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Plan Early for a Successful Partnership

Written by: Marijo McCarthy

Article Overview: Forming a company with a few colleagues these days may make all the sense in the world. And combining skills, assets and business development efforts may very well be a smart move. But, what happens when the bank asks for a personal guarantee of the company owners and one of them declines? Where do you go from there?

Plan Early for a Successful Partnership

Forming a company with a few colleagues these days may make all the sense in the world. And combining skills, assets and business development efforts may very well be a smart move.

But, what happens when the bank asks for a personal guarantee of the company owners and one of them declines? Where do you go from there?

Let me paint a picture…

Three smart people get caught on the wrong side of a large corporate layoff. Despite their talent, hard work and contributions, the large consulting company for which they have individually worked for many years tells its employees that revenues are down, expenses are up and there is nothing left to cut except payroll. No surprise there… lately we are seeing it happen every week.

Fortunately, the corporate employer decides to offer generous severance packages to those leaving and the three smart people find themselves sitting in the company's cafeteria on their last day of work, sharing thoughts on next steps. They decide to pool resources and open their own business. In fact, their employer encourages them to do so and offers referrals of smaller project clients. So far, so good.

Twelve months later, the business has legs, but it needs capital. Capital to operate, capital to cover expenses while waiting to be paid by larger business clients, capital to pay the salaries that the founders have foregone in the start-up stage.

So they turn to their friendly banker who reviews the short track record, long industry experience and contacts, status of contracts, etc. In short order, our friends' new business qualifies for a $100,000.00 line of credit. The bank's commitment letter arrives and the three owners eagerly begin to review the terms. More good news, until… lo and behold, the bank wants the unconditional personal guarantee of each of the owners.

Such guarantees were standard requirements even before the economic meltdown and certainly not something which will be abandoned today. But when one of the principals balks, now what options are available?!

Well, how about we rewind those 12 months and consider a better game plan from the start:

• Begin with a consultation with a lawyer and an accountant. Advice and mentoring at the very beginning will often save well-meaning colleagues from reaching the kind of impasse at which our three friends now find themselves.

• Pay attention when counsel advises the creation of an owner's agreement (stockholder agreement for corporate owners; operating agreement for limited liability company owners). These folks have a world of experience in helping owners "fix" mistakes made when creating a "do-it-yourself" company.

• Spend the time now to hammer out the pesky (but essential) questions that, if left unattended, may come back to bite you later. Having to "unwind" the relationship due to one partner's unwillingness to sign a personal guarantee months down the line is just one example of a situation that you don't want to face. (Do you really want to find yourselves having that argument in front of your new banker?)

Speaking frankly and bringing in professional counsel from the start doesn't mean you don't trust each other. It's simply good business practice and one which, if followed consistently, will allow you and your colleagues to continue to grow for many years to come.

Remember, as one of our founding entrepreneurs, Ben Franklin, advised, "An ounce of prevention…"

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  Partnerships - Some of the basics
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  What Type Of Company Should I set Up UK
  The Partnership Model for Growth and Profit

Article Tags: business development efforts, colleagues, forming a company, partnership, personal guarantee



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