Either you're in business as a sole owner, or maybe you're planning a new business and you'd like to have one or more business partners to help carry the load. In this video, we will explore these issues with an expert.
SCORE is a 55-year-old nationwide non-profit organization providing free mentoring services to business owners. Our SCORE experts are here to guide you safely through that minefield.
The Risks and Rewards of Taking on Business Partners
Today’s SCORE Business TV episode #13 is on the risks and rewards of taking on business partners. Whether they're investors or working partners, there's little doubt your life will change when you accept a partner in your business.
What You Will Learn About Having Business Partners
In this video, host Dennis Zink and his expert guest Michael Zuckerman, SCORE Mentor, Attorney, and Subject Matter Expert, discuss the following topics:
It matters what type of entity you have with a business partner
Advantages and disadvantages of each type of entity
How to find a good business partner
How to reward loyal employees
How many attorneys should be involved?
Ways to contribute capital and how to equalize contributions
Who needs to sign Personal Guarantees?
How to deal with salaries, draws and bonuses
How and when profits should be distributed
What if additional capital is required?
What are proper business expenses?
How to adjust for personal preferences?
Who decides what?
Hiring and Firing
Disability and Death - using Insurance policies and who should own the policies
What if one partner wants out?
What if one partner wants the other partner out?
Who you can and can't sell to
Covenants not to compete
Another opportunity arises and giving best efforts
Cashout and Exit Strategies regarding valuation
What percentage of partnerships fail?
How to Choose a Business Partner?
“Basically you're entering into a marriage, in a business marriage, and I think you've got to be extremely careful of what you do, and who you bring in. In many cases, you're just looking for an investor, and this person is just going to put money in, keeps a hands-off situation, they invest in many similar type deals and give a report once a month or once every three months and they're happy as long as they're making money. But the most common is where you're going to bring in people who you want to help. You're a salesperson, you need someone with finance, you need someone in the production part. So you look for those types of people and very often the ones who are good enough to come in, don't want to come in unless they have an ownership interest,” said Michael Zuckerman.
“Now, you've got to be careful about who you bring in and when. For example, I handled a lot of medical practices and a doctor coming out of residency comes into the practice, you make him a partner the first day that he's there. Well, we've had too many people really get burned on that. I try to go for a 2-year period. A 1-year period, a guy could hide who he really is. We had situations where a doctor came in, he was the best doctor they could imagine, but he could not handle the nurses, he couldn't handle the staff and he had terrible relationships with the patients and after six months they said, "Goodbye. You don't have an ownership interest because you had a 2-year waiting period before you came on." So you've really got to be careful how you do it,” added Zuckerman.
What Documentation Is Necessary with Business Partners
“It's very interesting because people come and they say, "Gee, my partner, we went to grammar school together. We've been together for 50 years, he's my best friend." "Well, how much business experience does he have?" "Well, we never did, but we talked about it." Or I've got a family member who's coming in. You know, How could I ask my brother-in-law to do this or do that?” said Michael Zuckerman.
“There's nothing that's safe. You can't do it on a handshake. You've got to tie everything down. And I think further on in our discussion, here, we're going to discuss the various things that should be in either the operating agreement, which is the agreement that you use in an LLC, limited liability company, or the shareholders by-laws and employment agreements that you use in corporations or a partnership agreement that you use in a partnership,” added Zuckerman.
Advice to Business Partners
“The best advice that I can give is what we've talked about for the last period of time is so complex and so comprehensive that we can't expect people to have gotten the message. If they're going to get into a relationship, partnership, get yourself some good, competent advice, right from the start, and go with it. It's going to cost you a little more at the beginning, but in the end it'll save you not only headaches, but all kinds of money, and that's my best advice,” said Michael Zuckerman.
“Again, talk to your SCORE people. I think that's a huge advantage because we're training them to be sure that these things happen and I think that that's very important,” added Zuckerman.
Dennis Zink, SCORE Manasota Chapter Chair
Michael Zuckerman, SCORE Mentor Attorney and Subject Matter Expert
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.