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2 years ago · by · 0 comments

Are You in Business with Friends? What Happens to the Partnership in Worst Case Scenarios?

A friend is often the first candidate to consider for a business partnership. And indeed, having two like-minded individuals chase a single business pursuit can be very gratifying at the beginning. However, a partnership based on a friendship could be both a bane and a boon, as personal and business lives mix. You never know when you could be thrown to either end of the spectrum.

Events that threaten a partnership

All is good when the business is on track. But have you considered what would become of your friendship with your partner when the business encounters trials and tribulations?

In a business world fraught with challenges, the path to sustainable success can prove to be very treacherous. If you are already in business, you probably know someone who has an awful business encounter with a friend that went terribly wrong.

Even with meticulous planning and execution, businesses are not spared from macro-level challenges that are beyond the control of either partner. For instance, businesses could go into the red, or even fold, as a result of a recession, an epidemic, or even the emergence of disruptive technology. The Asian Financial Crisis and SARS outbreak are real and worrying reminders that businesses are very vulnerable.

On a micro level, businesses risk potential litigations and claims, which are capable of depleting all of its resources. Other challenges arise when financial expectations are not met, management styles and business objectives between partners differ, or when work ethics and personal conduct of a partner is compromised.

In addition to grappling with these woes, business partners have to tread the fine line between managing their friendship and business with each other. Both partners could set out with the best intentions, but yet have a different approach towards the same matter.

Making or Breaking a Business

In the business world, where quick-thinking and critical decisions could make or break a business, are you confident that you and your partner are always able to cast aside personal feelings, work out differences promptly, and act in the business’ best interest? When challenged to make a decision to innovate with newer technology, or abide by tried and tested methods that have worked so far, for instance, who would then make the final call?

And in failing to reach a consensus, would differences turn into a battle of power that divides the friendship, diminishes the team’s morale and disrupts a business’ operations? When a business is put to the test, would you and your partner come together or fall apart?

Say a partner then decides to buy out the stakes of the other in a bid to steer the business in his or her desired direction, or both partners agree to liquidate the business and go separate ways, who would then get how much of the business? Or worst, who should shoulder the brunt of business debts and liabilities if it fails, and to what extent? Would you not be embroiled in yet another entanglement?

Changes in the Business

At other times, businesses face changes in partnership ownership when a partner passes on, becomes disabled, divorces, or faces bankruptcy. In some cases, the partner’s spouse, or ex-spouse for that matter, someone who probably knows next to nothing about the business could suddenly possess a stake and have a say in the business.

When this happens, are you certain that the business would function as before? If your partner had played a critical role in shaping its success, would his or her departure be detrimental to the business?

A partner could also voluntarily leave the business for personal reasons such as an early retirement, ailing health, or migrating to a new city. Under such circumstances, are you confident of an amicable buyout with your partner? Would your partner feel that he or she is deserving of more? Could it lead to a court settlement to pursue the supposed shortfall?

A legal document to insulate your business and personal lives

Many businesses and friendships end prematurely, when such ill fate could simply have been averted with a legal document. Even with this knowledge, many friends enter into a partnership without caring much about written contracts, as it seems awkward to draw such clear definitions.

However, all partnerships should be equipped with a formal exit plan, or a buy- sell agreement, to make provision for a change in partnership ownership. It is a legally binding agreement that ought to be established once a business reaches a significant value, to spell out what will happen to the business when a partner leaves, be it voluntarily or involuntarily.

Ideally, the agreement determines how a business should be valued, as well as ways to fund it. The agreement should promote equitable transfer of wealth, ownership and management, while restricting ownership interest to fall in the hands of an unwanted party.

With a buy-sell agreement in place, partners can set their hearts and minds on building the business, as they are assured a smooth transition if and when major events occur. Going forward, partners would then be confident of business ownership and continuity.

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