The day you enter into a business partnership is much like the day you say “I do.” Both events create a contractual relationship that can be extremely costly to untangle, and most do need to be untangled.
San Diego-based attorney Robert J. Steinberger says 80 percent of business alliances fail for one of two reasons: “They are undercapitalized, or the parties involved cannot agree on how to run the business, including issues around money.”
I certainly didn’t expect to be on the wrong side of this stat. I co-founded a business I knew would be successful, but money matters tore the relationship apart. I assumed my partner and I both understood the responsibilities of equity ownership and the way distributions would be made. Then I realized she expected to be paid monthly, and as a percentage of revenue, not earnings. That was the beginning of the end.
Maybe it’s one partner wanting to purchase new equipment, while the other believes it’s a waste of money, or one using an increase in earnings to supersize lifestyle, while the other prefers to reinvest in the business. Whatever the case, varying opinions about money can sabotage the partner relationship, as well as the profitability—and, consequently, the value—of the business.
When you enter into a business partnership, you’re literally tying your fortune to that person. Therefore, it’s important to discuss your perspectives on money upfront.
The two biggest monetary issues that sink partnerships are compensation and financial infidelity.
Disagreements over salaries can stall a business right out of the gate, so it’s important to get on the same page before anything is formalized.
“Discuss the expectations of the parties,” Steinberger says. “What type of personal overhead does each party have to have? Is each party willing to take less money out of the business to help it grow? From there, you can execute employment agreements, which provide for a base salary and allow for quarterly or semiannual distributions or commission income to be tied to performance.”
Financial infidelity is more difficult. Suspicions that your partner is stealing money from the business can be devastating. However, accusing your partner of the act, while failing to establish and document the allegations, could result in defamation claims and create a highly contentious relationship going forward.
To avoid this scenario, create a process of checks and balances wherein one partner oversees the day-to-day accounting, while another is responsible for account reconciliations, including (but not limited to) banking, credit cards, trust accounts, accounts receivable and accounts payable.
You can also prevent fraud by requiring dual signatures on checks that exceed a specific amount and/or establishing limits on bank withdrawals or credit card transactions.
Most important: If you and your partner truly want to put your trust in one another, conduct comprehensive financial background checks. Poor credit scores, tax liens, judgments or bankruptcies are all red flags that need to be discussed before signing any agreement.