A Primer on Partnerships
There are a number of inherent problems that small businesses face which can be extremely difficult to remedy. One of the most difficult areas is scaling-up, or growing the business from a small core of talent, business volume and market reach into a larger, more resilient entity. There may not be a more frustrating issue than not being of sufficient scale to take advantage of opportunities when they present themselves. How does a business figure out how to scale in rapid fashion when all the elements needed are in short supply?
Typically, the first thing to look at is: How do I obtain the funding necessary to grow my business quickly to take advantage of the opportunity I recognize? This often entails having a business plan and forecasting revenue streams to make the case for funding through the commercial banking industry or private investors. A business person needs to ‘make the case’ to be funded, which takes preparation lead time and considerable effort to achieve. The obvious answer is to have a perpetual business plan in hand and with a quick update of that plan with accompanying financial information with forecasts becomes a light lift to prepare for financing.
A second remedy is to form partnerships with other businesses and share talent, resources and information between the two or more partners in order to take advantage of each other’s strengths. These can range from being temporary for a project or joint venture all the way through a formal business structure that is registered as a partnership. Between the two ends, any combination of sole proprietors and LLCs or LLPs, outside investors and other sources of equity or owned capital can be de facto partnerships as well.
Partnerships can be with partners sharing equally or unequally according to investment. They can have active and passive partners – those who own and operate and others which may be silent, or funding sources only as investors expecting a return on the invested capital. They can be between competitors or are alliances between non-competing entities. The creativity in partnership formation, ownership privileges and responsibilities to clients and each other is endless.
When considering whether to form a partnership, oftentimes outside advice is utilized to help flush out issues and opportunities and through an iterative and collaborative process, arrive at a rough agreement as to how the partnership will function, how the proceeds will be split among the parties, the duration of the partnership from a temporary project through a perpetual entity among the topics. An operating agreement is written, a formal partnership agreement is written and all parties eventually execute the agreement on their own behalf. Spelling issues out in advance, especially how a partner may withdraw or how additional partner(s) can join, is critical to the success of the partnership being formed. The last step prior to signing any document is the critical step for each partner to seek their own legal counsel to review the agreements with the rights and obligations spelled. If a potential partner is not invested enough into a potential partnership, even if it is between family members or friends, to seek out independent counsel, then if a problem is experienced in the future, there is no one else to blame than themselves. Protect yourself from the start and encourage your partners to do the same for an enduring partnership. Qualified legal counsel will also explain the risks involved in forming partnerships, which can be extensive between partners, so that when a partner executes an agreement, the downside risks are known and accepted in full in advance.
In the public sector, partnerships take a different form. Partnerships are oftentimes formed to achieve common goals for promotion, for collaboration and extension of market reach, and for achieving projects that can benefit the community at large where each entity operates. On occasion, Memorandums of Understanding are formed to guide the actions of the partners for inclusion and avoidance of disputes and overlaps in duties. These are most always temporary in nature and are time or funding-based alliances for convenience and service.
One last area of public partnerships are referrals from one to another on a casual basis, according to client and community needs, with each partner organization providing the services they were chartered to provide.
This discussion of partnerships is a starting point to investigating the attributes inherent in forming relationships between entities at many levels through casual to formal arrangements. Once entered into a partnership agreement or if parties represent themselves as partners without any agreements in place, public and case law helps form the relationship and how disputes will be settled. Be aware of how casual alliances can become formal legal obligations in advance of representing yourself as a partner in any endeavor.
Marshall Doak is the Director of the Southern Oregon University Small Business Development Center and a huge supporter of innovation and the community that forms around innovation in the economy. In private practice, he works with businesses that plan to transition to new ownership within the next five years, assisting them to build value that can be converted to retirement income when the business sells. He can be reached through: email@example.com or 541-646-4126.