High ‘divorce rate’ means get everything in writing
While current divorce rates might be around 50 per cent, business partnership failure is closer to 70 per cent, a source said. Why then would anyone choose to go into business with someone?
The obvious answer is pooling of resources and ideas. The seminal story of Bill Gates starting his IT empire with a friend in his garage comes to mind. A lot of people enter into business relationships with individuals they may not know all that well to bring a business concept to life and hopefully prosper from their efforts. Often times, it is when they start to prosper that problems develop.
If the individuals have decided not to incorporate the business and enter into a shareholders agreement, but rather form a partnership, then there are some safeguards that will go a long way in ensuring long-term success rather than a breakdown and an inevitable trip to separate lawyers and sometimes staggering legal bills to extricate them from the enterprise. This comes in the form of a partnership agreement.
Just like shareholders agreements (which I have written about in the past), partnership agreements are focused on a number of factors but two most importantly:
- The rights and obligations of each partner, and;
- The method(s) of severing the partnership.
A very common circumstance is one partner feels they are unfairly doing the majority of the work but not reaping the majority of the benefits usually in the form of profits. Marital breakups often focus on emotion/love issues with money as secondary issues (well, certainly not always) but business partnerships have the added bonus of very often combining emotional turmoil and potentially substantial sums of money — a deadly combination.
Just as in a marriage, the key to a successful partnership is solid communication. Often times, each person has different expectations of their partner and their role in the business. Communicating these pre-conceived notions, even if in very basic terms that do not call upon the expertise of a business lawyer, is a start in the right direction.
The real question here is when should the partners solidify their relationship in writing. Preferably, the sooner the better.
A few thousand dollars worth of legal drafting and advice proactively can avoid the inevitable turn to the marriage counsellor of the business world: The commercial lawyer or even more serious, the commercial litigator.
Jeffrey D. Cowan, B.A., B.Comm, LL.B., M.B.A., is the principal of Cowan & Taylor, Barristers & Solicitors which practises in the areas of business and real estate law. Cowan appears in Your Money every other week. E-mail email@example.com call 416-363-5046 with questions for future columns. The information contained in this article should not be relied upon as legal advice.