It is not unusual for an enterprise owner to be approached by an ambitious person with an idea that will expand the enterprise to a new business or location. More often than not, these are not an idea for the enterprise but a partnering or other relationship in which the person seeks ownership and participation. These can be great or tear apart the enterprise, with costly consequences, if they are not set up correctly in the beginning. Last week, I had a call from a lady desperately hoping that I could help her out of the mess she was in.
She had approached the owner of the enterprise with an offer to help him expand into a lucrative market where she was established. She would manage and build the location. The business would be a hand in glove fit with the existing enterprise expanding the base of business to transact with businesses already under the enterprise umbrella. He knew her and her background and knew that she was the type he would hire if he were going to expand into that market. He had also been trying to put an exit strategy in place but did not have any candidate successors. She was also to invest some cash to get this started so it was definitely worth considering.
Once the two decided that it was worthy venture many components were initiated. They found a location to lease, agreed to use the operational infrastructure in place for other locations in the same genre of business under the enterprise and begin to submit requests for approval to the various government entities as well as the franchisor. Things were moving along quickly and people were being recruited to work there. Everyone was very busy.
The relationship of the parties and percentage of ownership were verbally defined and agreed with a handshake. The enterprise owner would have the majority stake in the venture which is not unusual. Everyone made promises to put everything in writing and some documents were drawn but none fully executed or filed. The use of the funds and consideration of costs including working without pay during an initial building period as a part of the investment were in many cases assumed or not discussed.
A few years have passed and no one is happy. Communications are primarily stiff, awkward and non-productive. There is a desire to dissolve the business relationship but no mechanics in place to do it in a business-like fashion. No matter how this is done, there will be hurt, resentment and financial loss.
All of this could have been averted with a few preliminary structures and knowing that the investment of time in setting up any business relationship correctly usually mitigates risk and establishes the boundaries where everyone can win.
- You do not have an agreement that will stand unless it is in writing and signed by all shareholders and stakeholders.
- Engage legal and financial help at the beginning, it is less costly than if you have to undo things later.
- Make sure that you have a strong Buy – Sell Agreement that address what happens if:
- You want to change the percentage of ownership;
- A partner is no longer able to take care of the business responsibilities and/or financial commitments to the business;
- The business segment is to be dissolved.
- A partner wants to be bought out.
- Make sure that you have set up the valuation methodology and criteria that will be used for any change in ownership or investment.
- Make sure that the agreement addresses what happens if more capital is required beyond the initial investment and how continuing financial obligations such as leases, mortgages and loans will be handled.
- Have all working arrangements, roles and responsibilities detailed and agreed in writing with specific review dates, accountability measurements and achievement criteria.
- Write and agree to a business plan for the business segment that is more than a spreadsheet. The how is often times more important than the projected results.
- Determine, as a part of the agreement, non-compete criteria should the business be dissolved or a partner leave the business.
- If the business is such that there is potentially an impact on people where factor such as loyalty to a person or relationships may impact the ongoing business, these should be considered in the initial agreement so that there are no questions later.
- If the severance of the business was to occur, what happens with other business relationships within the enterprise? Will the severed entity still be able to transact business as a customer?
- Consider payouts and valuation for remainder or follow-on business as a result of the business segment or partners efforts.
- Consider how will data, databases, customer relationships, proprietary methods and or processes be treated if there is a separation of interests or parties.
- Consider ownership of all branding and identities. Define who owns what and what will happen post severance? This includes web sites and social media.
- Make sure that use of space, names, and information procured as a result of the partnership is defined if there is dissolution or severance. Define whether or not setting up email forwarding or other methods of sustaining data, information and internal or customer communications is allowed or prohibited post separation.
- Define references that may be made to the past relationship in future marketing as in “formerly known as” or “formerly affiliated with”. This is follow-on marketing using the association. Such practices may or may not be in the best interests of the remaining entity if the severed entity is engaged in the same or a similar business.
No matter how exciting the opportunity may appear or the external factors that suggest short cutting it never is worth it in the end. If you must take advantage of a situation and do not have time to do it right, at minimum put a written agreement in place that outlines the initial structure with a definitive date for the detailed agreement to be written and agreed by all parties with a “what if” clause if it does not occur.
An enterprise built by design is always documented and reduces the risk that impulsive decisions and actions bring.