Fortunately, almost every state now recognizes some form of limited-liability partnership, or LLP. Unlike a general partnership, under which partners have "joint and several liability" to one another ("If something goes wrong, everybody gets hung," says Griffith), an LLP separates personal assets from corporate assets. LLPs can make partnerships less risky financially, but they're no substitute for common sense.
Trigger Points
Seven events in a partnership's life that are most likely to destroy it
Partnerships can sour at any time, for any reason. But certain events are common flash points, so don't let them surprise you. Among them:
- One of the partners divorces
- The company grows suddenly
- A partner brings a spouse or relative into the business
- Because of increased financial needs, a partner wants to take more money out of the business
- Partner A pinches Partner B's bottom, introducing a new complication to the relationship
- Partner B has a tragic motocross accident (or other medical misfortune)
- Then there's good old malfeasance, such as when Partner A begins doing business with customers on the side--"usurping corporate opportunities," lawyers call it--and thus violates his or her fiduciary obligation to Partner B
Full Disclosure
Why do you want a partner? No, really...
Mardy Grothe, a psychologist with a long track record of counseling partners, answers the question almost every would-be cofounder avoids: What's really driving you to seek a partner?
"Many people, sadly, want a partner for the wrong reasons. I see a lot of people who want a partner because going into business alone is too scary. It's a maxim in psychology that ambiguity leads to anxiety, and there's nothing more ambiguous than starting up a new company. It's filled mainly with a lot of fear about what will happen. What will happen if I fail? What will happen if I succeed? People want to share some of the anxiety.
"A lot of other people become partners because they're friends. There's a quotation from John D. Rockefeller: 'A friendship founded on business is better than a business founded on friendship.' Just being friends is not enough on its own to justify a business venture. It's nice, but you also need to do a very candid analysis with your prospective partner: 'What are you bringing to the table, and what am I? Do we make a more complete circle together?' People make the same mistake as young lovers: they assume that friendship, like love, will get you through. It doesn't. It's what causes you to form the union in the first place, but it's not what gets you through.
"Those aren't necessarily bad reasons to become partners. But I think they're bad if you aren't aware that they're the primary reasons you're doing it. Blaise Pascal, the French philosopher, once said, 'The heart has reasons that reason knows not of.' When we're driven by factors that we're not conscious of, we're more likely to run into problems down the road."
Happy Endings
When it comes to a business marriage, it's best to start by working out the divorce
So you and your partner have tried everything. You've seen a marriage counselor. You've done primal-scream therapy. And still you hate each other's guts.
No problem. There's nothing wrong with breaking up--so long as you have a buy-sell agreement in place before you start considering it.
When constructing a partnership agreement, experts say, nothing, nothing, nothing is more important (or more frequently overlooked) than a mechanism for ending the partnership--a way to extricate your partner, or yourself, from your company at a fair price. "It's kind of like your roll bar," explains Fort Worth management consultant Sam Lane. "You hope you never have to use it, but you want it in there." Several commonly used techniques have evolved for the purpose of determining who stays, who goes, and how much money changes hands, each approach designed to prevent one partner from gouging or lowballing the other:
Put Up or Shut Up (also known as Shotgun). One partner names a valuation for the company as a whole, and the other must either buy or sell the company at that valuation. Tends to be an effective mechanism for keeping both parties honest, except when one partner is significantly wealthier than the other.
The Price Is Right. Used when it's clear who's the buyer and who's the seller and the sticking point is the price. Each partner hires an appraiser to value the business. Then a third, independent appraiser is hired. Whichever of the two appraisals is closest to the independent appraisal (as long as it's within 20%) becomes the selling price.
The Spinning Shotgun. One partner submits a bid. The other partner must sell at that price--or else submit a counteroffer that's at least 5% higher.
Determining the price isn't the only issue a good buy-sell agreement should address, says Jonathan Karp, a lawyer at Reish & Luftman, in Los Angeles. The terms of financing may be equally important. In some states, companies can be forced to pay departing partners "fair value" for their ownership stakes within 90 days--a potentially bank-breaking requirement for small businesses. Working out an installment plan can ensure that the death of a partnership doesn't mean the death of a business, too.
