Bringing a new business partner, co-owner, or investor comes with its own issues. Be aware of these and how to avoid problems.
WHY BRING ON A NEW BUSINESS PARTNER?
There’s many reasons to bring a new business partner into your business. They may have an expertise in growing a business that you lack. Maybe the new business partner owns a similar or competing business somewhere else. You might just need the cash to invest in machinery, product development and other growth.
HOW TO GO ABOUT DOING IT
You can bring a new partner into your business in multiple ways. The main take-away is to plan, plan, plan for what their role will be in the business.
First, there’s the traditional money in exchange for ownership. Pretty simple, most people understand that. Be aware that “ownership” comes with rights to the new investor. Depending on how the bylaws are written, the new business partner may have a say in spending, planning, marketing, pretty much everything to do with the business.
Next, one business can merge with another. Technically it’s some kind of share for share exchange. But the result is that one entity survives, with the assets of both entities merged together.
Another method is when a new business partner exchanges labor, consulting, or equipment for shares.
CLARITY: GET IT IN WRITING!
With all of these methods of growing a business by bringing in new co-owners, get it in writing. What I mean is that the writing should clarify the roles and expectations of both sides of the exchange.
If the new owner is exchanging labor for ownership, define what you mean by “labor”. Not just, “he will work in the business as an electrician” but even more detailed. For example, “he will work 25 hours a week with the tools on customer projects, and at least 10 hours on management”
If it’s a pure money for shares deal, clarify what input the new owner will have in company affairs. See THIS article for a discussion on corporate decision making. Will the new owner be allowed to veto your planned spending on a new piece of equipment? Your plans to expand into Greenville?
HOW TO GET RID OF YOUR NEW BUSINESS PARTNER
Last, consider having an ejection method built into your deal. That is, if the new owner/electrician stops working, how can you get rid of him as an owner so that he’s not bleeding off profits from the company. Well-drafted documents, as always, help here.
CONCLUSION
Call me for all business growth questions in the Western North Carolina area, Asheville, Hendersonville, Waynesville, (312) 671-6453; or email at palermo@palermolaw.com.
Listen to my podcast on this and other business law topics at the link above or here on Spotify: BUSINESS LAW PODCAST
Other related blog posts are here:
WORKING WITH PARTNERS AND INVESTORS
FRIENDS AND FAMILY LOANS FOR YOUR BUSINESS
