Business Partner Help

[jamespurdy2]

All,

Thanks for reading!

I am thinking about opening a construction oriented business with two associates of mine. These associates have the know-how involved in this particular trade and I do not. I bring the business savvy and the capital.

Does anyone out there have any known pitfalls or lessons learns for this type of business set up? My first concern is the fact that I would potentially be the only one risking any type of monetary investment.

Please help!

[Paul]

1) If it's your money make sure you are the majority owner of the entity. It can be you 52% and each of them 24%. You can adjust income and profit distribution to be even but don't be outvoted on equity.
2) Be involved from day 1. Learn the business...don't just trust them to know it. You need to know at least enough to evaluate what they are doing.
3) Be on top of the money..payables, receivables, markup, margins , cash flow, inventory etc etc. Don't just trust it to someone else.
4) Don't be afraid to question things.
5) Be in a position to approve or nix expenditures, jobs, hires etc. Be the financial watchdog...money can slip away very easily when it's not closely monitored.

In general watch everything!

Two short stories..I once was in charge of a project that required that I oversee a group of engineers. Because I am NOT an engineer I had no idea what the heck they were doing and couldn't even properly monitor progress. The result was the project took 8 or 9 months longer than it should have and the cost went out of control ( they had me hire "assistants" that turned out to be their friends and purchasing equipment that wasn't needed).

Second I helped a manufacturer who had a partner for over 20 years. The partner was the financial officer. The guy that hired me couldn't understand why the business just always broke even and never made a profit. The answer was quite obvious but he would not believe it. The partner was stealing every extra dolar through phoney invoices to the tune of well over a million. Until we finally had a forensic auditor "break in" to the system and prove my theory they were best friends. A hard lesson for him.

It's your money....protect it!

[newyorker]

Yeah, it's not good, but if they got some knowledge you don't have then it's fine. However I'd force them to pay some amount of money, if they're not completely broke. It's fair and you share all risks.

[WashNDryGuy]

I agree with newyorker regarding having them share in the funding of your venture, even if it is a smaller investment. If they are going to have equity then they should have some skin in the game. If they are not invested they should be looked at as employees and not partners, afterall you could theoretically go hire people with the same skills and own the entire company.

Whatever you do, please make sure you have an operating agreement that covers everything you can think of, especially what happens in the event that the business doesn't do well or one of the partners wants out. Having a "business pre-nup" as I call it will save you hours of frustration and untold sums of money.

Best of luck!

[sherryz]

Paul has great advice. Other things to consider are written job descriptions and decision making ability as well as an exist strategy are all extremely important. I've been a partner for 20 years, initially I was sweat equity and my partner was the business experience. We've been partners and have a great relationship today for a few reasons.
1. We're morally and ethically aligned. We believe in the same things.
2. Make sure you discuss where you are personally and financially. Example my partner and I are 20 years apart in age. I want to grow - he wants to conserve money. We together have decided to grow, but if we could not come to an agreement we would need a strategy for the ultimate decision to be made.
3. We leave our spouses out of it. You are married a second time. When things hit the fan, your partners spouse is going to have his ear about you. Work through that before you sign up, talk about the if then - then that - it will happen. I lived it.
4. Check signing privileges should be addressed. I have all financial documents mailed to my house, and we discuss each month in a financial meeting.
5. Listen to the very small voice - the one you mostly want to ignore. If there is any doubt DON'T! Start up business is hard enough. Two partners is even harder. Three partners - you run the risk of 2 ganging up on one. Especially if they have the knowledge.
Best of luck. I work with a lot of home service businesses. I seen a lot of ways they run into problems. Always happy to help,


Partnerships are always very difficult. Would they consider hiring with profit share - and let you maintain 100% of the stock and decision making? If not documentation and talking through all the difficult things that will come up.

[Kamil Fotyniuk]

Paul,
These are really useful tips. Thank you for sharing this knowledge with us.

Kamil

[webdesignphx]

If you are bringing capital you should just start the business yourself and hire employees!! I know its a lot more work than that. But just something to think about. Good luck~

[shrinkme]

Whenever you give away equity you are giving away some control over the company. It's important that somebody be the boss though, and since you are bringing the capital, you should have at least a 51% stake in the business. You don't want to wrangle over decisions because nobody has a majority stake.

Beyond that, check out your partners well and make sure you have a good working relationship. You'll have to deal with them for a long time.