As the U.S. economy grows, more and more people are engaging in new business ideas and setting up businesses. Why not? Small business is the heart of the American system.
Many small businesses are family owned, but it’s common to see several people get together to partner in start-ups and companies. Regardless of the structure, five main factors that should be considered before people decide to partner up.
- Ensure that all partners have the same work ethic
David and John thought it was a splendid idea to work together. John was a newly licensed construction engineer and David was an experienced contractor. With one’s education and the other’s experience they thought they could conquer the world. Unfortunately, the partners didn’t share the same work ethic. While John was working all day and networking with clients in the evenings to get more business, David wanted a slow paced business with small income every month. John soon realized that their work ethic could place a damper on the company.
- Make Sure all partners have same capital to invest in the business
Ben and Jerry were neighbors. They decided to buy a child care center together. Ben decided to invest 100% of the capital (about $350,000) and Jerry was going to work at the business. Both were to split the profits 50/50. One year later Ben realized that Jerry had established the childcare business, made goodwill, and moved all clients to open his own childcare business, leaving Ben with no return on his investment. Ben lost all his investment, while Jerry gained clients for free.
- Ensure all partners have the same or similar business skills
Evaluate these business skills in each person before you partner with them:
- How comfortable is each person with taking risks?
- Are all partners optimistic in times of bad economy to wave through bad cycles?
- How are each partner’s leadership skills? Can he/she be a leader and a team player when needed?
- How is each partner’s personal life
It is important to get an idea of each partner’s personal life before starting a business together. Kevin and Ned decided to open a start up together. Both men knew each other since their PhD program at UT Austin and had worked in oil and gas together. The idea was great and their start-up dream was coming true. Kevin was single and Ned was married. One year into the start-up, Ned’s marriage started to fall apart. Ned’s wife filed for divorce and wanted 50% of the company stocks in her share of divorce. The company suffered financially and it took several months for Kevin and Ned to recover the financial loss. Had Kevin and Ned talked about their personal lives, they would have made a stockholder agreement that considered the possibility of divorce.
- Can you Trust Your Partner
Whether it be a partnership, limited liability company or a corporation, it is a marriage – a marriage to work together. All partners must make sure that they know the other and can trust each other, without doubt.
So here are some of our firm’s recommendations on critical traits to look for in a partnership. If you want to see whether the partnership is right for you and need a legal opinion, call us today at 832.930.1529 to schedule your consultation.
The above blog is not legal advice and the anecdotes are not all based on firm clients.