Not all entrepreneurs launch a startup company alone. When choosing a partner initially, you select someone who brings a specific skill set to the table or is willing to contribute startup capital. You may feel like you’re off to a great start, but some potential pitfalls can be fatal to your business in the future. It’s a smart strategy to deal with potential partnership troubles before you get your startup off the ground. Here is some advice on how to deal with the “deadly D’s” so that you can be prepared and keep your business afloat.
In the event of your partner’s divorce, part of their share in the company can be divided among the marital assets. Their ex could become a stakeholder in your company. Not only would this be extremely awkward, but it could threaten the smooth operation of your business. To avoid this possibility, include a divorce contingency clause in your partnership or joint venture agreement. This clause would require your partner’s ex to sell any stake in the company that’s awarded in a divorce settlement back to the company. Cascade Business News explains, “you can include a contingency solution in your partnership agreement. What is also a good soil for business security. These provisions should contain a list of specific situations that may occur and clear ways to solve them. Since a divorce can be considered an unforeseen situation, as well as a disease or disability, it can be included in a partnership agreement. You should very carefully consider such a document and work out all its provisions with a specialist before signing.”
When your partner becomes disinterested in the business and wants to exit, the most common solution for this scenario is a buyout. If your startup has developed into a hugely successful enterprise, you’ll give your partner a cash payout of the value of his share in the business. If your startup is still in the fledgling stages, it might be best to pay the buyout in installments because a significant outflow of capital could sink the business.
According to The Recovery Village, “more than 23 million people over the age of 12 are faced with an addiction to both alcohol and drugs.” One of the symptoms of drug addiction is spending copious amounts of money on getting the next fix. As the addiction progresses, addicts resort to stealing. Your addicted partner might even embezzle from the company to fuel his habit. If you see signs of addiction, limit your partner’s access to company funds. Work with other partners to pass a resolution limiting the addicted partner’s decision-making powers and control over the business until they’ve sought help for their addiction and are in recovery.
Unless your business is an LLC, the partners are fully liable for business debts. One partner’s default can threaten the whole enterprise. In some states, a partner’s business assets can be seized to pay off personal debts. If a partner knows that they’re close to default, they should transfer ownership of their assets to the business immediately. According to Second Wind Consultants, “when your partner files for bankruptcy, their 50% ownership in the company is considered an asset to the bankruptcy estate. But a 50% equity position in a privately held company is hard to sell, there just is no market for it unless this is a large company. The only logical buyer would be you. There might be an excellent opportunity to buy out your partner’s shares for very cheap and get him out of the business. You might as well since you are guaranteeing all the debts, right?”
Encourage your partner to make a will so that they don’t die intestate. Intestate estates are subject to probate, and you will lose control over who inherits your partner’s stake in the business. Convince your partner to bequeath their stake in the business to a competent, interested successor or have them sell it back to the business in the event of their death. According to Law 4 Small Business, “a Will is a fantastic way to help ensure your wishes are met upon your death. However, Wills are not foolproof. They can be contested. They can be lost. Wills (usually) need to be approved by a probate court and it can mean the business languishes as leadership is sorted out. Probate can potentially take a year or more, depending on the nature of the debts, assets and claims made upon your estate. How will your business survive this transition period?”
Partners may be close friends, but the business should be a top priority. You may have to protect the company from your partner or their relatives. It’s your financial health at stake, so be diligent.
One of the hardest things to attain when you’re trying to get a business off the ground is proper funding. Plan Thy Business wants to be there to help you in all of your business needs and to help you have the capital you need to get your business off the ground.