I just wanted to recap my seminar on business partnerships from last week at the Entrepreneurs Sandbox. Entitled All is Fair in Love and War: Navigating Business Partnerships, and playing off of Valentine’s Day, my panel and I discussed the ins and outs of business partnerships. We touched upon of course my focus, business law, as well as estate and financial planning, and marketing issues. I’d like to thank John Roth, esq. of Hawai’i Trust and Estate Counsel, Kai Ohashi, AAMS of Edward Jones, and Thomas Obungen of Slug Media LLC for their participation. Further their insight, knowledge, and personal experiences helping clients in business partnerships proved to be invaluable to the audience. A thorough discussion took place on the issues facing business partners inside and out of their business. Some of the topics included:
- Due Diligence of Potential Partner
- Choice/Forming Business Entity
- Operating Agreements
- Restrictive Covenants
- Goals & Metrics
- Succession Planning
- Departing Partners, Death & Disability
- Financing a Partnership
- Buy-Sell Agreements
- Differing Generations of Partners
- Partners that Have Competing Marketing/Branding Visions
- Communicating Internally and Externally
- Change of Business Partners
- and many more!
What I Had to Say on Having Business Partners
Talk it Out
For this recap I am not going over the whole presentation, but instead I would highlight a couple of items. I myself have a business partner, he handles the commercial litigation. So we see a lot of business partnership breakups; it says something when the transaction attorney and commercial litigator both feel the two biggest factors for business divorce:
- Lack of communication
- Differing Expectations
If you think about it, number 2 is an off-shoot of number 1. If you and your partner have differing goals and fail to talk about those issues, then over time the gap in goals widens. This gap is sometimes too wide to overcome. For example, money issues tend to be the biggest source of complaint. Of course they are, as profit is the nature of what a partnership. If you don’t know what the law defines as a “partnership” check my other post here. Frequently, partners that contribute different amounts of capital have differing exit strategies. Also know that even when the company is making money partners fight. Yes, I’ve seen arguments over profitable businesses because the partners failed to talk about what they would with their success. Distribute? Reinvest?
Then Write it Down
Even if you and your partner have discussed the issues, if you fail to formalize those discussions that is still a lack of communication. The reason being is memories fade, goals change, and in general life happens. What happens is the partners remember conversations differently. Then law firms, like mine, spend countless hours sifting through emails, texts, and images, trying to piece together what could’ve been the agreement. So the next thing to do after discussing and agreeing is writing it down. One of the activities that separates us from other animals is our desire (some more than others) to record things. Mark Kurlansky an author that focuses on interesting history topics, talks about this in his book Paper: Paging Through History.
Not every documentation needs to be a book, but having the formalities is crucial for a healthy business partnership. This is especially true for big ticket items. Consider items such as capital contributions, members’ interest, distributions, profit/loss allocation, and member’ responsibilities and duties. With a professional’s assistance, partners can discuss what they want and then document in a legally, binding enforceable agreement. For LLCs and their members, that is an Operating Agreement. Note: I am mostly sticking to limited liability company (LLC) language just due to the nature of my practice. For partners forming a corporation these items will be discussed, but will have differing terms and restrictions due to the choice of entity.
Operating Agreements & Employment Agreements: Separated or Incorporated
One other thing about why using a professional to assist in drafting your formal agreements is best. The advice on whether to separate or incorporate several relationships and arrangements in one document as opposed to several. The reason I bring this up as an audience member had an excellent question. Their question was:
Should an Operating Agreement contain the members’ employment duties and obligations?
Generally, an Operating Agreement is used to outline the LLC’s financial and functions processes as it relates to the LLC and its members (the owners of the LLC). It acts an internal governance document of the operations with respect to the way the owners interact with each other and the entity as a whole. Yes, in an Operating Agreement duties and obligations can be placed on the members, such as a restrictive covenant for non-competition. However, employment duties and benefits, such as position/title and duties under that position, compensation, vacation may be considered in a separate arrangement, an Employment Agreement. Why?
Consider a partnership were there are multiple members, the membership may elect one of them to be the Manager in a Manager-Managed LLC. Therefore, management authority would reside in the Manager and would be spelled out in the Operating Agreement. However, for their day-to-day tasks, compensation package and benefits, and termination provisions, those may be considered under an Employment Agreement. The reason for this separation is what if the membership wants to “fire” the Manager under the Employment Agreement, but there is an understanding that individual remains a member under the terms of the Operating Agreement. Having one giant document where duties and rights are confused or entangled may be problematic in enforcement or trying to carry out, especially in tense situations. Separation sometimes provides flexibility. Obviously, the trade-off is more documentation.
Last Words: Get it Signed
That was a brief recap of some of the interesting discussions that took place at the seminar. Hopefully, this will prompt you to consider your own business partnerships and what you need to do to improve their health. One last consideration: if you get a formal agreement, then get it signed! There is no point in engaging a professional to draw up a mutually agreed upon contract to then not execute it. It is worst, to then later to get into a dispute over the very subject matter in that formal agreement. Obviously, please speak to your advisers, including an attorney in your relevant jurisdiction. While, it may be costly, consider the costs of miscommunication, then the potentiality of lawsuits due to your business partnership dispute.
I know somber last words, but cheerfully check back for future seminars and similar content.
Thanks for reading!