In March 2021, Titi and Bose decided to start a clothing business. They sat down and drew up the cost of getting the clothes and the packaging materials. They talked about the marketing plans, setting up social media accounts, and running ads, and promotions. They split the cost evenly and shared the roles and responsibilities equally. Three weeks after starting, they started getting orders from some customers who opted to pick up their goods. At this point, Titi and Bose decided that it would be wise to have a small physical outlet and showroom where they could also display the goods and have customers pick up.
Titi had an unused 8by10ft store close to her gate. Although her husband intended to lease it out, she was sure he would not mind letting them have it for their business. So, they moved their goods in, put the place in order and it became their official store. Fast forward to 2022, it is now time to take account for the first 12 months of business, and after totaling the records, Bose decides that they should split the profit equally again. But there is a problem.
Titi is asking for 2-years’ rent on her husband’s property which they have used for a year without paying. Bose thinks Titi is just being problematic.
“I thought you offered for us to use the store free. Why ask for rent now?” Bose asked.
“Where in Lagos do you get a store to use for your business free? The store was ready to be rented out before I prevailed on my husband to let us have it, even without paying upfront. We have to pay him his money now” Titi insisted.
The friends and business partners are now at loggerheads, and it is threatening to break their 20 years of friendship. Neither is ready to accept wrong or give an inch to the other.
Unfortunately, many business partnerships between friends will end in similar rifts if you do not take the right steps. Here is what you should know and define clearly before entering a partnership with a friend, or anyone at all.
Define what kind of partnership it is.
Is it a general partnership or a limited partnership? Will the partners be responsible for the business debts and obligations? Is any partner going to serve as a Managing partner? What is each partner contributing to the arrangement, and what is the real value of that contribution? All of these things have to be defined ahead of time.
There are partners who will bring in the funds you need for the business and simply disappear. There are others who may not have the funds contribute, but will run the business for months without collecting any remuneration. You have to decide the value of each of them, and what stakes each person has in the business. Deciding this at the beginning of the business is the only way to have a fair deal.
Register the partnership properly
Just like you would register a sole proprietorship, a partnership should be registered to include the name of all the partners. This is good for documentation, and can help prevent or easily resolve a lot of avoidable conflicts in the future. There are also tax benefits that a partnership can enjoy when properly registered, so you should definitely give it a go.
If the business starts as one person’s business and becomes a partnership much later, do not forget to review the registration in line with the change. Some people are putting in so much sweat and blood to run a business that they do not have a stake in, and they think that simply because their name was added to the signage, all the paperwork have been resolved. Do not leave anything to chance.
Separate the Business from the individuals.
Decide and take steps to give the business an identity of its own. If you have one partner running the business fulltime while the other is simply a financial partner, make it clear that the managing partner is placed on an agreed salary and does not dip into the business funds at convenience to take care of personal needs.
Ask the right questions, and the stupid questions too
An adage says “he who asks questions never misses his way”. This is most true in a partnership. But you must start the questions from the first day. Don’t wait till you run into a ditch somewhere.
How will the ownership interest be distributed? Will any share be left floating to admit new partners in the future, or to reward existing partners who show a certain level of commitment? How will authority be distributed? Who will make the decisions for the business? Is it going to be a 50/50 decision-making process? What happens when they are on opposite sides? Is there a neutral person you can call on to break the tie? If a partner chooses to withdraw from the business, how and when will the money be paid to him? Immediately? Or after a period of four to five years? You don’t want to suddenly end in a financial crisis because one partner chose to opt-out.
Don’t start a partnership without consulting a lawyer
Partnership is not to be treated with kid gloves. It is way more than downloading a partnership agreement from a template warehouse online. Get a lawyer, sit down and have a chat, and have him or her draft an agreement. Everything should be spelt out in black and white. We have a previous article on legal options you can explore if you cannot afford to keep the lawyer on a permanent retainer.
