Partnership plusses and pitfalls

The dynamics of going into business with the boss. March 23, 2002

My fiancee has years of experience and knows how to set up and run a custom cabinet shop and produce high quality goods, and his boss has the money, credit and contacts to support a business venture. What are the pitfalls and profit ratios we should be thinking about with this partnership? The boss is a frame/trim contractor in business over 20 years with at least 50 subs and 1/2 dozen employees, in addition to a great rep. They've rented a 3000 sq ft warehouse and my fiancee is detailing tools/machinery to buy - around $10,000 worth (agreed upon). Both have great contacts for orders. They'll be setting up the paperwork/partnership contract/agreements this week.

Forum Responses
In my opinion, the first most important thing is that every principle partner must have a well-defined and documented set of expectations, assumptions and responsibilities. If you fail to establish any of the above, you are veritably doomed to fail. Establish a solid understanding of who is responsible and who has authority for what aspects of the business, and respect those tenants faithfully. If your fiancee is responsible for shop equipment operations, material purchasing, etc, then the other partner must honor that, and if the other partner wants to order a couple of units of material for a particular job, it should flow through your fiancee. That works both ways, of course.

Clear understandings and frequent, clear communications are required to prevent simple misunderstandings from dissolving partnerships. Even two people who work seamlessly together on complex projects can easily turn to feuding due to insufficient or poor communications, or poorly defined roles/responsibilities.

If you are part of the business, your attitude can make or break the partnership, too. Office politics (among other things) have been responsible for the demise of many a promising company.

It could work, but the chances are slim to none. If each partner is on equal ground and the one who puts up the money simply does so as a loan to the corporation and the corporation makes payments on that loan, you will have a better chance. For the small amount of money you are proposing, you might be better off with an agreement to work together in a separate capacity, each listing a percentage of return for their involvement in each project. At best, this will be difficult to pull off; at worst you will not be friends in the end. But, nothing ventured, nothing gained.

I agree with the above. 10k is not all that much money when it comes to tools. His boss has the money? Why doesn't his boss just set up the shop and make your fiancee the shop manager? If you want your own shop, just borrow the money from his boss and pay him his interest. Be careful - go slow and get as much as you can in writing. You will need more money.

From contributor A:
I started a shop with two partners in a similar situation. Two of us put up an initial $10K. The government required that all partners put up $2K minimum (I think that is the number), to register as an S-Corp.

Five years later, we have accumulated approximately $50,000 in debt to operate the company and purchase additional machinery. This debt is payable to the partners and two banks. We are just making our bills and payroll. To minimize our debt, we are selling a CNC, which we don't use. Two of us made the decision and the third isn't too happy but will go along.

I don't think there is any animosity between the three of us and we are meeting weekly to discuss the direction of the business. The debt is incidental to me, especially for a company less than five years old. We continue to exceed the previous year's gross sales.

One thing to keep in mind. We talked about getting key man insurance for our partner that runs the shop. Basically, this means that if he dies we get an insurance payoff to take care of the outstanding debt, and to help us in the transition of getting a new shop manager.

From the original questioner:
This all started with my fiancee asking for a loan to start up a shop. But the boss wants to be a partner (splitting the profits), not just a return on a 10K loan. I think my fiancee should minimize the agreement to a 1 year term.

As for the boss's involvement, he'll be a "silent" partner. He'll rely on my fiancee to run the shop, do the bids, and build the stuff.

As for going into major debt, neither of these guys wants that. They'll both have to agree on how much (profit) is reinvested as the business grows. This venture is going to be pretty small (1-2 man shop).

A note about potential profits... In our area (central Florida), construction is booming and the boss's present clients want him to get a custom shop going, so that from one side of the business they get frame and trim carpentry, and the other end, they get custom case goods. Build the condos, trim the condos, trim and build the case goods for the clubhouse, offices, virtual reality room, rec center, library, etc.

When you start a partnership, you should have a buy sell agreement. This will cover the dissolution of the partnership or one partner buying out the other, and how it is paid for as well as establishing a value or method for establishing a value. It is also wise to have insurance on both partners to pay for the buyout. In the event that your fiancee died and you were his wife at the time, this would allow the other partner to have the funds to buy your half of the business from you and for you to have some income for your family (future). This deal could grow for years and be very successful. One of the keys is determining how to deal with potential future problems before they exist.

From contributor A:
In terms of key man insurance, if I died, I don't want my death to be a burden on my family. In the same sense, if my partner dies, and he is the one that operates the shop, while I only do the books, then I don't want to lose the business. There is no way I could step into his role at this time. Down the road I may be able to, but not right now. Besides, in the event of his death that means that his widow won't be responsible for his share of the company debt. Plus, she would be paid off according to the buyout terms we established prior to organizing the company.

The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).

Comment from contributor B:
For a 10,000 dollar investment, don't take a partner. In this business, it's not easy to make a good profit. How will your fiancee feel after working a 70 hour week and having to split a 500 paycheck with a silent and non-productive partner? Get a loan. Interest rates are very low.