Many small businesses begin in the glow of excitement and expectation of great success. Often, though, this glow can erupt into wildfire if there isn’t a business partnership agreement to protect the business and the owners. All must be considered; collectively and individually.
Thank you, but why a formal business partnership agreement?
Historically, 20% of new businesses fail during their first year, and about half of all new businesses do not exist after five years. One out of three can expect to celebrate a tenth anniversary. Reasons vary. Initial under-capitalization, over-estimation of market acceptance, a failure to establish goals or to define success, as well as a failure to plan for success.
Many of our small business owners have approached ownership cautiously, not knowing everything which could be involved, and always asking questions. There are many types of business agreements. Not all businesses are set up as actual partnerships, and determining how a business is to be structured will establish the ground rules for the agreement. Our business owners’ stories create this composite experience of three friends who struggle to become partners.
“They came into the office with a business plan full of statistics, projections, great advertising and excitement. Then they introduced the elephant in the room.”
Jason, Matt and Jennifer were referred to us by Matt’s father who agreed that their plan for an independent coffee shop was well-crafted and sound. His concern had been their reluctance to tackle the nuts and bolts of a business partnership agreement. He had also reminded them of his brother’s disastrous business problems due, in part, by the lack of a proper agreement.
Choosing to talk about a business partnership agreement.
The three would-be partners had been reluctant to talk about a binding agreement or contract with one another, each thinking it a sign of mistrust, or that they had not chosen partners carefully. This contract had truly become the elephant in the room to be avoided and sidestepped. We agreed to agree that the elephant would be the topic of this conversation.
Choosing the right business partners to balance and counter-balance.
Business partners should have much in common and many differences. Matt, Jennifer and Jason each had a background in hospitality services, although from different angles. They filled skill gaps which provided the partnership with a comprehensive understanding of their business. Jennifer and Jason, twins, who brought expertise in the gourmet coffee industry, also brought marketing and internet skills. That they were siblings added yet another dimension to the agreement none of them had anticipated. Matt understood sales, had worked his way through college managing a bistro, and was a natural leader. They formed a triangle with a specific goal, supported one another, and filled most skill gaps.
Understanding the business partnership agreement better.
A common misunderstanding is that all partners own an equal share of the business. A partnership agreement can divide the ownership interest in the business in any manner agreed to by the partners. Another misconception is that all partners must be actively involved in the business. In fact, although a partner can be involved in the operation of a business, the partnership agreement can permit a partner to be an investor only.
Making the right choices as small business owners.
Some solid decisions were made during that meeting. Although Matt, Jennifer and Jason have the skills and knowledge to own and run their business, they realized that even small business payroll, accounting, taxes, and bookkeeping were not how they wanted to spend their time. They were surprised to discover that Matt’s father was eager to join their business as an investor and encouraged them to set goals that would strengthen and grow their business.
Anything else? Of course.
The coffee house has become a favorite and the business is looking for a second location. Pumpkin Spice Holiday Blend is in the air and their first year was good.
What’s the bottom line?
We establish and maintain a personal and business relationship with our clients. We know that Your BUSINESS Is Your Life, and Your LIFE Is Your Business, and we take both seriously.
Schedule an appointment now. We’ll talk about your business startup, contracts, and anything else you want to discuss.
Contact Melanie Radcliff CPA, Inc.
Call 479.478.6831 or send us an email