Business with the partner: how to reach success and not to lose everything

Sourse: ZN.UA

Are you about to start a new business in partnership with the family, acquaintances or third-party investors? Or have you already “got burned” on some joint business. This article is a short guide to the essential components of a successful partnership.

What is considered to be better: to organize a new business by yourself or together with the partner? This question is asked by everyone who decides to enter the path of entrepreneurship.

If you talk to experienced business people and listen to their opinions, the answers you will receive will be the opposite. Someone will say that due to the partners, their ordinary business reaches unprecedented heights. Someone will in any way dissuade you from doing business with others, even if they are your friends or relatives.

But statistics give us unbiased numbers: 70% of partnerships fail, but at the same time, 2/3 of the world’s largest companies have two or more founders. Therefore, let’s take a closer look at the institution of business partnership.

Advantages of business partnerships

Several partners can contribute to business much more than one person. Knowledge, abilities, skills, assets, money, real estate, brands, technologies – all this the company receives not from one, but two or more partners. These are the main advantages of a business partnership.

  1. Financial. In most cases, namely, the financial side is the reason that prompts people to unite for joint business. Everything is simple here, and there is not enough money to start a business alone – we invite those who will add the missing funds. More partners mean more company capital. Lack of working capital is the reason for the emergence to invite new partners into existing businesses. Attracting additional investment helps to solve the so-called “growth problem” of the company.
  2. Organizational. The partnership allows you to implement things you would not dare to do alone. If you are not acting solely, this is your additional support, confidence and co-creation. By attracting a partner, you can solve problems related to the lack of personal knowledge or experience.
    3. Managerial. Running a business with partners increases its efficiency, not only by pooling financial resources. The intellectual potential is also growing. By distributing various functions between the partners, it gives an ability to take advantage of emerging opportunities faster. It is also valuable and promising employees, who become the partners, so the company does not lose them, and gives an incentive to help the company earn even more.

Disadvantages of business partnerships

Partnership, among other things, is a union of different people with different characters, different temperaments, visions for business development. Disagreements between the partners on how to do business; share profits; what each partner contributes to their joint business; which partner is responsible for the particular parts; what product we are developing; etc. – all this often leads to “internecine wars”. As a rule, such wars result in collapse for the partnership and business in general. Significantly, a joint business’s disadvantages can be grouped into the same categories as its advantages.

  1. Financial. Decrease the share in the profit proportionally to increase the partner’s or partners’ share.
  2. Organizational. Here we shall include a partial loss of independence, the need to coordinate strategic decisions.
  3. Managerial. If one of the partners makes the wrong decisions or commits actions that discredit its reputation, other partners are also responsible for his actions.

 Components of a successful business partnership

Partnerships should not be taken irresponsibly. These are close people who often become partners. And if any conflicts arise in business, they destroy not only business but also personal relationships. As in the family, you need to constantly find compromises and respect each other in the partnership. Only then the expected synergistic effect of the partnership will be achieved.

We will not give a detailed analysis of the psychological and personal aspects of successful business partnerships. This article will focus exclusively on legal mechanisms.

We do not stop underlining a partnership agreement’s mandatory presence, meaning agreements “on the shore.” It allows you to configure all aspects of the future company. The entire civilized world uses a similar tool. You may come across different titles: corporate agreement, shareholders agreement, stockholder agreement. The essence will still be the same: this is a document that regulates relations between the company owners.

Even before the concept of corporate agreement appeared in Ukrainian legislation, the owners of non-resident structures, while registering them in such jurisdictions as Cyprus, Great Britain, the United States, had already entered into mutual partnership agreements, guided by the relevant legislation.

 Structure/content of the partnership agreement

If we talk about the content of the partnership agreement, it should be complete and detailed. It is necessary to formulate all issues the partners have agreed, especially those that may result in problems and disagreements in the future. You can’t leave any of these issues for later. Practice shows that precisely such cases later result in conflicts. Besides, it can be problematic to make changes to an already concluded agreement.

The content of partnership agreements can roughly divide into three broad sections.

  1. Certain business aspects. In this section, we recommend including the following:
  • company mission, vision, and strategic directions of business development;
  • holding of the shares (their size, valuation, purchase / sale);
  • amount and procedure for the dividend payment;
  • requirements for partners (knowledge, experience, reputation, values);
  • voting procedure on the acceptance of new partners;
  • positions of partners, their role in company management (marketing, operational management, strategy, security);
  • labor participation of partners, vacations, sick leave matters;
  • compensation to the partners: bonuses, benefits, personal cars, etc.
  1. Future business regulation. This section may include such items:
  • withdrawal of the partner from the participants (such withdrawal should not harm the company in any case);
  • option pools: if an employee wants to become a partner, it is essential to specify the procedure for the share buy-out, whether such partner will have voting rights, as well as the percentage of shares distribution in the form of option program;
  • mutual assistance matters in case of illness, divorce, death, conflicts between partners;
  • procedure on resolving conflicts between the partners and process on attracting mediators for such disputes resolving, effective communications to avoid deadlock situations, mechanisms for the exit of deadlock situations;
  • possible risks related to the employees;
  1. Personal values, corporate values. Such a section is still scarce in Ukrainian corporate agreements, but it is quite popular abroad.

In addition to the sections described above, the partnership agreement shall foresee the company participants’ responsibility. Such responsibility may consider the fines, deprivation, or reduction of a share, an obligation to transfer one’s share. The mattes of mandatory transfer of share are especially relevant in Ukraine when a partner goes into politics or government service, as this entails corruption and reputational risks for the company.

Finally, we once again underline the necessity of concluding a partnership agreement for joint business ownership. And if we are explicitly talking about Ukraine, we advise to conclude a corporate agreement and notarize it. We wish you all long and mutually beneficial business cooperation!