Retirees’ Guide to Do’s and Don’ts of Business Partnerships
Know some of the business partnership pros and cons before diving in. A business partnership agreement is a good place to start.
When first cousins Peter Guidi, 60, and JJ Mokarzel, 62, decided to launch a bourbon company, Joe Louis Spirits, in Old Orchard Beach, Maine, they each drew from experiences with prior partnerships to structure their business. Both men knew they needed to be equally committed to the venture’s success but bring complementary skills to the table.
Despite being 50-50 partners, they agreed that Mokarzel would have the final say on any split decisions. “A ship can only have one captain,” says Guidi. “It’s a waste of time and effort if all you’re going to do is struggle for control,” he says.
How to resolve an impasse is just one of many decisions you’ll want to agree on before establishing a business partnership. You should also discuss financing, business structure and location, other contributors, insurance and tax implications, valuing the company, and the possibility that one partner might want to step away from the business in the future. “It’s easier to get married than to get divorced,” says David Levi, senior managing director for CBIZ MHM, a national accounting and professional services firm. “Spelling stuff out upfront is just huge.”
That said, it’s impossible to predict everything that might come up, and hard to envision the scope and future of the business when you’re just at the starting gate. Although you will want to touch on all the key issues, don’t lock yourself into rigid policies or negotiate so fiercely that you kill a promising business venture before it launches. It’s a shame when people “try to negotiate too sharp a deal or too comprehensive a deal. There needs to be some trust and ambiguity,” says John Emory Jr., president of Emory & Co., a business valuation and investment banking firm in Milwaukee, Wis.
Plan for the Unexpected
Before launching a partnership, talk through your vision of the business, risk tolerance, timeline and what may need to evolve as the business grows. “It’s good to be aligned,” Emory says. “When they bring in someone like me, it’s often because one person wants to retire in the next couple years and the other wants to work for another 10 years.”
Conflicts often arise from feelings of unequal contribution and defensiveness about underperformance, says Ray Parsons, 59, chief executive of Transcepta, a procurement and accounts payable platform that he co-founded with three partners. “Feelings of unequal contribution are perhaps the toughest problem to face because they involve a lot of ego for all parties,” Parsons says.
That’s one reason partners should understand and mentally prepare for the division of labor and goals to shift over time. “These are living, breathing documents,” says Levi, who advises partners to have an open discussion as things change and restructure compensation if needed. He’s seen situations where one operating partner does most of the work but there’s no mechanism for buying the other partner out.
For example, if one partner has a health or personal issue that requires stepping back from the business for a year, the other partner should be compensated for pulling the extra load temporarily. “For that period while that difference exists, it’s got to be acknowledged,” Levi says.
