he or she is currently a saint–you could find your company shut out of many financing opportunities. Ask around about their reputation in the field. Are they well respected? If not, you may find that attracting business becomes a hard sell. Open your eyes to their behaviors; don’t just see what you want to see. Is your business partner truly a self-starter, or will they constantly look to you for direction? Do they have a positive outlook or are they a sad sack who will drag you down?
SmallBizLady: Can’t I form my legal business partnership myself online? Why would I want attorney to help me?
Nina Kaufman: Often, starting a business partnership means starting a new company. And of course, you can do the filing yourself. But can you be sure you’re choosing the right legal form of business for your needs? Corporations and LLCs have different advantages and disadvantages. That’s where the professional advice of an attorney and accountant will help you get set up with a strong foundation.
SmallBizLady: Lawyers are expensive. Can I put together my own business partnership agreement?
Nina Kaufman: It’s smart business to have an attorney at least review the business partnership agreement you put together, if he or she doesn’t create it for you. If you’re not experienced in drafting partnership agreements, you can’t properly evaluate what’s in the agreement that could hurt you, or what might be included that could help you. By all means, look at partnership agreements on the Internet for education and ideas. But let the training and wisdom of an attorney experienced with business partnerships provide the expert review before you sign it.
If you found this interview helpful, join us on Wednesdays 8-9pm ET follow @SmallBizChat on Twitter.
For more tips on how start or grow your small business subscribe to Melinda Emerson’s blog http://www.succeedasyourownboss.com.
Melinda F. Emerson, known to many as Small Biz Lady (AKA @SmallBizLady on Twitter) is one of America’s leading small business experts. As a seasoned entrepreneur, professional speaker, and small business coach, she develops audio, video and written content to fulfill her mission to end small business failure. As CEO of MFE Consulting LLC, Melinda educates entrepreneurs and Fortune 500 companies on subjects including small business start-up, business development and social media marketing. Forbes Magazine recently named her one of the Top 20 women for entrepreneurs to follow on Twitter. She hosts #SmallBizChat Wednesdays on Twitter 8-9pm ET for emerging entrepreneurs. She also publishes a resource blog www.succeedasyourownboss.com Melinda is also the author of the national bestseller Become Your Own Boss in 12 months; A Month-by-Month Guide to a Business That Works. (Adams Media 2010)