Partnership Checklist: Things to Think About When Going Into Business With Someone Else

by Lauren Owen, Principal, Redpoint Succession and Leadership Coaching

Here is a checklist that I share with clients who are thinking about going into business with someone else to help them think ahead of time about some important issues:

“Big Picture” items for your Partnership:

  • What are each of your short term and long term goals for the business?
  • Who will be responsible for what? Job descriptions for each of you would be a good idea. Where do you place each other on the org chart?
  • How often do you meet and how?
  • What can you each do on your own and what do you need to check with each other about? For example, spending limits, hiring and firing, contracts, etc.
  • Are there administrative functions, including bookkeeping/inventory management/buying that could be centralized under one business to save money? How is that accounted for between the two businesses?
  • Work schedules/expectations – hours, vacations, sick leave, time off, etc.
  • What happens if you don’t agree—what’s the resolution process?
  • What is each of your worst fears/concerns about working with each other?
  • How will you communicate/deal with staff? Does your partner have some human resource documents (employee manuals, job descriptions, evaluation processes) that could be used/adapted at your business?
  • What tends to frustrate/tick you off about other people you work with?
  • Short term and Long term personal goals for each of you? For example, retirement, kids, travel…
  • Compensation – both salary during the year and how year-end payouts will be determined.
  • Lease renewal – can’t remember when it comes up but does your partner sign it as well?
  • Legal structure – you’ll need legal and accounting advice on this one but will you be llc, c-corp, s-corp? Partnership? Or? Who does the research on this and when does it get done?

Buy-Sell Agreement

Even if the bank doesn’t require one as part of the loan process (and I would guess that they will), you’ll surely want one for your partnership.  It should address what happens in the event of several “D” events. None of these events are fun to contemplate but much better to deal with know and reduce your risk (and reduce stress to your loved ones) with adequate insurance:

Death – if one of you dies, the other will want/need to pay off the other’s estate, unless you want to be in business with the other’s widow (probably not!). The Buy Sell should stipulate how will the deceased partner’s shares be valued and who will buy out be funded (usually through life insurance). Since it’s just the two of you, you could do a “cross purchase” plan – each one owns a policy for the other.  If the policies are owned and paid for by the business, the proceeds are taxable. If you own them, proceeds are not taxable.  You could each “gross up” your pay to cover the insurance premiums.

Disability – more likely to happen than death. How will a disability be defined? When does it kick in? Again, this is usually funded through disability policies. Same thoughts as above on premiums. They might end up excluding any disability due to pre-existing conditions.

Divorce – if one of you gets divorced, you don’t want an ex-spouse running around with stock in the company.  A buy-sell provision can ensure that this doesn’t happen.

Disagreement/Departure – if one of you leaves, how and when does the other get paid out – so you need to think about terms of pay-out and how it will the shares will be valued so the business isn’t crippled by a huge pay out at once and/or a big fight about the value of the shares, which leads to:

Valuation – You’ll need to come to some agreement at the time of the buy sell agreement execution as to how the business will be valued at the time of any of these events in the future. As the value of the business changes over time (hopefully up), this valuation method will need to take that into account.  Some buy sells use a formula (value = one year’s revenue for example), some stipulate that an independent appraiser that it is approved by both parties will be engaged at the time the buy sell is activated by one of the seven D’s.

It’s a good idea to talk through these issues beforehand and then go to an attorney, who will most likely bring up lots of things I haven’t even thought about – but these are the biggies.

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