Often clients with existing businesses decide they want to bring in a new partner – a “growth partner”. Someone who brings skills, considerable funding, industry connections, know-how, or other business acumen to the table. In a separate article we discuss the 42 Questions you should ask before taking on a business partner. Here we get into some very basic but essential questions you should address before letting someone into the business you’ve already established.
What services are they specifically contributing?
Often someone is being brought into the business because they offer certain specific skills such as IT services, legal services, accounting services, construction services, business development services etc. If your potential new business partner is contributing services then you need to determine with specificity and document: (1) what specific services are they contributing (2) how much time will they dedicate to contributing those services (whether on a weekly, monthly, or annual basis etc.) (3) the agreed upon value of those services whether it be based on an hourly rate, or a fixed fee rate for a specific service, and (4) any specific guarantees or promises regarding the outcome of those services.
The point of all this is to specifically quantify the services the new partner is bringing to the table in order to (1) better understand if they’re paying a fair contribution (price) in exchange for the percentage ownership of the business, and (2) to avoid disputes later on as to whether they made an actual (or fair) contribution to the business in exchange for their percentage ownership.
For example, often partners will argue that partner A was supposed to contribute certain business development services to the business but the partners never put pen to paper on what that actually meant. They never documented the specific business development services, the time devoted to those services, the agreed upon value of those services, and the reasonable expectations of the partners regarding the outcome/guarantees of those services. This could theoretically lead to a determination that the partner didn’t “pay” (or contribute) what was promised in exchange for their percentage interest and that as a result they are not actually a partner in the business. It could also set the stage for a breach of contract claim, or breach of fiduciary duty claim. The point is, the failure to properly document the parties’ understanding can lead to a messy, complicated, and expensive dispute
What is the value of assets they are contributing?
The story changes slightly if your new partner is contributing assets. Actually it’s a bit simpler but follows essentially the same principles: (1) what specific assets are they contributing (2) what is the agreed upon value of those assets? Also, there should be a discussion in some cases as to the Company’s continued right to use those assets in the event the new partner leaves the business. Especially if those assets are essential to the Company’s success.
