The PCR Blog

Helpful news, tips and business advice for small to medium business owners about how to maximise profit, minimise waste and grow and protect your business.



Things to Consider Before Entering a Business Partnership

Being in business with partners can be a highly rewarding experience. If done well, you can leverage each other’s skills and experience whilst covering each other’s weaknesses. This often makes for a very successful business model.

Of course, it isn’t all roses. To make your business partnerships run smoothly, there are a few things to keep in mind.

When going into business with other people, you should consider:

  1. Director & Public Officer Insurance.

This insurance is like Professional Indemnity for Directors.

  1. Voluntary Exit (retirement or circumstantial exit).
  2. Forced Exit (disagreement, non-performance, bankruptcy).
  3. Involuntary Exit (death or some significant trauma).

This is where Buy/Sell Agreements and risk management come in. Should one of the owners have an accident there needs to be the appropriate mechanisms in place to protect the interests of the business and shareholders. A Buy/Sell Agreement covers the involuntary exit and is usually covered via some insurance policies or vendor finance agreement agreed upon in the Shareholders Agreement.

  1. Shareholders Agreements.

This should take into consideration how a voluntary exit (i.e. retirement or circumstantial) takes place, a forced exit (i.e. disagreement, non-performance, bankruptcy) or involuntary exit (i.e. death, significant trauma).

 

Shareholders Agreements for Business Partnerships

If you enter into a business partnership, a shareholder agreement is crucial for outlining the rights and obligations of each party involved. A shareholder’s agreement consider the problems you may face and outline processes such as the following:

  • Decision-making process for major decisions e.g:
  • Selling the business by trade sale or public offering.
  • Buying another business.
  • Borrowing working capital.
  • How you sell your interest in the business in the event that you just can’t get on with each other or circumstances change?
  • How you value your interest in the business in the event set out in the event that circumstances change and how will it be funded.
  • How do you compensate the shareholders who work in the business? How will you calculate the salaries?
  • How will the business be funded i.e., will the shareholders contribute working capital from time to time and will loan accounts bear interest and how and when will they be repaid?
  • Will there be external borrowings?
  • What will be your dividend policy?
  • How will further shareholders be introduced and upon what basis?
  • You should have a right of first refusal if one of the shareholders wants to sell their shares?
  • Will personal guarantees by the directors be required to be given?

If one shareholder wants to sell out must the other shareholders be automatically included in such a sale? I.e., do you have ‘drag along and tag along’ rights?

The valuation methodology of a business can also be agreed on for the business and should be revisited each year should it change and the methodology doesn’t go out of date.

 

Who Should You Go Into Business With?

Not only is important to consider the above matters it is also important that you share alignment with the people that you are going into business with.

Sometimes convenient business partnerships aren’t necessarily the best. Don’t just go into business with a friend because you think it’s a good idea. It’s not worth being in a partnership that is taxing to you in any way.

The ‘ideal’ partner in a business partnership is someone who…

  1. Brings something to the table and complements existing partners
  2. Is a good cultural fit in the firm
  3. Is a good communicator with partners, team, clients and all stakeholders.
  4. Is emotionally and financially stable
  5. Is profit and growth motivated
  6. Has a strong work ethic
  7. Is reasonably fit and healthy.
  8. Is at a similar stage in life mentally.
  9. Shares similar vision, values and ethics
  10. Is goal orientated and knows what they want
  11. Is supportive of new ideas
  12. Is respectful, flexible and intuitive in their thoughts and actions
  13. Is fun and encouraging to be with
  14. Walks the talk not just talks the talk.
  15. Acts in the best interests of clients and the firm at all times.
  16. Can bring in new business.

As you can see, if you are looking at going into business with someone it is important to think about and work through the issues that I have outlined above. Don’t make a split-second decision. Take the time to mull it over and make sure you have a good sense of not just how they operate as an individual, but how they operate their business.

If you would like to discuss your options and receive experienced and trusted advice on entering into a business partnership, chat with PCR Accounting & Advisory today.

 

Owner of PCR Accounting & Advisory, Peter Marmara-Stewart is a top-tier accountant and financial advisor dedicated to helping clients reach their business goals and achieve financial freedom. Peter is highly regarded for his client-focused approach and entrepreneurial spirit, catering to a diverse range of professionals across a wide scope of industries all across the country. Peter’s expertise can help you plan effectively, set goals, maximise profits and protect your assets. Get in touch today on (03) 9847 7516.