Business startup lore is filled with stories of two college friends who share an idea and decide to start a business.
They frequently have complementary skills such as experience in technology and commercial management. Both work hard and eventually become successful.
But partnerships are like marriage, and it is rare for a partnership to survive 30 or 40 years. Gradually there is friction between the two partners, followed by a messy breakup.
The problems can be related to the business or personal issues. Partners can disagree over the direction of the company, whether to reinvest or distribute profits, to accept a buyout offer, or they are unable to keep their egos in check. Personal issues such as divorce, elevated lifestyles, college tuition or the death of one of the partners can result in disagreements over the ownership, finances and management of the company.
The best time to address these issues is in the initial partnership agreement. Among other issues, it covers what happens if and when these events occur.
If one partner wants out, the agreement specifies how to value that partner's share. It details what happens if one of the partners dies and how the spouse's interests are protected.
In short, the partnership agreement is a road map on how to manage the inevitable ownership changes in a company.
In the end, everyone somehow needs to get liquid - find a way to convert their interests to cash. It is much easier for the partners to know how that will happen before the stress of a life-changing event triggers the process.
A partnership agreement is a legal document and must be prepared by an attorney experienced in this area. An investment of time and money upfront under less a stressful environment will pay dividends in the end.
Ralph Hershberger is president of SCORE Southern Arizona, a nonprofit group that offers free small-business counseling and mentoring by appointment at several locations. For more information, go to www.southernarizona.score.org, send email to email@example.com or call 505-3636.