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Before you start the business or even invest a dime, get everyone to agree to GET AN ATTORNEY to create a partnership agreement! I have seen so many messages on this board where someone trusted someone else as a friend. Trust me when I tell you, friendship is almost always the first thing to go when the business goes.
I mean it. Get an attorney. It is money well spent and will save you and your partners thousands in the long run. Seriously, stop what you are doing with your business, and read the rest of this message...
A partnership agreement can mean many things. It can define what the roles are for each member of the company. It can define what happens to your share when life events intervene. It can and should define what happens when someone wants out.
My attorney gave me sage advice that saved us a ton of heartache. A business partnership is easy to get into, but very difficult to escape from. We spent around $1200 for our LLC and operating agreement, which included the partnership agreement. It seems like a lot, but read further.
I had worked with two of my three partners for more than 5 years. I bent in a huge way when one partner had issues with working a 40 hour week. I bent when she wanted to be paid during maternity leave, and paid her out of my pocket as if we had a disability policy. I bent when she wanted to go part time.
When I broke and chastised her for not living up to the three day schedule she wanted, she up and quit. Immediately. No discussion. 60 days notice, as written in our partnership agreement. Then she demanded what she determined was her share of the company. $20K, due immediately.
Not so fast, I said. We all signed an operating agreement, so I said no. Follow the rules and get an appraisal, like we agreed. She had to pay for this appraisal according to the rules, since she was the one who quit.
She decided to use accrual accounting when she presented the balance sheet and P&L to her appraiser. Unfortunately for her, we are a cash accounting business. This also meant we rejected the $220K valuation she came up with. She though just because she paid for an appraisal, we were obligated to accept it. Again, not so fast, I said.
We rejected it, and she promptly responded with a lawsuit. Again, not so fast, I said. She can't do that. Our operating agreement says specifically that all disputes must go to mediation first, followed by binding arbitration. We negotiated, and wound up settling on less than half her original hallucination. Paying $1,200 up front saved us $30K plus legal fees.
GET A PARTNERSHIP AGREEMENT TODAY! THANK ME TOMORROW!
Bruce
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