By Jeffrey D. Jones, ASA, CBA, CBI
Owning and managing a business can be a real challenge. Dealing with partners or shareholders creates a whole set of additional challenges that can be beneficial or detrimental depending upon the structure of the partnership, the relationship of the partners, and the documentation specifying operational procedures, management responsibilities, and buy/sell provisions. Part One of this series discussed the benefits of having partners. Part Two of this series discussed some of the negative aspects of having partners. This article will review some of the things that can be done to make a partnership successful.
PROPER DOCUMENTATION
A major key in forming a successful partnership is to have all agreements in writing at the formation of the partnership. It is amazing to me how often I come across partnerships where there are no written agreements among the partners/shareholders. A Shareholder or Partnership Agreement and a Buy/Sell Agreement are the two critical documents that every business with partners or shareholders should have at the inception of a business entity. The Partnership/Shareholder Agreement should spell out the type of organization to be formed, the division of management and operational duties among the partners, the method for determining the salaries, commissions, and benefits to be paid to the partners, the procedures for allowing partners to join or leave the firm, terms of covenants not to compete, and the voting procedures for making revisions and/or modifications to the Agreement.
The Buy/Sell Agreement should provide for the procedures of buying or selling a partner’s ownership interest upon death of a partner, the disability of a partner, divorce of a partner, or a partner’s desire to dissolve an ownership, often referred to as the 4 D’s. This Agreement should address issues such as restrictions on buying or selling a partnership interest, who has first right of refusal to buy another partner’s ownership interest, and how the ownership interest being bought or sold is to be valued. When valuing a partnership interest, the Agreement should specify the procedure for selecting an appraiser, the standard of value to be utilized, and how the price will be paid.
In a partnership, mutual trust and respect is critical to a strong and good working relationship. Without mutual trust and respect, the partners will tend to do things that enhance their personal agenda, lines of communication will become blurred, confusion and lack of understanding will prevail, and the employees will begin to choose sides. This will have a negative impact on company operations and profitability.
The overall benefits of having partners in a business include: the sharing of economic risk, the assistance in management and training duties, obtaining peer review of business operations, leveraging the skills of others, the ability to attract top level employees to the firm, and enhancing your exit planning. The negative issues of being involved in a partnership can include: having to give up degrees of control of business operations, dealing with different personalities and their personal agendas, not having a written partnership and buy/sell agreements, and not maintaining clear communications among the partners. A friend of mine likes to say, “Partnerships are like a marriage without sex.”
In my opinion, the benefits of having partners far out way the negatives, so long as all the partners share in a common goal, all agreements are in writing, and clear communications are maintained.
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Jeff Jones is the President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. located at 10500 Northwest Freeway, Suite 200, Houston, TX 77092. You can contact Jeff by phone at 713-401-9110 or by email at jdj@advancedbb.com.
