Are you protecting your partnership?
No one buys homeowners insurance because they actually expect to have a fire at their house. But they know if they want until there’s a fire, it’s too late. So, on the very first day they buy their house — they buy the insurance as well, hoping they never have to use it.
For some reason, agency owners don’t always apply this same logic to their business. If you have any sort of partner (minority, silent, 50/50, etc.) you need to have insurance in case that partnership goes south. Hopefully it will never happen but an illness, a divorce, a midlife crisis or a myriad of other things could put your business in harm’s way. Without the proper partnership documents that outline how you handle any threat to the agency — you can be left holding the bag.
Your partnership agreement should cover these aspects of partnership:
Decision making: As a business owner, you made many decisions every day. What are the rules around that? How will you and your partner make decisions, especially in those cases when it’s an important topic and you don’t agree?
Be sure to specifically deal with:
- Contracts: Does each partner have the authority to sign contracts on behalf of the business? If so, those contracts will bind all partners.
- Debt: Is the business going to have a credit card, credit line, a loan? Keep in mind here that, depending on the business structure that you choose, each partner may be personally liable for this.
- Spending: Does a partner have the ability to make purchases without consulting the other partners? Generally, there is a limit that is set in the agreement above which point the partner must obtain permission from the other partners.
Capital contribution: This is about deciding how much money partner will put in to start the business or if the business gets into a cash crunch. What will happen if the business needs more money? How do you decide if you should infuse the business with cash, take a loan or shut down the agency.
Partner responsibilities: Decide who is going to be responsible for which parts of the business. Each partner will probably have multiple responsibilities and they should be identified. You should also answer questions like:
- Are partners expected to work set hours?
- Does one partner plan on working more or less than the other partners? If so, how does that impact compensation?
- How much vacation is allowed?
- Are partners allowed to conduct other types of businesses outside of the partnership?
Salaries/distributions: When and how will the partners take money out of the business? If your financial circumstances are different, how will you balance the difference? Will the partners get re-paid for their initial investment and if so, when?
Death/disability: Even though the odds are you won’t have to face this, it’s best to be prepared. Insurance, trusts, and wills all come into play on this topic, so you’ll have to think through who in your life you trust to make decisions on your behalf; who would inherit your shares of the company; and if you’d want your beneficiaries to have a say in what happens to the company (or, on the flip side if you’d want to share power with your partner’s spouse/family member/friend.)
Dissolution or Additions: No one ever wants to talk about how they’d handle the business if the partners get sideways with one another. But I see this happen more often than you’d think. It’s critical to have this worked out at the beginning of the business relationship, while everything is still good and you can work out something that will be fair to all parties. What will happen if one of the partners doesn’t want to be involved anymore or one of the partners does not want to be in business with the other partner. The other side of this coin is what are the mechanics of adding a partner. How do you determine the value of the company and the process for buying in.
These documents are even more critical if you’re 50/50 partners.
I’ve had many conversations with owners over the years who find themselves in a position they’d have sworn could not happen. And yet it did. A good partner will welcome this conversation and exercise. After all, they’re at risk if you’re the one who gets sick, goes off the deep end or has personal issues that trickle into the agency.
Don’t be the person standing on their lawn, watching their house burn to the ground, all the while wishing they’d purchased the insurance. Protect your partnership now — when there are no issues, problems or worries. It’s a much easier conversation to have when you can’t imagine ever needing it.
