Disclosure: I am not an attorney and am not providing any legal advice. I simply want to help you avoid some of the painful situations I have been through over the years.
TIPS FOR CHOOSING A PARTNER AND SETTING UP A PARTNERSHIP:
- Date Before you Marry – You will be better to take things slowly, or you might end up in a “one-night stand.”
- Tag Along/Drag Along – Have verbiage in your contract that will allow you to either sell your interest or force your partner to sell, even if he does not want to. You need to put guidelines around this, but I would definitely recommend it!
- Expulsion – The specifics for expelling (removing) a partner from the partnership must be in detail in the partnership agreement. Many partnership prenups do not include this and both parties regret it when they end up in court.
- Tie Breaker – Oftentimes, partnerships are 50/50. So, how do you handle issues that cannot be resolved? Always have a method to break a tie. For example, if you and your partner disagree, who wins? Engage someone that can be used to break a tie and make sure their decision is final. I’ve known one agreement that allowed for a “coin toss” to determine who wins minor disagreements. No joke!
- Deal by Deal – Consider splitting profits deal by deal. Some roles/responsibilities contribute more than others and it is not uncommon for one person to do more work than the other partner(s). However, oftentimes that person will feel “slighted” when their partners are compensated equally. To avoid such animosity in a partnership, I would suggest a business plan that allocates partner percentages by task category. In past deals, we have used categories like the ones below to determine how each partner gets compensated:
• Who found the deal
• Who put up the earnest money
• Whose balance sheet is being used for the loan
• Who is raising money
• Who is managing the property
- Resign – I would suggest having a clause in your agreement that allows someone to resign as manager. You have to ask yourself…do you want to force a partner to stay in the relationship if they don’t want to be? Keep in mind that getting out of a bad partnership can be much more difficult than getting out of a bad marriage.
- Bank Issues – Most banks do not provide for a 2-step verification, which means your partner can make withdrawals from the bank account without your approval. You want to address such issues upfront and in your agreement.
- Core Values – You should consider having partners that share your same core values. If they are unethical, even in what may be considered a small matter, it is likely they will be unethical with you and with your money. Get to know your partner.
- Communication – Does your partner treat people, in behavior and speech, in a similar manner as you? If not, this could become an issue. Does your partner communicate updates on the tasks he is responsible for? If not, this will become an issue.
- Reputation through Association – Your partner’s reputation can be placed on you. I have an identical twin brother…and, even though I never did anything wrong, I would always have to share the blame. Punishment by proxy…It’s a thing!
- Check with Old Partners – Find out if your potential partner has worked with others. If so, why did the partnership end? Are they amenable to you placing a quick reference call to a prior partner? Sure, partnerships dissolve all the time and for good reasons. Your potential partner should be able to articulate why they moved on from a situation. Even if they are not comfortable with you contacting their previous partner(s), the line of questioning will open the lines of communication and reveal interesting information for your consideration.
- Background Checks – Consider running a background check on your potential partner. They should understand and appreciate your caution. Maybe it’s unfortunate that business has come to this, but it’s also necessary. Treat a potential partner with the level of trepidation you would a greasy biker boy showing up to pick your daughter up for a drive-in movie!
- Non-Circumvent – Have a non-circumvent in place so your partner cannot solicit your contacts or investors.
- Trust your gut. If you feel something is off, then it probably is. Dig further or walk away.
- Have an independent person audit the books and consider doing this randomly with no warning. For example, have an auditor pull some invoices and then contact the vendor to validate the paperwork’s legitimacy.
- Be extremely cautious buying into an existing partnership. I did this and inherited costly issues that my former partner had not disclosed.
- Your reputation will be tied to your partner’s reputation.
- Make sure you have full access to the bank accounts.
- Do your due diligence upfront. Unfortunately, all the due diligence in the world might not cover all the unforeseen, but better to be as safe as you can so you won’t be the sorriest dude you know.
- Have everything in writing. The best way to protect both you and your partner(s) is to plan for the worst with an upfront contract!