Broker business partnerships: how to reduce the risks before jumping in

Some say that a business partnership is like a marriage, but perhaps without the pleasurable moments that a marriage brings.

One who knows that better than anyone else is Andreas Uve*. He started a kitchen manufacturing business in the Southern Highlands with a partner. He thought that they shared the same values and opinions because they came from the same country. It would turn out that he was very wrong.

“I was unfortunate and broke my leg, so I was away from work for quite some time. When I came back things had changed. Amongst other things a new person had been hired in my absence,” he explains.

But that was just the tip of the iceberg. Assets and contracts were shifted from one company to another without Andreas’ knowledge, and revenue started to go to the new company – which was owned by Andreas’ partner and the new employee. Andreas was pretty much left with the debts.

He explains that allowing his partner to take care of the business’ paperwork would prove to be his undoing.

“We divided the tasks between us, and I looked after the clients and suppliers on the practical side while my partner attended the business side of things,” says Andreas. “I wasn’t too involved in that part, only signed papers now and then, which I bitterly regretted for the several years that it took me to sort out the mess.”

In the end Andreas and his partner made an out of court settlement, in which Andreas received some compensation. Due to conditions in the agreement he is not in a position to talk further about the matter.

Reducing the risks

Andreas’ cautionary tale is just one example of the risks that are taken on when forming a business partnership, as DFK accountant and partner Paul Fiumara explains.

“The biggest risk you could face is that your business partner will undertake an activity in the name of the business that sends you broke and could see you in jail. If there is a problem that both parties want to solve we can mediate,” he says.

So what steps can you take to reduce the risks involved with going into business with a partner?

“First and foremost, you should ensure that your business goals are well aligned and that you can trust and rely on each other. I also believe that it is essential for business partners to ensure that they have a shareholders agreement, says Fiumara.”

In a shareholders agreement (also called a partnership agreement) every area of the business’ life is stated and signed off on. At the bottom of this article you can find some of the areas that will make for a good starting point for discussion with a potential partner.

Someone who did their due diligence before starting their business is Stina Korsell who runs Two Swedes Cooking, catering for Scandinavian businesses and clubs, with her partner Asa. Next year they celebrate 10 years in business together.

“We discussed it nearly a year before we started. We have similar opinions upon everything in the business. I think that is essential, otherwise it would take too much energy to discuss it all the time,” she says.

Fiumara adds that the advantage of going into a business relationship with a partner, is that you share responsibilities, liabilities “and are able to take advantage of the differing skills and knowledge of your business partner.”

“When the business is going well and there is a lot of money being earned, everyone is happy. Disagreements tend to surface when there are cash flow problems and when one of the partners starts to question the contribution made by the other partner”, he adds.

And this is why having a shareholder’s agreement in place from the start is a vital business risk management strategy.

Questions to ask before entering into a business partnership:

Vision

• What vision does each partner have for the business: quality standards, future goals, future partners, etc.?
• What vision does each partner have for themselves?
• Look at a one-, three-, five- and 10-year horizon in both cases.

Personal

• What special skill will each partner contribute to the business?
• What does each partner expect of the other (personally and professionally)?
• What role ambitions in the wider industry does each partner have?
• What role will wives or husbands play in the running of the business (e.g. job designations, authority over other staff, how much autonomy should be allowed)?

Work and remuneration

• How many professional hours does each partner wish to contribute?
• How will this be remunerated?
• How much home time does each partner wish to have?
• How should management tasks be divided between partners?
• Budgets and net profit targets: what will each partner’s share of the profit be?
• Reinvestment policy: how much profit do we reinvest in the business?

Practice benefits – settle on the rules for:

• Holidays
• Long service leave
• Sick leave
• Partnership insurance
• Vehicle, conference, industry membership and other allowances

Operations

• What will be the policy on practice financial operations, e.g. signatories, staff loans, security?
• Settle on a bank, accountant, lawyers and superannuation scheme

Staff matters

• Staff reviews: who, how often, productivity incentives, etc.?
• What will the policy be on recruitment and dismissal?
• What will the policy be on staff structuring and delegation of duties?
• What will the staff benefits policy be?
• Will there be profit sharing incentives?

* Name changed at the request of the interviewee