Vail Daily column: Planning for the perils of partnership
When potential business partners first meet, any negative thoughts about the nascent partnership are drowned out by the hum of the dollar signs that each is sure will be earned. Birds chirp, children laugh, it is a dream that nobody wants to think can transform into a nightmare. Our budding entrepreneurs are youths in love, blissfully ignorant and happier for it. This combination of myopia and exuberance is powerful and a critical instrument to success. But it should be counterweighted with prudent planning. Enter the attorney, playing the role of buzzkill.
Maligned though they may be, lawyers have knowledge and experience that is directly relevant to businesses in their infancy. When getting together to start a company, a small investment in an attorney’s advice is the proverbial “ounce of prevention” to forestall the “pound of cure.” The lawyer will help the partners craft an agreement governing how the partnership will be run. It will explicitly set forth each party’s responsibilities, the capital they are expected to contribute, the parties’ respective shares of profits and losses, how decisions are made, how new partners can enter or old ones exit, how the business can be terminated and any number of other items relevant to the particular business and partners. Can a partnership run smoothly without an agreement? Maybe. Should it? Not unless one really enjoys being a party to litigation. Let us not be so naive as to believe that a handshake will cure all ills.
Forming the company with an attorney’s assistance is a team effort, catering to the players’ respective strengths. The soon-to-be partners each bring their own experience and ideas to the table. There is the big picture lady and the details guy and the techno-geek, all working in concert. The lawyer serves as both a guide through the legal jungle and as an independent set of eyes on the lookout for red flags.
The biggest red flag: a business partner who refuses to discuss what happens if all goes south. Walk away at once. A partner who is all gas and no brake is bound to have other flaws that have not yet surfaced. Failing to consider the ramifications of a failed partnership demonstrates that the potential partner does not have the well-rounded mind necessary to make a business work. Put those superstitions away: Thinking about a future that is less than rosy will not conjure failure. Indeed, contemplating the ways in which the business may cease to function properly can help the team reverse engineer ways to prevent it.
Other red flags may pop up in the course of business planning or agreement drafting. One partner may have assumed that she would have an equal share of the business, while the other thought that he would be a majority owner. It is infinitely better to identify and address this discrepancy before the money starts flowing. While the whole plan may fall apart, the potential losses are minimized. If the business was already booming when this issue arose, one or both parties stand to lose a lot of expected income, not least of all to attorneys’ fees.
Having frequently gone through the process of business formation across industries and over time, the attorney will have a repository of ideas of what works and what does not. Those factors may not be exactly the same for each business, but patterns emerge that the partners would be wise to consider. As a consumer within the businesses’ target market, the lawyer can also offer insights. This is not strictly legal advice, but it may be helpful nonetheless. When partners have an idea, they tend to drift into an infinite feedback loop of assurance. The partners each think it is a billion-dollar idea, their spouses are inclined to agree, their parents don’t want to diminish their dream by offering obvious criticism, their friends are just there to be supportive. But the lawyer, not being personally invested in the matter and not living with it on a daily basis, has every incentive to speak up and suggest that perhaps the idea is objectively terrible.
Painful as the initial planning may seem, it pales in comparison to the years of dread that could follow if partnership litigation arises. It has all of the characteristics of a divorce, without any of the memories of when love was in bloom. So, bite the bullet, lay the groundwork, and then get to work making those millions and having partnership retreats in Bali.
T.J. Voboril is a partner at Reynolds, Kalamaya & Voboril LLC, a local law firm and the owner and mediator at Voice Of Reason Dispute Resolution. For more information, contact Voboril at 970-306-6456, firstname.lastname@example.org or visit http://www.rkvlaw.com.