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.
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.