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Pre-Start Planning for Business Partners

May 31, 2010

by Rosalind Resnick, American Express Open Forum

As a consultant who works with startups and small businesses, I often meet with partners who are launching a business together. Whether they’re married couples, high school buddies or friends from a previous job, they’re usually in the honeymoon phase of their relationship, all lovey-dovey and optimistic about the future.

But, occasionally, I’ll meet with partners who have started their business already and now their relationship is on the rocks. Last week, I sat down with two partners — let’s call them The Visionary and The Money Guy — who came in for help with their business plan. Though they both still shared a passion for their business, The Money Guy had invested a boatload of his own cash into the venture while The Visionary was burning through money at an alarming rate and had yet to make a single sale. Before long, the consulting session had turned into couple’s therapy with the “husband” lecturing his “wife” about all the money she was spending on “shoes” and the “wife” complaining that her “husband” was pressuring her and “just didn’t understand.”

How can partnership problems like these be avoided? Like any good relationship, the key is to identify the issues and address them in advance. While it’s hard to know exactly how many business partnerships survive the test of time, the numbers I’ve seen indicate that these relationships fare no better than most people’s marriages, if not worse. And, just like spouses who squabble about the mortgage, the car payment and the cost of sending the kids to college, most business partners fight about money, too.

That’s why it’s important for both partners (or all three or four) to negotiate a shareholder agreement (or an operating agreement in the case of an LLC) before they walk down the aisle. Not only does the agreement spell out who owns how much of the company but it also provides for an “exit strategy” for the partners in the event that one of them dies, resigns, becomes disabled or turns out (in the other partner’s opinion) to be completely incompetent. An agreement like this also lays out the ground rules for selling the company, raising additional capital from banks and investors, and dissolving the business if things don’t work out.

The way I see it, negotiating a shareholder agreement is the dress rehearsal for the day-to-day reality of running the business together. If you can’t come to terms with your partner on the “prenuptial agreement,” it’s unlikely that the “marriage” is going to work out, either.

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