What is The Business ‘Prenup’ and do you need one when going into business with a best mate?
Choosing the right business partner can be like trying to choose your ideal life partner.
You will feel that initial sense of excitement and anticipation as you navigate what the future looks like together. We recently wrote about how going into business can be harder than marriage which focused on the importance of finding your perfect business partner match.
There is a direct correlation between a harmonious business partnership and the overall success and longevity of your business.
Here are some more useful tips to add to your business toolkit before taking the leap of faith into a business partnership.
A “business prenup” often looks like a Shareholders Agreement or Partnership Agreement, depending on the legal structure of the business.
The idea behind a business prenup is very similar to a marriage prenup. They both create a framework for addressing issues, resolving disputes and protecting the interests of the relevant parties.
So, let’s do some math.
If, conservatively, you intend to earn an income of $100,000 per year and you intend to be in business for 10 years, then (using a very basic valuation methodology) your business investment on day one is worth $1,000,000.
My question to you is – what are you doing to protect that investment?
By getting your business relationship onto paper, business owners are given a framework to:
- Have the difficult conversations at the beginning of the relationship, before they each invest significant time, money and effort and become further entrenched in the business.
- Help manage the expectations of each business owner and clearly define each party’s roles and responsibilities, which ultimately reduces the potential for disputes to arise down the track.
A Shareholder/Partnership agreement will typically cover the following topics:
- Each party’s roles and responsibilities (both to each other and to the business);
- A framework for decision-making;
- The funding and working capital requirements of the business;
- The financial and other contributions of each party and the ways in which profits and losses will be distributed;
- Expansion of the business and a standardised procedure for inviting new investors into the business;
- exit strategies in the event that one business owner wants out of the business;
- A clear and defined dispute resolution process in the event of a dispute between the parties; and
- Most importantly how to value the business if one owner wants out down the track.
The moral of the story is that for most of us, the investment we make in our business will most likely be the biggest investment we make from both a time/money and blood, sweat and tears perspective.
Managing the expectations of your partners is just one of the ways to insure your investment against the natural trials and tribulations of the business journey.
Do you have a partnership agreement for your business? Or are you looking to make sure it’s up to date?
Connect with us for a free consultation and future proof your business for success.