The Start-Up Business
June 01, 2020
Owning your own business can be exciting, challenging and fun! It can also be frightening, particularly given the scary statistics regarding the exceedingly high failure rate of start-up businesses. Below is a case study of one of our recent client experiences.
At EisnerAmper’s Center for Family Business Excellence, we believe that businesses need to start with a strong foundation to ensure their long-term viability. Regarding the scenario highlighted below, the recommendations we gave to Jason and John are very similar to those we often make when working with new business entities – start by creating a plan, talking about the hard stuff and reaching an agreement on a wide range of ‘what-if’ scenarios. By considering these questions -- that are rarely covered ahead of time -- a new partnership greatly increases their chances of success.
Throughout this quarter, we’ll be sharing a host of ideas to help you with your new business venture. Rest assured, we are here to help whenever you need us!
Jason Popper and John Powell are young, ambitious, childhood friends who have always dreamed of going into business together. Recently they bought a car wash business, consisting of three car wash facilities, from its current owners, a married couple who were long-time friends of their respective families. While Jason and John have been working together for several months, learning the ropes from the existing owners, they have not yet had the opportunity to formalize their working relationship with an agreement that will assist them with their decision-making and future organizational challenges.
At first, the two were reluctant to even consider having these conversations and developing a partnership agreement. After all, they had been friends since they were in 3rd grade and felt that they could figure out how to handle any situation. However, they recently witnessed a nasty breakup of another partnership, also among friends, that frightened them both. That experience convinced them that perhaps they might need some help to identify the questions and possible problems that they might realize could be an issue.
Lisë Stewart met with Jason and John and suggested developing a simple agreement document that outlines how the partners will make decisions about issues that often disrupt and undermine an effective partnership. These issues may include business management concerns, hiring and firing policies, family involvement, governance, debt planning and exit strategy planning. Lisë suggested that the partners begin with a fairly simple plan that provides some basic guidelines that can be expanded to deal with challenges as they occur. The group agreed that this might be a very effective way to ensure the continued harmony and success of the business relationship.
Lisë worked with Jason and John to:
- List the agreed strategic goals of the business.
- Brainstorm a list of potential challenging decision points.
- Agree on simple protocols for addressing the issues identified.
Lisë suggested a list of common areas that need to be considered in any partnership discussion. They discussed practical ways in which similar partnerships address areas of concern and handle tricky subjects such as how, if, and when one might consider hiring family members or friends to work in the business. Finally, Lisë helped Jason and John complete a plain language agreement and add an appendix with additional questions and references where the partners can get further information and support as they continue to grow their business.
The purpose of this plain language document is to clearly reflect the partnership discussion between Jason and John and provide the information and framework for an attorney to use to develop the appropriate legal documents.
Their plain language agreement included:
- Their shared values and a statement about how they want to grow the business.
- Clarity regarding the ownership or membership in the business
- What to do if someone wants to leave the partnership.
- What to do if someone is requested to leave the partnership (what constitutes a need to do this).
- Their compensation agreement – how they will pay themselves now and in the future.
- Their individual management responsibilities, including types of meetings and who will be responsible for documentation.
- How they will resolve disagreements and make decisions.
- Their hiring (and firing) policies.
- How they will value the business and undertake their accounting/bookkeeping practices.
- Financial responsibilities, such as how much money can each partner spend without seeking a vote.
- Risk management and ownership of intellectual property.
- How they will avoid any conflicts of interest.
- What to do if things go wrong and they want to dissolve the partnership.
Interestingly, both Jason and John agreed that under normal circumstances, they would never have thought to cover these topics and that the discussion helped to clear the air, improved their understanding of their mutual goals and helped them to see how important ongoing communication was going to be.
Now they can move forward with a shared understanding, a way to resolve conflicts and a better chance to make sure that their partnership will survive and their business will thrive.
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