It is an all too familiar story, and one that you or someone you know may have experienced in some iteration. Two best friends graduate with grand plans to start a business together. They have worked with one another throughout school, after all, and have been inseparable for years.
What could be better? What could possibly go wrong?
The women get together over drinks and write down on the back of a napkin what they believe their arrangement will be, or maybe they download form documents that they think would work to start the business. They sign the documents (or the napkin), take out loans, and personally guarantee all the debts of the business. Together, they open up small business credit cards, sign a lease, and purchase everything they need for the business.
Sounds perfect, right?
Fast-forward four years, and the business arrangement has gone downhill. One feels the other does not pull her weight and struggles with a staff that constantly complains about her business partner, or the business has simply gone in a direction that one partner does not agree with the other. The women are barely speaking, the business is suffering, and a legal solution is needed. One partner wants to buy the other out and hires a lawyer to review her options. Because the two friends did not plan for the possibility that their partnership would deteriorate, their original business agreement is poorly written and does not adequately contemplate a breakup scenario. This agreement shortfall could lead to a long and costly legal battle to unwind the company.
While this situation is difficult to resolve, it could have been avoided. Although there are no guarantees, here are three steps that anyone starting a new business with a friend should take now to minimize a complicated legal dilemma later.
1. Communicate Openly
Before you start, you both need to sit down together and talk. This can be done with or without a third party. Talk about everything, especially what will happen if the business is not successful, or if you are not getting along. No one wants to think about the end when you are just getting started, but the best thing you can do for each other and the business is to plan for the worst when you are getting along. If you wait until you are not getting along, agreeing on just about anything can be nearly impossible.
2. Plan … a Lot
Discuss your expectations of each other and the time you both plan to devote to the business to ensure that you are on the same page. Delineate responsibilities according to strengths. Avoid potential conflicts by proactively addressing questions that may come up in the future, such as:
- How will decisions be made for the business? Does every decision require 100 percent approval? (Note that your answers may be different if there are more than two partners.)
- Should there be spending thresholds?
- What will be your dispute resolution mechanism if you do not agree?
- Who will be responsible for which business functions?
- Can you have outside employment?
- What will happen if you want to add a new partner?
- What if the business needs additional funding?
- What if you want to add another product line or service offering?
- What happens if one of you dies? Do you want the other’s spouse to be your business partner?
- What happens if one of you becomes physically or mentally disabled?
- What if you want to take time off to have children?
- What happens when children get sick?
No one wants to think about these things, but the more you plan for the worst, the better off you will be in the long run.
3. Get Legal Documents in Order
No one wants to spend money on lawyers, and downloading legal templates may seem like an inexpensive solution for the DIY business owner. The problem with standard forms, though, is that no two businesses or situations are alike. What works for some may not work for others. Your documents need to reflect your particular agreement with your partner, which may or may not be “standard.” It is best to hire a lawyer who specializes in business law. In addition, although more costly, you and your business partner may want to consider hiring separate counsel to represent your unique interests and roles in the business. In addition, it is important to periodically review and update your legal documents if necessary. What makes sense for your business today may not make sense down the road as the business grows or changes.
Work through as many concerns as you can before opening up your business. It could save your business and your money, not to mention your friendship.
Pamela Zimlin is a member of the DailyWorth Connect program. Read more about the program here.
This article is made available by Pamela Zimlin and Royer Cooper Cohen Braunfeld LLC (“RCCB”) for informational purposes only, not to provide you with specific legal advice. By reading this article, you understand that there is no attorney client relationship between you and RCCB. The content of this article should not be used as a substitute for obtaining competent legal advice from a licensed professional attorney.