HOW TO INCORPORATE

Happy Together

Many business partnerships end in disaster. Yours doesn't have to.
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Marty Ambuehl and Neil Clark truly enjoy being business partners. They appreciate each other's relaxed and playful attitude toward what they do, and like the way each partner challenges the other to do better, more creative work. "We push each other," Ambuehl says. "We balance each other very well."

Still, they don't agree on everything. In fact, the co-founders of ATM Express -- a Billings, Mont., distributor of automatic teller machines -- are in the midst of a fairly significant disagreement right now. A tempting acquisition target has recently presented itself. Ambuehl sees the purchase as a great expansion opportunity, but Clark is reluctant to take such a big step. Fortunately, the twosome prepared for just such a scenario years ago, long before the ink was dry on the company's incorporation papers. Careful planning at the beginning, it turns out, has been key to the success of their partnership and their company, which generated more than $19 million in revenue last year.

Unfortunately, many partners only learn that lesson the hard way. "People go in with the best of intentions," says Richard Harroch, a partner at San Francisco law firm Orrick, Herrington & Sutcliffe and an adviser to start-ups. "They're more excited about getting into the business and doing it than they are about the legal details." And that can be a real danger. Left ignored, details that seem tiresome or unimportant at the outset lead to big problems -- and can even destroy a business. The stress of battling a partner is enormous, and protracted litigation can sap financial resources and cut away at the value of a company.

Better to plan ahead. Here's how you, too, can forge a better match:

Choose wisely. Do you even need a partner in the first place? Maybe not. A potential mate should bring something substantial to the table -- like deep pockets or industry connections. Be sure to choose someone who complements, rather than mirrors, your own skills. At ATM, Clark is the sales whiz, for instance, while Ambuehl is the manager. "We knew going in that we had these strengths," says Ambuehl. "It offers us two viewpoints on everything, and even though we can step into each other's roles, we've always been real careful not to step outside our bounds." Just as important is for you and your partner to share the same strategic vision. If you have dreams of going public in five years, for instance, and your partner is happy running a small shop, there's bound to be conflict down the road.

Sure, complementary skills and a shared vision are a good starting point, but you should never underestimate the importance of actually liking your partner. Just ask Naomi Miller, an architectural lighting designer based in Troy, N.Y. Miller joined a lighting firm in San Francisco as a co-partner in 1991. She knew and respected her partner professionally, but while the pair agreed on business-related matters, Miller quickly realized that the two had no personal rapport. "I found that I didn't really look forward to going to lunch with this guy," she says. "I just wasn't having as much fun as I had anticipated." Two years later, when Miller had the chance to leave San Francisco and end the partnership, she didn't hesitate.

Finally, before entering into any partnership, do some due diligence. It might be awkward, but even if you get along fine, ask for financial statements and a resume that includes the names and phone numbers of past investment partners. Then start dialing. ATM's Clark even suggests that potential partners take a personality test, then compare the results.

Get down to the nitty-gritty. In the early '90s, Ambuehl and Clark were college friends who owned a piano-moving company. They formed that first partnership with little more than a handshake and a slap on the back. But when they founded ATM in 1999, they decided to establish a more formal structure, partly because they intended to drum up outside investing. They hired a lawyer and formed a C corporation.

"You're fooling yourself if you think there's never going to be a disagreement."

That turned out to be a smart move. The incorporation process forces partners to face tough issues right at the outset, says Richard Harroch. Incorporation documents will clearly define the specific roles each partner is expected to play, as well as address other issues like how to bring in a third partner or drum up additional financing. While a general partnership agreement may seem like a simpler, more affordable option, such agreements often cause trouble in the long run because they are too broad, cautions Harroch. Ambuehl and Clark faced one of the toughest questions when launching ATM Express. Their main investor asked, "What happens if the two of you get to a point where you don't want to be partners anymore?" Ambuehl and Clark answered the question by drafting employment contracts that locked them into the partnership for five years.

Discuss possible exit strategies. It seems counterintuitive, but the best time to begin exploring exit strategies is at the outset. Of course, in a perfect world, all partnerships will last until the parties involved are ready to sell or merge or otherwise move on to new things. But it's seldom that simple. Indeed, the more likely scenario is that one partner will wind up buying out the other, so it's wise to put a buy-sell agreement in writing at the outset, says Cliff Risman, of Gardere Wynne Sewell, a Dallas-based law firm. The buy-sell is a mechanism by which partners agree in advance that should a dispute arise later on, one partner can buy the other out. "If you don't," Risman says, "you're leaving yourself open to the worst-case scenario -- where a jury of your peers will decide it for you."

Agree to disagree. Back in Billings, Ambuehl and Clark aren't too worried about their disagreement over the acquisition. When they founded their business five years ago, they decided that they would make a major move like an acquisition only if they both agreed on it. "If there's no agreement, there's no deal," Clark maintains. "That's the solution." Whether or not they decide to make the purchase, both men are convinced that their partnership -- and their company -- will survive. "You're fooling yourself if you think there's never going to be a disagreement," Clark says. Ambuehl agrees: "Neil and I don't draw lines in the sand and say, 'This is the way it is, period.' We don't try to back one another into a corner. We know we have to bend."

Last updated: Nov 1, 2004




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