Thinking of Joining Forces to Build a Business?
Too often, business partner breakups are messy because the owners did not take the time to form proper agreements when the business relationship began.
This doesn’t just apply to partners. Are you thinking of bringing on a sales associate with income that’s part salary and part commission? Is a strategic alliance in your future? Do you collaborate with other companies for referrals? All these circumstances are better done with a clear, written agreement when the relationship is formed.
The best time to figure out how to part ways is before the business relationship begins. You can call it whatever you want – an owner’s agreement, an operating agreement, a buy-sell agreement, a partnership agreement, a shareholder’s agreement, a memorandum of understanding – but the key is to outline exactly how you want to separate amicably or transfer ownership rights. This should be something you discuss together (and with a lawyer) prior to formalizing. It also should be specific about how proceeds are awarded.
If you are sharing equity interests in a business (whether it is a partnership, a corporation, or an LLC), make sure you define how assets will be valued. How can one buy the other out? Are there any residual income payments that will be made after the breakup? What is the value associated with the skills and contacts each brings to the business? How will the business transfer in the event of one’s death?
Agreements with employees collecting commissions should specify job duties and performance benchmarks for compensation. Strategic alliances and referral arrangements should document how each party will be compensated for leads and within a certain time-frame. The agreement should also stipulate whether any compensation will be awarded after the relationship is terminated.
Business relationships aren’t something you should enter casually. Creating smart agreements that include clear exit strategies upfront is critical for long-term business success. If you spend thoughtful and communicative time discussing how you might handle bumps in the road, as well as exit strategies before you begin, it’s likely your business will be much better off, whether you stay together or not.