Business partnerships come in two varieties:
- General partnerships
- Limited partnerships.
In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.
Unless you expect to have many passive investors, limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities. If you have two or more partners who want to be actively involved, a general partnership would be much easier to form.
Keep in mind that business partnerships are also more expensive to establish than sole proprietorships because they require more legal and accounting services.
If you decide to organise your business as a partnership, be sure you draft a partnership agreement that details how business decisions are made, how disputes are resolved and how to handle a buyout. You’ll be glad you have this agreement if for some reason you run into difficulties with one of the partners or if someone wants out of the arrangement.
Do You Need a Partner in Business?
Business partners, like parents and spouses, are rarely perfect. The acid test of a good business partnership is whether each partner feels better off with the partnership than without it. That requires each partner to perceive the business as a success and to regard the contributions of his or her partners as critical to that success. Only embark on a business partnership that promises to pass the test.
Deciding on whether to take on a business partner or go it alone is a crucial question when first launching a business. Before you ask someone to join forces with you, there are some questions you should ask yourself:
1. Is this the type of person I could work with every day who complements my skill set?
Deciding whether or not to partner up isn’t unlike dating vs marriage – there’s a big difference between going out for an occasional dinner and waking up next to that person day in and day out. The bar is a lot higher when you’re signing someone up for the long haul. Think about the person you’ve got in mind and ask whether they’ll make the highs even better and the lows more tolerable. Will they bring out your strengths and compensate for your weaknesses? This is not a time to clone yourself. You already know what you know, so where are you weak?
2. What are my core values, and is there someone who shares the things that are most important to me who can help me grow my business?
Choose a business partner who is completely in sync on issues like integrity, authenticity, passion and drive. If you have a strong work ethic you will feel slighted by a partner who didn’t work as hard, even if they were a good person. Be honest and realistic about your expectations you can’t compromise on things like core values.
3. Do all partners have to be equal?
This is a tough one. Should there be an odd number of partners so you can break ties? Does it make sense to be classified as a minority or a woman-owned business if you qualify? And how would that change the dynamics? Two equal partners have to have a lot of issues ironed out in advance to be successful. The corollary here is, will everyone feel like an owner if they have some equity stake in the business?
4. If I don’t have a partner, who will I turn to for advice or input?
Making an important decision in a vacuum can be dangerous. If you don’t take on a partner, then you’ll need to consider who knows more about certain issues than you do. And what’s in it for them to help you make the right call? Can they be an objective third opinion? Which decisions of yours should be vetted with an outside party as a reality check?
5. Will the business be stronger with more heads at the top?
You’d need to decide how to divide responsibilities. It can be split by inside person/outside person and also by function. And when it comes to titles, will you be co-CEOs or will one of you be the president and the other the CEO/chairman?
6. Do you want to have to consult someone every time you want to make a major decision?
Bachelor(ette)hood has its privileges. There are days when you really don’t want to consult with anyone else or invest the time it takes to sell others on your ideas. You just know in your gut or through prior experiences that your decision is the right one. And without a business partner around, you can solely decide to take on that new client, pursue a new market, or not go to the trade show this year without getting any attitude from a partner.
7. If I try it solo, could I bring in a partner later?
When times are good, everyone wants to be your partner. When things get tough, will they still be around? In the early years when a company is in investment mode, few people offer to write cheques to keep the train moving. Do you need outside capital to grow? As your customer base grows and revenues build, you’ll find plenty of people who are interested. When deciding whether to take on a partner, there are a lot of considerations, none of which should be taken lightly. These are important decisions because the health of your business is at stake.
Making Partnerships Work
In the spirit of improving what often becomes a flawed process, here are tips for the art of partnering.
1. Partner for spreadsheet reasons
The right reason to form a business partnership is to increase sales or decrease costs. Here’s a quick test: Will you recalculate the spreadsheet model of your financial projections if the partnership happens? If not, the partnership is doomed. You can wave your hands all you like about “visibility” and “credibility”, but if you can’t quantify the partnership, you don’t have one.
2. Define deliverables and objectives
If the primary goal of a partnership is to deliver “spreadsheet reasons,” then execution is dependent on setting deliverables and objectives, including additional revenue, lower costs, penetration of new markets, and new products and services. The only way to determine whether a partnership is working is to answer quantifiable questions, such as “How many more sales occurred because our websites are now linked?”
3. Ensure that the middles and bottoms like the deal
Some people believe the key to successful business partnerships is that top management thought of the idea. They’re wrong. The key is that the middles and bottoms of both organisations like the partnership. After all, they’re the ones who’ll be implementing it. The best partnerships occur when the middles and bottoms work together and wake up one day with a de facto partnership that didn’t involve top management until it was done.
4. Designate internal champions
One person inside each organisation must be the champion of the partnership. “A bunch of different people contributing to the partnership when they can” doesn’t cut it.
5. Cut win-win deals
A partnership seldom takes place between equals. The more powerful side will be tempted to squeeze the other party, while the weaker side will begrudgingly accept such deals and try to get whatever it can. Bad idea. Bad karma. Bad practicality. If the partnership is a win-lose deal, it will blow up because concrete walls and barbed wire can’t hold a partnership together. Only mutually beneficial results can.
6. Include an out clause
This might seem counter-intuitive, but if one company in the business partnership knows the other side can terminate the relationship easily, they’ll work harder to make it successful. Frankly, if all that’s holding the partnership together is a legal document, then it’s probably not going to work anyway.
7. Ask women
Men have a fundamental genetic flaw: the desire to partner with anything that moves. They don’t care about practicalities and long-term implications. Don’t bother asking men for their opinions about a partnership because they’ll almost always think it’s a good idea. Instead, ask women. You’ll gain real insight as to whether the partnership makes sense.
8. Wait to legislate
After you and your new partner have reached a conclusion on the deal terms, you will then draft an agreement. This happens at the end of the process because you want all parties to be psychologically committed to the partnership first. If you start the drafting process too early, you’re automatically asking for nitpicking, delays and blow-ups. Incidentally, if you ask for legal advice too early, you’ll kill the process. The best way to deal with the lawyers is to simply say, “This is what I want to do. Just keep us out of jail while we do it.”
The Partnership Agreement
When taking on a partner, it is critical to have a formal, written partnership agreement. While this is not a legal requirement, it does provide a framework for the partnership in terms of everyone’s obligations, settling conflicts, disagreements and other issues that could occur. The agreement is needed for the wellbeing of the business.
Create your written partnership agreement with the assumption that anything that can go wrong with your partnership will. Friction between partners over things such as money, power or ego frequently undoes business relationships. Your partnership agreement should prepare you for all possible “what-if” situations, and set methods for resolving them.
You can save money by drafting your own version of the key parts of your agreement, then taking it to your firm’s attorney to be reviewed, clarified, modified and finalised. It is important to have an attorney review the contract.
These are some of the key areas you should include in your written partnership agreement:
- What is the name of the partnership?
- What is the purpose of the partnership?
- What is the duration of the partnership?
Responsibilities, performance and remuneration
- What is each partner’s role?
- What are each partner’s responsibilities within the company, and what level of performance is expected?
- Are partners expected to make a full-time commitment to the venture, or are business activities permitted?
- What will be the income of each partner, and how will profits or losses be distributed?
- What will each partner be contributing to the partnership in terms of cash, assets, loans, investments, and/or labor?
- If a partner loans the company money, what will be the terms or repayment?
- Will the partners be expected to make additional contributions to the partnership, and if so, how will that be handled?
- Withdrawal of partners/admission of new partners
- What guidelines should be followed if one partner wants to leave the partnership?
- Will partners be allowed to sell their interests in the business to outsiders?
- On what grounds can a partner be expelled from the partnership (misconduct, non-performance of duties)?
- How will new partners be admitted to the partnership?
- What guidelines should be followed if one partner wants to retire or leave the partnership?
- What happens if a partner is incapacitated or dies?
- Will the partnership take out “key man” life insurance to ensure the surviving partner is able to buy the deceased partner’s shares from his/her heirs?
- Will partners who leave have to sign a non-compete agreement?
- What methods will be used to settle disputes that can’t be otherwise resolved?
- What procedures should be used in the event of a tie vote between partners on crucial partnership decisions?
- Will you use mediation or binding arbitration?
- If disputes can’t be resolved, is there a mechanism in place for dissolving the partnership?
- What banking arrangements will be made for the partnership?
- Which partners will have check signing privileges?
- Who will be authorized to draw on the partnership’s accounts?
- How will the books be kept?
Method for dissolving the partnership
- When can the partnership be dissolved?
- What happens to the partnership if the partners decide they can’t work together?
- What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?
- FreeLegalDocs: www.freelegaldocs.co.za
- LegalWise: http://www.legalwise.co.za/index.php/downloads/free-contracts.html
Understanding Your Responsibility As An Employer
Now that you have your own employees, here is what you should know about your new responsibilities.
Hiring employees requires more work from you as the employer than simply placing a job ad, hiring the right person and training them on their role.
You need to be aware of the Labour Law requirements in terms of the various funds and other stipulated registrations.
Related: 5 Factors That Make a Great Boss
The law does not differentiate between different size organisations, and therefore it is imperative that SME’s fully understand the implications of all aspects of Labour legislation.
How To Write A Business Plan
A useful guide on how to write a business plan.
An international study showed that only 42% of small-business owners actually took the time to write a formal business plan, but of those who did, more than 69% said it contributed greatly to their success.
It’s no surprise that most experts and financial institutions advise those thinking of starting their own business to put together a comprehensive business plan first.
Related: Business Plan Format Guide
But before you put pen to paper, there are a few vital exercises you need to go through to ensure your business idea is a viable one.
Step 1: Research
The business you plan to start might be in an industry you have some experience in or it might be totally new to you, either way you need to do in-depth research into the industry and market to make sure you fully understand how it operates.
Your research should include:
- Understanding the dynamics and forces affecting the industry
- The preferences and characteristics of your target market
- Insight into how many competitors are already operating and the quality of their product or service
- Finding out who you could partner with to start the business
- How your product or service will be created and delivered
- How it is different from those that already exist, and identifying a profit and operating model for the business.
Some of the sources you can turn to for this information include:
- The Internet
- Industry experts and associations
- Suppliers who play a key role in the industry
- Existing competitors in the industry
- Interaction with member of your team.
Step 2: Stress-test your business concept
Many people are infatuated with their new business idea before they have properly evaluated whether it is worth the time and money they need to invest in it.
FREE Business Plan Template Download
An idea should be stress-tested before producing and selling it.
- Technical feasibility: When considering the technical feasibility you need to know if the technology for your product or service is available or still in development, what possibilities are there that the end user might not want to use your technology and what other technologies could becoming competition in future.
- Market feasibility: The market feasibility refers to the actual need for what you are selling, how large is the market and how fast it is growing. You need to know who your customer is, what their needs are and the advantages and disadvantages of your product or service over the competition.
- Financial feasibility: You also need to determine the financial feasibility by determining what the sources of revenue for the business are, what the major costs are for the new business, is there a good profit margin, what capital is required to launch the business, how long the business will take to break-even and you should develop best-case and worst-case scenarios regarding your cash flow. If you are using your business plan to apply for funding, the funder will also want to see that your cash flow will adequately cover your running expenses and enable you to re-pay their loan.
- Team feasibility: When looking at the team skills you will require to get your business off the ground, you should identify how many people it will take to make your business happen, what cost they will come at and develop a timeline for staffing if your budget does not enable you to hire staff immediately. If you intend to run the business by yourself then determine the skills and expertise you will require (marketing, sales, financial, etc). If you are not equipped with these skills, you should consider bringing a partner on board, outsourcing and/or up-skilling yourself.
Step 3: Refine your business concept
Based on the findings from your research and once you have stress-tested your idea, you may have identified weaknesses or opportunities.
The findings will allow you to refine the business idea so that it fills any gaps in the industry, meets market demands, is different from competitor offerings, leverages relationships with partners and suppliers and is financially sustainable.
Step 4: Writing the business plan
While a business plan doesn’t automatically guarantee success, it does assist an entrepreneur to avoid many of the common causes of business failure, including undercapitalisation or an inadequate market-share.
Related: Sample Business Plans
While there is no universal business plan template, plans generally include the following sections:
1. Table of Contents
This features the main headings of the business plan and their page numbers for easy reference. Finalise this section last to ensure the numbers are all correct.
2. Executive Summary
The executive summary is a summary of your full business plan. It contains the summary highlights of each section of your.
It should also describe the company, provide details about management and their strengths, the business objectives and why it will be successful, and if the business needs external funding, how much is needed, and how it will be repaid.
The executive summary is written last and should not exceed two pages in length.
3. General Company Description
This is where you give an overview of the company and the business it engages in.
It should include the company’s name, mission statement, goals and objectives, and strengths.
If you have a register company name, trademarks, patents, BEE credentials and/or a VAT number include those details here.
4. The Opportunity Industry & Market
Based on the research you conducted prior to writing the business plan, you will discuss the opportunity you have identified, the ‘gap’ that exists in the market. You’ll need to detail why this gap exists, how you identified it and how you will fill it.
When writing about the industry you must answer questions about:
- The ‘barriers to entry’ (how easy or difficult it is for future competitors to enter the same market and offer the same product or service as you do)
- Who the customers are and the influence they have over prices
- Who the suppliers are and their influence over the prices
- Who the competitors are and how strong their products or services are and the major changes affecting the industry.
Regarding the market you need to state the total size of the market, what percentage of the market share you will have, and major trends.
5. Business Model
The business model you choose will be a strong determining point of the future the success of your business.
Your business model must include information on what your companies offers in terms of products or services; what makes your offering unique; who you sell them to; and how you make your money.
You need to take into consideration the source of revenue, the major costs incurred in generating revenue, the profitability of the business, the investment required to get the business up and running and the critical success factors for the model to work.
Discuss how your business will compete in its specific market.
You need to explain the strategic choices you have made including the focus of the business, how you will create a unique and valuable proposition, what is unique about your business and what value there is for customers.
You must also include your plan for how you intend to enter the market and grow your market-share.
7. Team: Management & Organisation
You will provide a breakdown of the people in the business. It should include a list of founders including their qualifications and experience, a description of who will manage the business, and an organisational chart if you have over 10 employees.
8. Marketing Plan
This should provide details on your marketing strategy based on your market research.
The marketing plan should include important marketing decisions about the product or service and the value thereof, a detailed description of the target market, the product or service’s positioning, the pricing strategy, the sales and distribution channels and the promotion strategy.
9. Operational Plan
An explanation of the day-to-day operation of your business. It should include the business’s operating cycle, where the skills and materials will be sourced from, if anything is to be outsourced and how you will manage those relationships, and the cash payment cycle.
10. Financial Plan
The financial plan is an overview of your business’s financial future. You should back up the main features of the financial plan with accurate financial projections.
The most important information to include in this section includes start-up expenses and capitalisation, a 12-month profit and loss projection, a 12-month cash-flow projection, a projected balance sheet at start-up and the end of years one and three and a break-even calculation.
This section contains any supporting documentation you think the reader would want to refer to and could include:
- Brochures and advertising
- Industry studies
- Blueprints and plans
- Maps and photos of locations
- Lists of equipment
- Letters of support from future customers
- Market research studies
- Detailed financial calculations and projections.
- Business plans vary from one organisation to the next as well as the reason for the business plan. If you are writing the business plan to submit to a bank or other institution for funding you should contact the institution beforehand to find out what their specific requirements are for business plans. If you aren’t looking for funding your plan will look different and there should be a focus on cash flow.
- If you are using your business plan as a tool to attract funders, partners or suppliers, the executive summary is the section that will be viewed first. The contents of the summary therefore must make a good impression and clearly demonstrate opportunity and viability.
- Some entrepreneurs are concerned that those who read it could steal their ideas presented in the business plan. While some experts say this really isn’t something to worry about since it is the execution of an idea that is most important, if you believe your plan contains proprietary intellectual property, you should take steps to protect your ideas by registering trademarks and/or patents.
- Using visuals like graphs, tables, diagrams and photos will capture readers’ attention. If you are communicating technical or complex ideas use a graph, table or diagram to increase the likelihood that the information will be read and understood.
- If you are presenting your business plan to third parties, ensure have corrected all spelling and grammatical errors. It is a good idea to give it to someone with strong language skills to edit it for you. Spelling mistakes make a bad impression.
- There are many people who offer to write business plans on your behalf. This is not the best route to take as the process of putting the plan together will identify areas that need further research and help you determine the viability of the idea. It will help you know your business inside out, which is especially essential when presenting to potential investors.
- If you don’t have a strong financial background, you can get assistance from someone who has, but be sure to let them explain the different aspects of your business’s financials. They will help you by pointing out key areas like payment terms and cycles, cash flow and any other discrepancies in your plan.
- One of the most common mistakes people make is in creating unrealistic and over-optimistic projections. You must spend enough time collecting relevant and realistic figures for your financials. As a rule of thumb, experts recommend that start-ups halve their revenue projects and double their expenses.
- Don’t make the business plan too long. In general it shouldn’t exceed 25 pages as this puts people off reading it. If you have more than 25 pages, cut out unnecessary information and include it in the appendix.
Zoning and Permits
If you are thinking about setting up a business in a residential area you will need to know about zoning.
Have you considered the legal ins and outs of starting a business in a residential area? You will need to know about zoning.
The Home Office
You want to open a simple consultancy, for example. You start out on your own, as so many entrepreneurs do, at home in your spare room. No inconvenient trading licences to worry about. As you take on some support staff, you hire your first few square meters of office space. Times are good and suddenly your new business is legit and firing on all cylinders.
Clients are happy, word of mouth has taken care of your marketing and you’ve had to take on more staff to cope with the increased workload.
All of a sudden you no longer fit into the modest office space you hired for your fledgling business and you have to think about expanding. But you’ve been paying rent for over two years and it seems such a waste. And now that you think of it, you were considering selling your substantial home and moving into a lock-up-and-go townhouse.
It occurs to you that perhaps you should keep the house (it’s an asset after all) and convert it into business premises. That way you’ll save on rent.
On the surface it all seems to make perfectly good business sense. Except for one thing. Your house is in a residential area and therefore not zoned for business purposes. In order to trade as a business on those premises, you will have to apply for the property to be rezoned – and the time and energy needed to achieve that may make another year’s worth of paying rent not seem so onerous after all.
If you are operating a one-person business, don’t employ staff and don’t have clients calling regularly at your premises, you don’t have to apply for business rezoning. But if you need to put up signage, expect clients, suppliers and staff, and if the property is used solely for business purposes then, in all likelihood, you’re in for a rezoning application.
If you are searching for a business premises, here is what you need to know about leases and landlords.
The Rezoning Battle
But here’s the catch – applying for a property to be rezoned as a business in no way means that it will automatically happen. As South African cities boom with business growth and congestion becomes an ever-increasing cause of frustration and wasted time, businesses are moving out of the CBD and into what were previously residential areas.
This is a natural phenomenon of urban geography and over time, as residents realise the potential value of selling up their homes to businesses that want to move in, areas are rezoned for business. However, if an area is not yet zoned for business, the residents usually have fairly strong objections to it becoming so.
Businesses generate traffic and parking problems. Local councils typically take the concerns of residents seriously and are reluctant to rezone an area for business on the strength of one application.
Add this to the fact that every local authority has a different set of parameters which guides rezoning decisions – and that each application is taken on its individual merits – and the process becomes extremely complicated.
Ultimately, if you want to avoid the daily horrors of traffic and purchase your own business premises in a residential neighbourhood, your best bet is to set up shop in an area in which other businesses are already established. After all, there is strength in numbers and this greatly improves your chances of getting the area rezoned.
Related: Register A Company In South Africa
To apply for rezoning in an area that is not zoned for business, you have to secure a zoning scheme departure or special consent from the City Council. Getting this can take a while – in some cases up to three months. You may need to advertise your business’s intention to conduct a particular business activity in the local newspapers.
Residents and other stakeholders will have the chance to respond with any complaints, which are heard by a board, before you will be granted or denied the departure. Being granted a departure usually paves the way for successful zoning approval but, once again, there are no guarantees. And all the while, you can’t operate legally as a business in that particular area.
When it comes to the legal side of setting up a business, it pays to do your homework and get professional assistance where appropriate. The cost of mistakes and bad judgement calls in this area can be severe.
Trading licences are governed by the Business Act of 1991, No. 71, which states that certain businesses require licences. These include:
- Those that sell or supply meals or perishable foodstuffs
- Those that provide certain types of health facilities or entertainment. These are defined as Turkish baths, saunas or other health baths; massage or infrared treatment; escort services (male and female); games halls that have coin- or token-operated mechanical or electrical devices or three or more snooker or billiard tables; night clubs and discothèques; cinemas and theatres, and “adult premises” as referred to in section 24 of the Films and Publications Act, 1996
- Those that hawk meals or perishable foodstuffs
Before you open your doors, you had better check whether your business needs a special permit or licence. Certain types of businesses, namely those that sell, hawk or supply meals or perishable foodstuffs and those that provide certain types of health facilities or entertainment, require a licence to trade. In addition, purveyors of liquor need to apply for a liquor licence.
To obtain a trading licence for your business, you need to apply to the Licensing Department, which in turn requires reports from the health and fire department and town planning. The latter two departments will check that your business meets health and fire regulations and that your proposed premises are in an area zoned for business.
- Provincial and Local Government directory
- South Africa Government Services: Permits, Licences and Rights
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