In both business and romance, the early stages are filled with starry eyes and optimism. Nothing can possibly go wrong – but if it does, the partners will face it together. In real life, however, things are rarely that neat.
One fundamental error made by many start-ups is failing to have essential business documents and agreements in place from the beginning. Partners often hold off on putting key terms in writing because in the early stages, when everyone is enthusiastic and in sync, they can be loath to interfere with the thrill of getting a new business off the ground.
But having basic partnership or incorporation papers that outline each party’s roles and obligations, as well as other agreements more specific to the type of business, is key to preventing problems down the road.
In fact, companies that use lawyers and have documentation in place are more likely to succeed than those that don’t. Wherever there’s ambiguity, there’s conflict.
In addition to specifying founders’ roles, partnership and incorporation documents lay out a plan for what will happen if there are changes among company principals, or if the business shuts down altogether. People can quit, relocate or die, so a buyout clause is a necessity.
Companies that fail can leave behind assets that will need to be sold or distributed among the owners. Talking about these transitions beforehand will save time, money and hurt feelings later.
Agreements should be negotiated as early as possible – ideally before opening the doors, but certainly before the business accumulates value or takes on debt. Once the business starts gaining value, things start getting touchier – it’s better to do it in the beginning when people are on equal footing.
Clear incorporation documents prevent unpleasant surprises, such as a smaller-than-expected share of sale proceeds, which can lead to legal disputes that cost money, ruin reputations and destroy friendships.
The partnership or incorporation agreements are also closely related to the financing of the business, so they should be drawn up before seeking outside capital. If one founder is providing a significant amount of the capital, it’s particularly important to have a lawyer review the paperwork.
Company founders who go into a financing negotiation without having their own agreements in place beforehand will be particularly vulnerable to a financing arrangement that strips them of control or limits their upside if the firm is sold.
A legal matter
Start-ups often stall on legal agreements because the founders prefer to put their limited resources into sales, marketing and product development.
Many lawyers who work with entrepreneurs are willing to negotiate payment agreements, such as deferring some billing until financing arrives. Standard business organisation, nondisclosure and other agreements can be used to get a conversation started and to prepare for a meeting with an attorney, reducing billable hours.
Entrepreneurs often want to do it all themselves, but that can be a recipe for disaster. Legal work is one task that’s easy to outsource and important enough to the success of the business and its relationships to justify the time and expense. It’s also a good first exercise in delegation. Don’t be the CEO, COO, CTO and lawyer at the same time.
Here’s the deal
Legally, when two or more people start a business, they are considered to have a general partnership and share equally in the assets, liabilities and profits – unless they sign an agreement that states otherwise.
In addition, you may consider drafting other agreements, such as: a non-compete agreement, which restricts the ability of a founder or key employee to leave the company to work for a competitor; a non-disclosure agreement, which may help protect intellectual property; power of attorney, which can give the other partners the ability to handle business decisions in case one partner is incapacitated; and an arbitration agreement, in which the parties agree to send any disputes to an arbitration panel instead of resorting to litigation.
How To Partner Successfully With A Younger Boss
Age sometimes seems a lot more than just a number
Just a few years ago, millennials surpassed Generation Xers to become the largest cohort in the United States workforce, according to PEW research. As a result, more and more young people are assuming positions of management.
Being managed by someone younger can feel uncomfortable.
I have to admit, I get into the habit of comparing myself to other people. Those who are younger than us who have advanced further professionally can make us feel inadequate or resentful.
At one of the start-ups where I worked, one co-founder was a decade younger than me. At first I felt awkward with the heavy slate of marketing, sales and social media duties she assigned me. It wasn’t too long, though, before we settled into a groove and formed a strong working relationship.
Creating a bond with a younger manager can have significant positive effects on your own career. Here’s how you should manage it:
Identify skills that helped your boss advance and develop them in yourself
Even innovative businesses will adhere to rules of thumb. One rule of thumb many business leaders believe, rightly or wrongly, is that experience is valuable in and of itself. If your manager is younger than you, it means she probably had to overcome stereotypes and false assessments to get there.
Rather than assume your manager is a young punk who had a managerial role handed to her, work on identifying the skills that helped your boss to succeed. By developing the same skills within yourself, you’ll be more likely to enter a managerial role as well.
To get started, consider asking your manager point blank to identify the skills that she thinks were most useful in propelling her career forward. Once identified, make it clear that it’s a goal to develop those same skills within yourself. A good manager will take this conversation as a sign that you are a driven professional.
Alternatively, you could have a conversation with the person who decided to promote your manager in the first place. As long as you position your question to ensure that it sounds like it’s coming from a good place, the senior manager should have no problem sharing this information with you.
Think of your relationship as a partnership
Your manager is not your parent or your babysitter. If it feels as though your manager is overbearing, have a conversation with her about it. Otherwise, you should treat the relationship you have with your manager as a partnership.
Chances are you are both being evaluated on the same or similar metrics. If you fail, your manager fails, and if your manager fails, you fail. By changing your perspective on this important professional relationship, you may find working with a manager who is younger than you to be more comfortable.
Related: Build Better Business Relationships
Most managers simply want to ensure that whatever they’re working on is completed in the best way possible. They’ll be happy to work with employees who are collaborative, open to new ideas and motivated to get the job done.
In return, a manager who is satisfied with your work can make it more likely that you will also find yourself in a management role someday. If nothing else, you can consider leaving your current company and listing your current manager as a reference if you are able to develop a strong relationship.
Trade experience for new ideas
Both you and your manager have important knowledge that can be made more valuable when put together. You probably have accumulated wisdom from on the job experience, and your manager might have a fresh perspective or innovative new ideas.
Together wisdom and innovation can form a valuable pair that propels both you and your manager to success.
Make sure you make it clear that you are open to new perspectives and new ideas, and offer your experience when appropriate to guide your manager to making smarter choices.
Encourage open feedback in both directions
Feedback is a critical component of professional growth. So much so that companies like Goldman Sachs are overhauling their feedback processes to boost employee performance. As a younger manager, she may feel anxious or conflicted about providing you with honest feedback. Instead, “manage up” and invite your manager to provide you with honest feedback.
In doing so, you will also set expectations that your manager should invite candidate feedback from you as well. By creating open dialogue between you and your manager, you’ll accelerate your professional learning curve and avoid passive aggressive moments.
Though your manager may be younger than you, she earned the privilege of managing a team for a reason. As an ambitious professional, it’s your job to understand why your manager earned that role and to begin cultivating the same skills within yourself.
Instead of feeling resentful, partner with your manager to share feedback and wisdom as you both work to achieve success.
By committing yourself to professional self-improvement, you may soon find yourself managing your own team of people who are older than you.
This article was originally posted here on Entrepreneur.com.
The Case For A Business Partner Who Makes You Uncomfortable
Should you even have a comfort zone?
As humans, we love living within our comfort zone. Science tells us that our comfort zones are a place where activities and experiences fit a pattern and a routine that we’re used to. It’s a place of minimum risk for us, which is why it feels so good to stay in that bubble. The idea of adding experiences and actions that could be stressful, lead to failure or worse is not appealing to our minds. So, we get into comfortable routines and rationalise why we are not doing all the things we’ve dreamt and talked about doing in our businesses. This is a familiar pattern that we’ve repeated most of our adult life.
As you grow a business, there comes a point where it makes sense to bring in others who could help the business grow.
This could be a business partner, it could be a board of advisors, or it can be contractors that do tasks we’re not qualified to do. There is a safe route where you can bring in only what makes you comfortable and only entrepreneurs that are YES people – they agree with what you do and say even though they know it’s not right. Or, you can take a different path. You can explore the zone right outside of your comfort zone.
Charlie Munger is the vice chairman of Berkshire Hathaway. Warren Buffet describes him as “his partner.” They have been in business together for 56 years.
Munger has been quoted saying, “we don’t agree totally on everything, and yet we’re quite respectful of one another.”
Over the years, the advice Munger has given Buffet has not been as a yes man to Buffet, and for that reason, both have flourished. They’ve built an amazing company that keeps growing every year.
In April of 1975, Bill Gates and Paul Allen formed a partnership that led to a little company called Microsoft. You are probably using some of their products as you read this article. Their company has become one of the largest in the world. These days, it seems their partnership is not what it once was but it was those early days of partnering with someone who made Bill Gates step outside of his comfort zone that helped the company grow. They complimented each other in different ways. They weren’t yes partners. They pushed and challenged each other and that’s what led to growth.
A wise man once said that if you’re not uncomfortable, you’re not growing. We have run from discomfort when the reality is that there are situations in which the discomfort comes from growing. When you can learn to embrace the opportunity to get uncomfortably from growth, you can take your business to whatever the next level is for you.
There are things you excel in. There are things you’re not so good at. The right business partner – and business partnerships – can help complete the areas you lack. We know that we’re the average of the people we associate with. Traditional logic tells you to associate and partner with people that make you comfortable.
While we want to associate with people whose personalities match, we want to seek out entrepreneurs that will push, inspire, motivate, and challenge us in the ways we can’t do for ourselves.
You want a business partner that will call you out when you’re clearly making excuses. They will challenge traditional ways of thinking about growth strategies. They will inspire you through the actions they’re already taking in their life and business. They walk their talk and let their success doing all the talking for them publicly. They are sincerely invested in seeing you succeed without expecting anything in return. They have love for you. They will stay with you through the good times and especially the hard times.
Don’t pick YES entrepreneurs or add them to your circle. Pick entrepreneurs that make you uncomfortable in a way that leads to growth in life and business. You only get one life to live. You have a goal and dream for your business. The right partners or partners can help you get there in a way that helps you scale.
This article was originally posted here on Entrepreneur.com.
Selling Your Business To Your Business Partner
Follow these tips for creating a deal to sell your business that both you and your business partner will be satisfied with.
The following excerpt is from Mark J. Kohler and Randall A. Luebke’s book The Business Owner’s Guide to Financial Freedom.
Selling your business to a partner is probably the most common ownership transfer among small businesses. The reason is, your partners have a clear picture as to the value of the business, its potential, and what they need to do in order to replace you in the operations.
Selling to a partner is often one of the easier transfers to handle legally – not that partners don’t have their battles and disagreements – but most buying partners want to make the transition smooth and get the selling partner out quickly and painlessly. Many times, I feel that partners are amenable and anxious to define the transaction and process so that they themselves can utilise the same method with a good conscience in the future.
The document that typically lays the groundwork for a partnership sale like this is called the “Buy-Sell Agreement.” These types of agreements are drafted daily by law firms around the country and are actually implemented for more reasons than a partner wanting to sell.
In a more elaborate Buy-Sell Agreement for a more mature or established partnership, the document will cover issues of divorce, death, disability and a requested departure or exit. I call these the “Four Ds,” and each is important to address with predefined terms.
The primary purpose of the Buy-Sell Agreement is to define the procedure for the transfer of ownership, price, terms and transition well in advance of any event causing a transfer. This is a powerful tool because it prevents a partner from holding another partner hostage at a price or process in the heat of emotions when the transfer is needed.
For example, if all partners understand the process to determine the value well in advance, then they can work more clearly toward increasing the value of the business. Each party also knows that they’re all held to the same equation and process no matter what side they’re on. This way, it will be fair when the time comes for each partner to leave the partnership (at least, that’s the goal of the document and can certainly minimise the chance of a lawsuit). Following are some details you need to know about the Buy-Sell Agreement.
Determining the value
Most Buy-Sell Agreements require the partners to agree to the value of the company on an annual basis and record it in the annual partnership meeting. This may seem arbitrary, but if everybody agrees (typically requiring a unanimous vote) and everyone knows the value applies to everyone, then who cares what anyone from the outside thinks? If the partners can’t agree, then a third-party appraiser is brought in to do a formal valuation if a buyout is triggered during the upcoming year.
Oftentimes, the terms are based on a note, with interest, paid out over five to 10 years. This can obviously create the retirement income a partner is looking for, and over the period of payments, it will spread out the tax bill as well. Some Buy-Sell Agreements require the remaining partners to obtain a loan for a good portion of the purchase price and then finish off the rest with a Note. This allows the departing partner to invest the initial money received wisely to create additional cash flow and prepare for when the payments under the Note end.
First right of refusal
Typically, there’s a first right of refusal that must be given to the remaining partner(s) when a partner wants to leave or sell. This means that before a partner can run out into the open market and look for another buyer, they first have to offer their ownership interest to the other partners. This obviously can create some hurdles for the partner wanting to sell because they first have to find a third party willing to buy into a partnership where they may not be welcomed with open arms, probably be in a minority position, and then have to wait around for the other partners to exercise their first right of refusal. But, again, it’s a protection mechanism that “cuts both ways” and protects all the partners.
To protect both parties, there can be a provision requiring the departing partner to sign a noncompete, and also the remaining partner or partners to “pledge” the partnership interest they purchased as security or collateral for the Note they’re paying off. Thus, if the buying partner(s) defaults, the selling partner can come back into the company as an equity partner to try to recover the remaining sales price or value sold in the original agreement.
It’s OK for a partnership not to have a Buy-Sell Agreement in place, but it can increase the tension in the case of a partner selling when the remaining partners didn’t foresee the situation and don’t have the wherewithal to buy out their partner. In these situations, I tell the partners to turn immediately to their partnership agreement (typically an LLC Operating Agreement) to understand what the governing document allows for when it comes to a partner who wants to get out or sell.
If you’re in a partnership and you have the slightest thought that you might want to sell in the next 10 years, and your partner might just be the buyer, then implement a Buy-Sell Agreement immediately. Don’t mess around with the disaster that can be created in a partnership when it becomes volatile or a partner up and decides they want out.
This article was originally posted here on Entrepreneur.com.
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