Just like any other relationship, a business partnership structure requires a strong base and constant maintenance to keep it healthy and working well. If you’ve come here directly from “Business partnerships: Part 1 – Is a partnership right for you?” you are primed for this article to enlarge on those topics. If not, please click back to read about the foundational aspects of setting up a business partnership.
In this article, we’re going to get into the weeds and look at the details of setting up a business partnership and keeping it healthy. The good news is there are many aspects you can “set and forget”. Once you’ve made the decisions and established the ground rules, you won’t have to address them day to day. For everything else, the key is maintaining communication and ensuring you and your business partner stay on the same page even as you may pursue totally different aspects of running the business.
Our tips for setting up and maintaining a business partnership:
1. Have an agreement
A contract that covers a business partnership is called a shareholders’ agreement. Most businesses have them drawn up by a solicitor, but there are also template contracts available online.
–During the process you’ll document answers to the following:
- What happens if your partner wants to exit the business?
- What happens if one partner passes away or is permanently incapacitated?
- Under what conditions can the business be sold?
- How will the business be valued if any of the above events occur?
- What decisions can you make without your partner’s approval (and would your partner agree with you)?
- What happens if one partner can contribute funds to the business, but the other can’t?
- How will you resolve disputes that arise in the course of business operations?
- When and how can the relationship be renegotiated?
For this reason, it’s best to document these matters when the partnership is in good health. Shareholders’ agreements mostly deal with worst-case scenarios; often with the breakdown of the relationship specifically. Think of a shareholder’ agreement, then, as an essential piece of safety equipment. You should do your best to make sure you don’t need it, but you will be grateful it’s there if you do.
There is one situation in which you might want to wait. When new partners are inexperienced in business it can be hard to conceptualise the importance of these situations until they have at least some trading under their belt. For this reason, a lot of partners wait 6-12 months after starting their business before preparing a shareholders’ agreement. However, if there is significant upfront investment by either partner, you should have a signed agreement in place from day one.
The process of developing a shareholders’ agreement can be productive in its own right. Working with a solicitor often illuminates details that are easy to miss. It will force you to address the little things in a way you might not think of otherwise. And having clarity on the details is essential to a functional business partnership.
2. Decide upon remuneration and ownership in a way that ensures win/win outcomes
What’s in a name? Well, legally, a lot, it turns out. As you iron out the details of your partnership, make sure you are clear and specific about the nature of your work and your role in the business.
For example, there is a difference between being a business owner and being an employee. Obvious, right? Not quite. If you’ll be working in the business, then you’re an employee and an owner. You can contrast this to someone who might invest money to simply be an owner, having no real involvement in the day-to-day running of the business.
When structuring a partnership, your roles as employees and as owners need to be viewed separately:
- As an owner, you are thinking about your rights with regard to the business. How much do you own? Are assets shared equally by the partners? How will profit be distributed? Most business partnerships will have ownership split equally, and for good reason. This keeps things simple and ensures a single partner can’t dominate decision making.
- On the other hand, your role as an employee is to perform the day-to-day work of the business. This might be sales, marketing, operations or otherwise. In a smaller business, it’s likely that you’ll take on a combination of the above.
You should agree upon remuneration structures that reward each person for the effort, time and expertise that they’ll be contributing to the business. It could certainly be the case that one partner is more experienced or is taking on more managerial responsibility than the other. Hence, they may receive a higher wage.
Bonuses or commissions could form part of a partner’s wage, but any such incentive-based structures should be carefully considered to make sure they actually serve to benefit the business as a whole. This is a crucial point, and people often overlook it. For example, business partners might operate by saying “you earn income from your clients and I’ll earn income from mine”. At that point, the relationship no longer strictly resembles a business partnership. It’s really just two people trying to run their own businesses from the same place.
What does ownership mean?
Ownership means three things:
- Splitting profit
- Splitting the proceeds from the sale of the business
- Ultimate decision-making power.
Remember, profit is distinct from revenue. It is what is left over after operational costs are paid out, including the wages of owner-employees. An equal split of ownership is usually the best option. However, there are some situations in which another structure makes more sense. For example, if one partner is:
- Taking on much more risk than the other. This could happen if one partner is investing more capital
- Contributing substantial intellectual property. This could mean an established reputation or a valuable list of contacts
- More involved in the business than the other
- The originator of the idea or product that underpins the business’s profitability or operations
- Joining an already-established business.
If you encounter one of these situations, it’s worth asking whether a shared business ownership structure is actually the right model for you. You should investigate other ways to redress the imbalance. That could mean a higher wage, a commission structure or something else appropriate to your business. In most cases, these scenarios can be addressed by means other than imbalanced ownership.
It’s also important to maintain perspective and to remain conservative about building-in remuneration imbalances. A small difference in contribution at the start can balance out over time. Ultimately, all parties have to be comfortable with the equity split down the track. One person might have a stellar reputation today, but, in five years’ time, their partner could equal or surpass them. Long-term fairness should always be front of mind.
3. Hold one another accountable to your agreed ‘big picture’
We covered the importance of an agreed “big picture” within our article “Business partnerships: Part 1 – Is a partnership right for you?”
Consistent attention is needed to ensure you both apply your efforts towards this.
Imagine a scenario where your business partner comes under some kind of personal or financial stress. Maybe another investment has gone sour and they need money quickly. And so, they start focusing on short-term gains, they start making rash decisions and they start taking shortcuts. What can you do?
The only way to prevent situations like this is to help one another stick to the big picture you agreed on.
In our Guide to a Better Business, we outline the three crucial components of a business’ big picture:
- Why do you do what you do?
- Where do you want to take your business?
- What do you and your business to stand for?
4. Be generous and don’t sweat the small stuff:
Every successful business enjoys a long journey, full of “swings and roundabouts”. The best partnerships are between people with complementary skills. Because of this, you often can’t compare the contributions of each partner — some things just can’t be quantified.
It’s not easy to put a value on things like quality of ideas or cultural leadership. The best advice is not to over-analyse who is doing what day to day. So long as the balance of ownership is right, your interests are aligned and everyone is trying their best, you can afford to grant your partners some latitude.
Short-term annoyances can be mitigated by maintaining a long-term perspective. Don’t sweat the small stuff! The effort you spend on mentally policing someone else’s work is energy you could put towards bettering the business overall. Be reflective and realise sometimes the fault may not entirely be with the other party.
This does not mean you should ignore your grievances. If you are starting to experience a build-up of short-term annoyances, look at your communication dynamic first. Is there a reason you can’t have a frank conversation with your partner? Keep an open dialogue and address these things early.
5. Take time to just talk openly about the business:
A lot of people are more comfortable with the practical side of business than with the personal aspects. There’s a reason “getting down to business” means focusing on the task at hand. Unfortunately, that idiom does a real disservice to the importance of communication in business partnerships.
One of the greatest advantages of being in a partnership is to have a sounding board — someone to help you think through your plans. If you aren’t leaning on your partner in this way, you’re under-utilising one of your most valuable assets. Sharing ideas will enable you to produce work better than either of you could achieve alone. Conversely, good communication is key to addressing issues as they arise. Every business — and every relationship — goes through highs and lows. Open lines of communication are like the safety bar on a roller coaster.
You should maintain your relationship in the same way you maintain any other important asset … or the way you would maintain that safety bar. That means regularly and thoroughly!
Schedule a regular time to discuss the business, the challenges you’re facing and the ideas you have. This could be once a week, or once a fortnight, but it shouldn’t be less regular than that. It doesn’t have to be a formal meeting. Some of the best conversations are had over a coffee or a beer.
For this to work, each person should have approximately equal time to speak. This is especially important if you have different communication styles. If you’re usually the big talker, try to stay quiet and just listen to your partner speak uninterrupted. You’ll be amazed at the depth of their thinking. You can be flexible with the topics too. You might want to troubleshoot a short-term issue or you might just need to decompress after a challenging period. You can also discuss long-term plans and realigning your big picture.
Here are some extra tips:
- When you do touch on actionable items, keep a record. You should note the topic and detail what the next step is and who is responsible for it. Make sure to circle back to these in later meetings.
- Sometimes brilliant ideas just need to be noted and left somewhere to be revisited at an appropriate time. You can’t do everything. That said, make sure your note-keeping system is well organised so you don’t lose something magical.
Putting it all together
Thanks for reading our guide and we hope, in some small way, it helps you to enjoy your business partnership as we have, now for over a decade.
Remember to go back and read Part 1 if you haven’t already or if something here requires more context. Further, check out our Guide to a Better Business for more tips.
For advice on how to put anything in context for your business (or the one you are planning), reach out to Eagle Financial at https://eaglefinancial.com.au.