Evaluating Effective Business Partnerships
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Evaluating Effective Business Partnerships

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When you're a small business, partnerships with other business can be a great way to grow your marketshare, brand awareness and product offering. But how do you get started seeking a business ...

When you're a small business, partnerships with other business can be a great way to grow your marketshare, brand awareness and product offering. But how do you get started seeking a business partnership, and what do you need to know going in to the arrangement to make sure your bases are covered legally and personally? This white paper tells you everything you need to know to about evaluating, setting up, and working within business partnerships.

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Evaluating Effective Business Partnerships Document Transcript

  • 1. Effectively Evaluating Partnerships s m a l l b u s i n e s s s t r at e g i e sB y D e s i r e e A daway a n d K y l e D u r a n d
  • 2. IntroductionChoosing and validating a viable commercial opportunity is the main goal of any business. We are assuming that you have done thework and have a viable business opportunity at hand and are ready to create a partnership to take your idea to market.Great partners do tremendous things for your life and business. They make your life easier, open doors of opportunity, multiply yourincome and are there to support you during challenging times. Conversely, partnerships that are not established carefully after clearand open communication between the partners can be sources of tremendous anxiety, strife and conflict.This partnership guide is your go-to resource for how to determine if partnering is for you, how to go about creating a strong andlasting partnership based on open communication and what to expect over the lifetime of a partnership. Pa r t n e r s h i p s i n t h e U n i t e d S tat e s : According to the latest census survey, there are over 3.5 million reg- istered partnerships in the United States alone. These partnerships employ almost 6 million people, and earn revenue in excess of fifteen billion dollars.What is a Partnership?It is not always clear whether you are dealing with a partnership, another form of business entity or simply a contractual arrangementbetween parties. Many business relationships that people call partnerships or joint ventures are simply contractual commercial rela-tionships or don’t otherwise constitute legal partnerships. Some of these include: • Co-branding • Distribution agreements • Intellectual property licensing • Nonprofit venturesOur goal in this chapter is to introduce you to the legal definition of a partnership, describe some different types of partnerships andgive you a few examples of when each would be an appropriate choice. H i s t o r y o f pa r t n e r s h i p s : Exactly when business partnerships originated is unknown, but the concept of two or more people combining their respective skills and personal property for mutual benefit has existed for centu- ries. One respected scholar once said that,“some form of partnership is probably as old as the first exhibition of the gregarious instinct of man.”Types of PartnershipsPartnerships, like people, appear in a variety of shapes and sizes. But most partnerships fall into one of three types: general partner-ship, limited partnership or joint venture.General PartnershipA general partnership is defined as an association of two or more persons to carry on as co-owners of a business for profit.11 Uniform Partnership Act section 6(1) 2S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 3. A general partnership is the business entity most people envision when they think of two or more people going into business togeth-er. General partnerships are the most common type of partnerships and are the easiest shared business arrangement to form. In fact,no state or federal agency requires a general partnership to file its partnership agreement or even any ongoing paperwork to maintaina general partnership entity. All it takes to create a general partnership is for two or more people or businesses to go into businesstogether.Whether a partnership exists is determined by an examination of all of the facts and circumstances. A partnership will almost certainlybe found to exist when two or more people or businesses expressly agree to form a partnership. However, the intent of the partiesto form a partnership may be inferred from the facts and circumstances, since express agreement is not necessary. The UniformPartnership Act requires only that two or more parties carry on a business as “co-owners” for a partnership to be formed. It is in thisexamination of the facts and circumstance where entrepreneurs have found themselves unwitting partners in a business partnership.For instance, courts have found that a person who only receives a share of profits from a business is presumed to be a partner unlessa contract states otherwise. Courts have gone so far as to find that a partnership exists even if the parties did not intend to form apartnership.The bottom line is that it does not take much to form a general partnership, so make sure to carefully map out your business relation-ships in writing to avoid becoming an inadvertent partner.LiabilityIt is not always clear whether you are dealing with a partnership, another form of business entity or simply a contractual arrangementbetween parties. Many business relationships that people call partnerships or joint ventures are simply contractual commercial rela-tionships or don’t otherwise constitute legal partnerships. Some of these include: • Co-branding • Distribution agreements • Intellectual property licensing • Nonprofit venturesOur goal in this chapter is to introduce you to the legal definition of a partnership, describe some different types of partnerships andgive you a few examples of when each would be an appropriate choice. E x a m p l e : Andy and Suzy are partners in a consulting partnership. Business has been good, so Andy decides to lease a company car at the local Mercedes dealership in the name of the partnership. Even if Suzy did not want the car, she is on the hook for the full cost of the lease if the partnership or Andy stops making the payment.You can see why it is so important to be careful about who you partner with and why trust is so vital in a partnership. Even thoughauthority to represent the business can be limited in the general partnership agreement, third parties are legally entitled to rely on therepresentation of one the partners that he, she or it has the authority to enter into a transaction.TaxationPartnerships are not subject to state or federal income taxes. The partnership must file a tax return every year (usually by March 15th),but it does not pay taxes on any of the income or recognize any losses. Instead, each individual partner recognizes its share of theprofit and losses and pays taxes accordingly. Since a partnership itself is not taxed, it avoids the double-taxation of a corporation andcan therefore create significant tax savings over other types of business entities. Ta x f o r m s : Although a partnership does not have to pay tax, it still must file a federal tax return each year and issue tax forms to each of the partners. Many states also require partnerships to file an annual tax return. See the Re- sources section for information on how and when to file these forms. i s to r y o f pa r t n e r s h i p s 3S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 4. Partners’ Duties to One AnotherPartners in any type of partnership have an obligation of loyalty towards each other and the business and cannot act in any way thatconflict with the partnership. There are volumes of cases litigating the rights and duties of partners to one another, but the law cap-tures these obligations in four main categories of duties: • Duty of good faith and fair dealing. Partners must always act in the best interests of the partnership and cannot divert an opportunity away from the partnership or use partnership assets for their personal benefit. Each partner must also act fairly when dealing with other partners. • Duty of loyalty. A partner may not compete with the partnership and may not deal with the partnership on behalf of an adverse party. • Duty of care. Each partner has an obligation to refrain from engaging in grossly negligent or reckless conduct, inten- tional misconduct or a knowing violation of the law when dealing with partnership business. • Duty of disclosure. Each partner must disclose any material facts affecting the partnership to the other partners. For example, where a partner has a conflict of interest in connection with a particular transaction, that partner must disclose his or her interest and any other material facts that might affect the value of the transaction to the partnership.Limited PartnershipThe limited partnership is a special type of partnership created by statute in every state, which combines the tax advantages of part-nerships and the limited liability of shareholders in corporations.This type of partnership has two types of partners— general partners and limited partners. At least one general partner must beappointed who is in charge of operating the partnership’s business and who is also liable for the partnership’s debts and obligations.Limited partners, on the other hand, have no or very limited rights to control or influence decisions affecting the partnership’s man-agement but, in turn, they are not liable for the partnership’s debts and obligations. If the business fails, limited partners only lose whatthey have invested in the partnership, whereas general partners are personally liable for all of the partnership’s remaining debts.Prior to the adoption of the limited liability company (LLC) laws, the limited partnership was the most common form of businessstructure for small business investment activities. The flexible structure, tax benefits and limited liability features of the limited part-nership were principal attractions of this type of business structure for investors. But with the widespread adoption of the LLC, whichdoes not expose any of its members to liability, much of the passive investment activity has moved away from limited partnerships.Because limited partnerships provide limited partners with liability protection, there are many more formalities involved in creatingand operating this type of business structure. Unlike general partnerships, limited partnerships generally must register with the stateand have ongoing filing requirements to maintain limited liability for the limited partners.Unless the organizers of a new business expect to have passive investors and want to limit the management authority of certain part-ners, the limited partnership is generally not the best choice of entity.Joint VentureA joint venture is a general partnership for a limited or particular purpose. Whereas a general partnership has a broad purpose and iscontinuous, the joint venture is meant to be limited to a specific purpose and timeframe. Because the joint venture is for a specificpurpose, the duties and responsibilities of each joint venturer are usually spelled out in great detail in a joint venture agreement.The line between joint ventures and general partnerships is not always clear and sometimes those who intend to form a joint venture 4S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 5. may have been found to form a partnership. Many times, this arises in the case where a joint venture has continued to operateonce its purpose has been achieved. In those situations, courts have found that the joint venture morphed into a partnership.Although the same general laws govern joint ventures and partnerships, joint venturers have less power to bind co-venturersthan partners have to bind each other. This is often a very important distinction.Partnerships are About PeopleWe’ve all heard the cliché that the most important asset of any business is its people, but nowhere is that more true than in a partner-ship. Like the owners in any other type of business, partners provide know-how, financial support and social connections to the en-terprise. But, more than any other type of business entity, the interaction of the partners themselves determines whether the businesswill be successful. The partners’ relationships can be the one thing that prevents the business from excelling, even if it has everythingelse going for it. Clear and consistent communication is critical to any successful partnership.The skills each partner brings to the table are very important, but the extent to which the partners establish and maintain trust be-tween each other is the keystone to an effective partnership business. It is well worth the investment of time and effort at the outsetto choose the right partner and to build a strong relationship with that person.Think transformational rather than transactional.This first lesson is about creating criteria for making the very tough decision about whom to entrust with your business name and rep-utation. It is also about how to talk about what you both need to do to make the relationship mutually beneficial. Finally, it will prepareyou to spot red flags quickly, and provide a graceful exit if things don’t go as intended.Critical steps to partnership building: • Partnership requires vulnerability. When partners create a safe space for its members to be vulnerable, it can reach a deeper level of success. • There are no cookie-cutter methods for partnership-building. Each partnership is unique in its needs, its members and its context. If you forget that, your partnership will never live up to its full potential. • A partnership is made up of individuals and you can’t treat them all the same. Each member carries his/her own sto- ries, baggage, limitations, giftedness and uniqueness. • Effective partnership building is based on meeting common needs. This means that each partner has to be willing to articulate his or her needs and be welcoming to others’ needs. • Effective partners ask the right questions and believe in holding deep and meaningful conversations—even if they are difficult. Growth and positive change require new conversations and deeper inquiry. • Effective partnerships do not ignore conflicts. With individuals come differences and with differences, eventually, come conflicts. A strong partnership will honor the differences and find effective ways of working through the conflicts. • In partnerships, leadership is shared. Once members become engaged in a partnership, leadership becomes the re- sponsibility of every member. 5S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 6. The Partnership LifecyclePartnerships go through a series of stages, during which particular signs are most appropriate to ensure partnership progress andsuccess. These are similar to the stages that any team is likely to go through, as people collaborate to achieve common goals.The Partnership Life Cycle is a tool for understanding partnership development. The important stages we discuss in this guide areInitiation, Design, Realization and Maturity.All phases of the partnership lifecycle should emphasize communication, management and collaboration. Never forget that none ofthe above phases can happen in isolation.Stage One: Initiation In this stage business partners or colleagues may come together to meet a specific need. A brick and mortar guitar business mayrealize they need a partner with a distribution company to assist in its direct, online sales activities.Are You Partnership Material?Know thyself. This act of self-awareness is critical for the success of all partnerships. Are you someone who communicates well?Are you conflict averse? Do you need to run every aspect of your business? Can you honestly handle a shared ownership/leadershipsituation?Taking the time to analyze yourself before you move forward with exploring potential partnerships could help save you time, moneyand heartache. Not everyone is suited to share business ownership and decision-making authority and that is perfectly okay. The keyis to understand whether you are one of those people and to design alternatives to partnering if you are not partnership material.Choosing a partner who doesn’t have your interests at heart or who is out of sync with what you’re trying to build may cause you tolive with a bad relationship for several months or even years and could cost thousands of dollars in legal or therapy bills.Be Very SelectiveNot everyone will be a good fit; in fact, very few people will be a good fit as your partner. Quality is more important than quantitywhen it comes to partners. Your partners should add value to what you are doing, and you should add value to what they are doing.It is very important that you figure out what you need and want from a partner before a partnership opportunity presents itself.It is just as important to be clear about why you want to partner as it is to find the right person to partner with. Charlie Gilkey ofProductive Flourishing has a wonderful framework for understanding how to make strategic choices about your business that he callsCash Flow, Visibility and Opportunity: 1. Do you want to partner with someone to make more money? 2. Do you want to partner with someone to build your audience and gain exposure? 3. Do you want to partner with someone to set up an “opportunity chain” to position your business for growth in the future?A partnership home run would include all three of these elements. i s to 6S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 7. Important Steps: • Define the specific skills, values, strengths and experience that you are looking for in a potential partner. • Create criteria for making the very tough decision about whom to entrust with your business name and reputation. Take the time to explore potential partnership relationships carefully. • Talk about what you both need to do to make the relationship mutually beneficial including questions that explore: • Why should you partner? • Are you a good strategic fit? • Beyond money, what will success look like? • How will you work together? • How will you know when it is time to part ways? Q u e s t i o n s t o d i s c u s s w i t h y o u r p o t e n t i a l pa r t n e r b e f o r e s ay i n g y e s . 1. What excites you about this partnership? 2. Have you participated in a partnership like this in the past? If, so how did it go and what lessons did you learn? 3. What resources can you contribute to the partnership? 4. What aspects of the business would you want to manage? What aspects would you not want to manage? 5. What other commitments do you have, and how much time can you devote to this business? 6. At what time of day do you perform your best? 7. What are your major goals over the next three years? How does this partnership fit in with those goals? 8. What is your ideal exit strategy from this business?These are core questions to ask before you say yes and start developing your partnership agreement. Meeting with potential partners is worth a face-to-face conversation, but the likelihood of a viable business partner living in your same town is slim. Instead use web conferencing with video to get the same face-to-face experience but without the cost and hassle of traveling. To learn more about taking meetings online, visit www.gotomeeting.comStage Two: DesignThe legal and financial sides of partnerships are often skipped over or ignored because they seem to be too complicated, too serious,too scary or too formal. Designing the partnership is a critical step to its success.Getting on the Same Page: The Partnership AgreementYou and your future partner have decided to start a business together. You have a killer idea, a great business plan, some cash to getstarted and you’ve talked through several of the pre-partnership issues. You are chomping at the bit to get rocking and rolling, and thelast thing you want is to kill your momentum by working on a partnership agreement. After all, you are close and seem to be on thesame wavelength, right?When the new venture bug bites, entrepreneurs are usually focused on making the business succeed—bringing in customers, max-imizing revenue and minimizing expenses—rather than discussing compensation structures, taxes and what will happen when onepartner leaves the business. People almost always get along while the deal is being put together. But every partnership runs intorough patches along the way and every partner will eventually leave the business either voluntarily or through death or disability. 7S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 8. Partners need to acknowledge the reality that, regardless of how they feel about the business and each other going into the venture,they will face tough business decisions and partner separation issues down the road. These issues are best addressed in a calm atmo-sphere at the outset of the business, not at the point of crisis when emotions will be running high.A BlueprintThe partnership agreement is simply a blueprint for the business structure and the relationship between the partners. More impor-tantly, discussing a partnership agreement is the dress rehearsal for the day-to-day reality of running a business together. If you can’tcome to terms with your potential partner regarding the terms of an agreement, it’s unlikely that the partnership will work out either.You learn a lot about yourself, the other person and how you will work together by making hard business decisions in the beginning.A well thought-out written agreement is also a crucial component to building a successful partnership because it shines a light oneveryone’s expectations at the outset.A partnership cannot be formed without a fundamental agreement between the partners, but that does not mean that the agreementmust be in writing. In fact, as we saw earlier, the agreement does not have to be explicit or even intended but can be implied by thepartners’ actions. Courts only focus on whether the individuals intended to jointly carry on a business for profit. The language you use to characterize a relationship is relevant but not determinative. As one court observed, “Refer- ring to a friend, employee, spouse, teammate or fishing companion as a ‘partner’ in a colloquial sense is not legally sufficient evidence of expression of intent to form a business partnership.” 2While the partnership agreement does not have to be in writing, interpretation problems may arise without a written document. In ad-dition to the problem of proving that there was in fact an agreement to be partners, there are all kinds of legal and tax issues that areonly easily resolved by a carefully considered and crafted partnership agreement. This does not mean that the partnership agreementmust be a certain length or that it has to contain legalese that the partners need a lawyer to interpret every time they look at it. Theagreement is written for the partners and should be easily understood by the partners.Elements of a Partnership AgreementThe best-drafted partnership agreement in the world cannot prevent or address every potential issue the business will face. But, mostgood partnership agreements contain the following fundamental elements:Name of the Partnership, Names of the Partners and PurposeThese issues present little difficulty. The name of the partnership and the names of the partners are included to avoid any confusionover the business or who is a legitimate part of the partnership. The only restriction on the name of the partnership is that it cannothold itself out to be an incorporated business (i.e. Inc.,LLC,Ltd.).The type of business designated in the partnership agreement is given extremely wide latitude. Generally, the agreement shouldcontain a short statement describing the basic purpose of the business in broad terms to allow for future expansion of the business.If the business is subject to extensive regulation or is a joint venture, the duration and/or specific purpose of the business should besuccinctly described.Occasionally, partners may want to limit the purpose of the partnership to control how their contributed capital may be used or whatthe business can legally do. Although the purpose of a partnership does not have to be limited, the partners may want to build in anassurance that their money or their personal assets will not be exposed to unexpected liabilities.Management and ControlIn the absence of an agreement to the contrary, all partners have equal rights in the management and conduct of the partnershipbusiness and any differences in opinion are to be decided by a majority of the partners.2 Ingram v. Deere, 288 S.W.3d 886, 900 (Tex. 2009) 8S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 9. There is no formula for how specific to make the management provisions of your partnership agreement. Rather, it is up to thepartners to decide how detailed they want to define the management roles. In some cases, partners may want to describe the skills,services or amount of time each will devote to the business. This is especially important in partnerships where one partner contrib-utes money and another contributes services.A crucial point to address, though, is how management decisions will be made. Most partnerships divide management decisions intomajor and minor categories, requiring unanimous consent for major decisions and empowering any partner to make minor deci-sions. This is simply a pragmatic approach to partnership management, since the business cannot afford to come to a screeching haltin order to hold a partnership meeting for every decision that needs to be made.Capital ContributionsA partnership, like any other business, needs capital to operate. Partners are typically the source of all or a substantial portion of apartnership’s initial capital. Partners may contribute cash, services, tangible or intellectual property, or a variety of other types of valu-able consideration to the business in return for an interest in the partnership. Contributed assets become the property of the partner-ship, and each of the partners gains an interest in the assets equal to their proportional interest in the partnership.Because these contributed assets become the property of the partnership, it is important that title be formally transferred to thebusiness. Money contributed to the partnership should be deposited immediately in a partnership bank account and the appropriatedocuments for the transfer of other assets should be prepared, signed, and, if necessary, filed with a title registration agency.The partnership may need capital in addition to that contributed by the partners at the outset to continue or expand operations. Forinstance, if a partnership’s business is contingent upon establishing distribution channels, it may need only limited capital when it isorganized. But, once those distribution channels are set up, the partnership will need additional working capital to begin operations.The partners may decide to contribute only enough capital to establish the distribution network in case that effort fails and will makea commitment to contribute more capital if operations commence. In a case like this, the partners’ commitments to make futurecapital contributions will be included in the partnership agreement. There are both financial and tax considerations to be taken into account in connection with contributions of capital to a partnership. So, talk with your tax professional beforehand to avoid any unwelcome surprises.Compensation, Profit and Loss SharingWhen a partnership generates profits or suffers losses, those profits and losses flow directly to the partners according to their “distrib-utive share.” A partner’s distributive share does not necessarily equal that partner’s percentage interest in the business. Unlike corpora-tions, partnerships are allowed to allocate profits and losses independently of the owners’ interest in the business. This is not the casein most partnerships, though, because the IRS scrutinizes these “special allocations” carefully to ensure they have a legitimate purposeand are not simply being used as a tax-avoidance scheme. The majority of partnerships find it unnecessary to make special alloca-tions and simply link the distribution of profits and losses to a partner’s ownership share in the partnership.A partnership may also pay one or more of its partners a salary, but this is not often the case. A salary acts as a guaranteed paymentto a partner. So, if the business did not make any money, it must still pay that partner a salary. Partnership taxation is one of the most complex and least understood aspects of the Internal Revenue Code. In fact, the Tax Court has described the partnership sections of the Internal Revenue Code as a “distressingly complex and confusing” set of rules, which “present a formidable obstacle to the comprehension of these provisions.” 3Transfers of InterestsDuring the lifecycle of a partnership, it may undergo changes in who its partners are. New partners may be added, existing partnersmay transfer their interests in the business or partners may die or withdraw from the partnership. Besides the legal, financial and tax3 Foxman v. Commissioner, 41 T.C. 535, 551 (1964) 9S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 10. implications of these changes, the partners often have a strong interest in who can become a partner in the business. After doing allof the hard work to evaluate potential partners in the beginning, one of the last things most partners want is for an unknown personto acquire the right to participate in the business without their consent. For this reason, partnership interests are not freely transfer-rable as a general rule. Most partnership agreements require unanimous consent to add a partner and prevent current partners fromtransferring any interest to a third party without the unanimous consent of the other partners.Dispute ResolutionA very important issue to be addressed in the partnership agreement is how disputes among owners will be resolved. Regardless ofhow carefully an agreement is drafted, the possibility for disputes will always be present. It’s a good idea to have all of the partnersagree to a method for quickly resolving any disputes that may surface, since the default alternative is costly litigation. A commonmethod of quickly resolving disputes, and one that is included in many partnership agreements, is binding arbitration.Terminating the PartnershipSome partnerships last longer than others but all cease operating at some point. We will cover the mechanics of terminating a part-nership later, but for the purposes of the partnership agreement, it is important to address a few basic issues: • Under what circumstances will the partnership be dissolved? • What notice must be given to other partners and to third parties? • Will assets be sold or distributed to partners? • Do any partners have rights to specific assets? • How will the assets be appraised?Periodic ReviewAfter the partnership agreement is signed, sealed and delivered, it shouldn’t be tossed in a file cabinet and forgotten. The partnershipagreement is a “living” document that needs to be reassessed on a regular basis. The agreement should be pulled out and reviewedperiodically to determine whether it properly reflects the state of the business, the status of the partners and the expectations ofeveryone involved in the partnership.The Goal of a Partnership AgreementUltimately, the goal in creating a written agreement is to clarify expectations and obligations and to make sure that one of the part-nership’s most valuable assets—the relationship between partners—is protected and maintained.Stage 3: RealizationCongratulations! You have spent quality time defining the characteristics of great partners. You have done your due diligence, talkingin depth with your partner, and researching the work and impact they have had in the past. You have thought about the legal com-ponents of your business relationship, and made decisions about how to split the money, protect everyone’s interests, and provide aclear path if either partner wants to leave or change the partnership in the future.Now, it’s time for the fun part; setting up systems to create products and services, interact with your customers and to get paid.What do you need to track?Think of yourself and your partner as pilots for a moment. If the two of you were sitting in the cockpit flying your partnership, whatinformation would you need to make navigation decisions? Those pieces of information should be readily accessible to each partnerat any time. It is absolutely crucial to share critical information openly and freely with all partners.In particular, all partners should feel like they are always clear about the following: 10S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 11. • Income • Expenses • Correspondence • Payments to partners • Customer interactionsCommunications and Project ManagementEvery partnership should have a basic project management plan including milestones, due dates and check-in meetings. Face-to-faceconversations breed familiarity and trust, so if you can’t meet in-person, take your partnership update meetings online with video con-ferencing. Non-verbal communication is an important part of understanding and being understood, and nowhere is it more importantto be on the same page than with your business partner(s).Financial ManagementRelevant, timely and complete financial data shared with all partners is a critical part of a successful partnership. T h e pa r t n e r s h i p k i l l e r s Let’s explore some of the top reasons partnerships end, and many times end badly! • A partner does not meet set deadlines or deliver on commitments • A partner is not clear/transparent about money and other information relevant to the partnership • Partners do not communicate regularly • A partner attempts to cover something up or otherwise keeps secrets • A partner engages in immoral, illegal or unethical behaviors • A partner does not respect the confidences of other partnersStage 4: MaturityThere is an end-of-life to every partnership. Partners need to prepare early for the day when they will part company for whateverreason. Start with the end in mind to make this process as painless as possible.Ending the PartnershipAll good things come to an end, and partnerships are not immune. For one reason or another, every partner will leave a partnershipeventually voluntarily, involuntarily or as a result of death or disability. If the partnership has more than two partners when one leaves,the remaining partners may choose to continue the business or terminate the partnership. If a partnership is comprised of only twopartners, the partnership, by definition, dissolves, since a partnership requires two or more partners.A partnership, like a marriage, often is far easier to start than it is to end. Unlike a shareholder in a public corporation, a departing part-ner cannot simply sell his or her interest in the business and be done with the relationship. The process is significantly more compli-cated than in the case of a corporation, because every partner is on the hook for the partnership’s debts and has authority to act forthe partnership. Whether there is a buyout of the departing partner or a liquidation of the partnership, the disassociation of a partneralmost invariably takes time.Although most partnership dissolutions are the result of the disassociation of a partner, dissolution may also be the result of a volun-tary agreement of the partners, of an event specified in the partnership agreement or of judicial action. Regardless of the reason, thecomplete termination of a partnership involves three steps: • a dissolution; • the winding up of the partnership’s business; and • termination of the existence of the partnership. 11S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 12. DissolutionDissolution is the first step in the partnership termination process and involves the decision to end the partnership, the automatic trig-gering of a dissolution event described in the partnership agreement or a court order. Once dissolution is triggered, no new businessmay be conducted by the partnership.Winding UpA partnership continues after dissolution but only for the purpose of “winding up” its business. Winding up the affairs of a partnershipconsists of collecting all assets, paying all liabilities and distributing the remaining assets to the partners entitled to them.TerminationOnce the business of the partnership has been wound up, the partnership is finally terminated. In most cases, the final terminationis accomplished via a termination agreement between the partners.Wait, it’s not over!Most partnerships do not terminate when a single partner leaves the business. Rather, the more common situation is that theremaining partners cash out the equity interest of the departing partner and continue operating the business. In this case, thepartnership agreement will set forth the rights and obligations of the partners (departing and remaining), including how the valueof the departing partner’s equity interest will be appraised and the mechanics for how that partner will actually be paid for his orher interest.But, as is the case throughout the entire partnership lifecycle, the value of clear and continuing communication between the part-ners during the buyout cannot be understated. Partners should acknowledge the simple reality that no matter how good they feelabout each other going into the buyout, tough business decisions may create friction, and the best way to prevent the processfrom grinding to a halt or, worse yet, a legal blowup, is to maintain open and honest channels of communication throughout theprocess.Talk Face-to-Face with GoToMeetingBusiness partnerships can help you grow your business when executed correctly. Part of facilitating an effective partnership ishaving open and honest communication, which is best achieved by a face-to-face conversation, and video conferencing fromGoToMeeting is the affordable way to meet face to face without traveling.ConclusionGood partnerships are one of the very best ways to fast track the success of any business, and the foundation for a solid partnershipis clear communication from the outset and throughout the partnership lifecycle. The ability to effectively communicate expectationswith potential partners and to maintain trust and confidence in those people and organizations you choose to partner with will makeor break a partnership.Too often, the temptation for entrepreneurs is to short-circuit the planning process in the beginning of a partnership in favor of focus-ing on business opportunities. Starting a partnership without understanding your motivations, your partner’s motivations and the me-chanics of working together is a recipe for disaster. Taking some time to evaluate potential partners and to discuss and document theissues you will face throughout the partnership lifecycle together will set your business on a course for success from the beginning. 12S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 13. ResourcesPartnership Formation Checklist 1. Decide if you are partnership material 2. Identify and interview potential partners 3. Create a partnership agreement 4. Choose a business name a. Check for name availability b. Register the business name.If you will be operating your partnership under a name different from your name or the name of your partners, you may need to file documents with a state or local agency. 5. Obtain any required licenses a. Many local governments require partnerships to obtain a business license. The best way to find out is to search your city or local government’s website for the terms “business license.” b. Obtain an Employer Identification Number from the IRS c. Register with the appropriate state and local agencies if you will have employees 6. Open a bank account. Most banks require a Tax ID number (EIN) and a copy of the partnership agreement. 7. Set up your systems a. Communications b. Project management c. FinancialPartnership Taxation and Accounting 1. IRS Publication 583, Starting a Business and Keeping Records 2. Filing deadlines 3. Questions to ask your accountant 13S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s
  • 14. BiosDesiree Adaway is a non-profit consultant who has served in senior-level positions at organizations including Habitat for Humanityand The Rotary Foundation.She is especially skilled at helping organizations achieve more consistent, quality program results through strategic partnerships. Shehas designed and administered partnerships that have secured over $10.5 million in funding from a variety of private and corporateresources.During the Haiti earthquake crisis, Desiree helped coordinate partnerships with corporate and non-profit partners and hundreds ofvolunteers to create thousands of shelter kits in less than two weeks.Desiree is known by her staff, senior leadership, peers and partners as being great at open, honest and productive conversations. Sheis not afraid of addressing anything that gets in the way of a great work.Find Desiree at http://www.desireeadaway.comKyle Durand is the founder and managing member of the Precept Group. Kyle earned a Bachelor of Science from the United StatesNaval Academy, Juris Doctrorate from the University of Southern California and a Master of Laws in Taxation from the University ofWashington. He is licensed to practice law in Washington, California and the District of Columbia.Kyle is a trusted guide to his clients, helping them navigate the complicated and often confusing maze of financial and legal issues.Working closely with entrepreneurs, he helps them make daily business decisions and create plans that ensure the well-being oftheir businesses and families. His considerable legal expertise includes business and tax planning, wealth preservation and intellectualproperty protection.Kyle is also the founder of OurDeal.com and TaxReceipts.com.Find Kyle at http://www.kyledurand.comAbout GoToMeetingOnline Meetings Made Easy.GoToMeeting is the extremely simple, extraordinarily powerful web conferencing service from Citrix. It integrates HD video confer-encing, screen sharing and audio conferencing, allowing you to collaborate effectively online in a face-to-face environment. Holdunlimited meetings for one low flat fee and attend meetings from a Mac, PC and mobile devices. GoToMeeting will change the wayyou work – and perhaps a whole lot more.To learn more, visit www.gotomeeting.com 14S m a l l B u s i n e s s S t r at e g i e s : E f f e c t i v e ly E va lu at i n g Pa r t n e r s h i p s