Setting up a business partnership

I am contemplating selling a share of my business to the person who manages and works in the business full time (whereas i am more part time). Is this a good idea? Has anyone done something of this nature and are there any pitfalls to beware of?

jersey10 said:

I am contemplating selling a share of my business to the person who manages and works in the business full time (whereas i am more part time). Is this a good idea? Has anyone done something of this nature and are there any pitfalls to beware of?

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I did something similar... with my ex... no wait a minute, I gifted a 1/2 share and she didn't even work in the business!

But seriously, it depends what you are trying to achieve. In my case it was common for income splitting.

If you are after some extra ready cash it could be a good idea. Similarly, it could be a way to let your key staff become more involved and committed in the business.

On the flip side, you may loose control of some key decision making and direction of the business depending on how much you sell and what your new partners role is in the business.

I know of a few cases of partnerships where one partner, for one reason or another wanted to change direction in life and sell their business interest. The other partner was in a position of intimately knowing the workings and profitability of the business and was able to buy out the other share making exiting the business a much simpler option than putting it on the market for example.

This is something that may come up for me one day too, and I think there'd have to be very clearcut agreements in place regarding income, decision-making control etc. How are the profits of the business distributed now? - do you take a salary from an incorporated business or is all profit simply yours? How would this alter? If your new partner contributes more to the profit, will they be entitled to a greater share? Will they pay for their share of the business up-front, or in instalments? Will they be able to on-sell their share to a third party unknown to you? - or could you find yourself in a situation where you'd be forced to buy it back to retain control of your own business? What if your new partner starts slacking off, or wants to relocate, or take the business in a different direction, or borrow to purchase new equipment/machinery and/or take business risks you're not comfortable with?

I don't necessarily want to put you off - I'm aware of some partnerships that flourish. I do think though that you'd need to be so very, very careful about who you go into business with - partnership disputes have caused the end of so many friendships and family relationships. I must admit I'm probably too much of a control-freak (and so is my husband) to consider handing over any decision-making control of our business. If we're unable to find an outright buyer for our business when the time comes, maybe we'd consider selling it on an instalment system whereby the purchaser worked in the business and bought increasing shares of it from profits - but I'd rather sell it outright if I could.

Whiskers said:

I did something similar... with my ex... no wait a minute, I gifted a 1/2 share and she didn't even work in the business!

But seriously, it depends what you are trying to achieve. In my case it was common for income splitting.

If you are after some extra ready cash it could be a good idea. Similarly, it could be a way to let your key staff become more involved and committed in the business.

On the flip side, you may loose control of some key decision making and direction of the business depending on how much you sell and what your new partners role is in the business.

I know of a few cases of partnerships where one partner, for one reason or another wanted to change direction in life and sell their business interest. The other partner was in a position of intimately knowing the workings and profitability of the business and was able to buy out the other share making exiting the business a much simpler option than putting it on the market for example.

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My main objective is to keep the manager locked in so i am free to do other things and minimise my input in the business while giving the manager the incentive of sharing the profits of the business. I agree it will be very important to have every detail covered relating to income, exit strategy, profits, etc. etc.

jersey10 said:

My main objective is to keep the manager locked in so i am free to do other things and minimise my input in the business while giving the manager the incentive of sharing the profits of the business. I agree it will be very important to have every detail covered relating to income, exit strategy, profits, etc. etc.

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Have you considered incorporating at as a company rather than a partnership?

McLovin said:

Have you considered incorporating at as a company rather than a partnership?

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It is a company.

jersey10 said:

It is a company.

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How robust is your shareholder agreement if you have one?

I'll assume you don't have one based on the OP. I'd say consult a solicitor, you need to specify exactly what you are both going to put into the business. You may also want to look at issuing different classes of shares to eachother with limits on them (ie one class can vote, but isn't entitled to a dividend).

jersey10 said:

My main objective is to keep the manager locked in so i am free to do other things and minimise my input in the business while giving the manager the incentive of sharing the profits of the business. I agree it will be very important to have every detail covered relating to income, exit strategy, profits, etc. etc.

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Why not just offer a performance/profit based bonus, or a share of profits achieved beyond a set benchmark, rather than a share of the business itself? Owning a share of the business won't necessarily "lock in" an employee/partner if they decide they want to move on, but buying out a partner could be far more problematic than replacing an employee.