Business Law: When It Comes to Choosing Business Partners, Look Before You Leap

By Nina L. Kaufman, Esq

Once upon a time, there was a fox that had fallen into a well. A thirsty goat ambled by and asked the fox if the water was good. The fox told the goat that he had never tasted such clear, pure, water in his life. The goat was so thirsty, that he went into the well to drink his fill, without thinking how he would get back out of the well. Once there, the fox suggested that the goat stand on his hind haunches so that the fox could nip up to the top, and then pull up the goat after him. The goat happily complied. However, once the fox climbed out of the well, he soon made off in another direction. "Wait!" cried the goat. "You broke our agreement! You promised to help me out of here!" The fox replied, "You have more hairs in your beard than brains in your head, Mr. Goat. Otherwise, you wouldn't have gone down the well without thinking how you were going to get up."

This Aesop's fable tells us a lot about trust, collaboration, and - for the purposes of this article - having a plan. Plans are especially important when it comes to choosing a potential business partner. So often, the promise of "something new" (like new love) can make us blind to the realities, the quirks and the weaknesses, of the business relationship.

For example, there are a number of entrepreneurs who have formed a new business entity with a co-owner without having worked out the details of how the business will be owned, what each owner will be expected to contribute, and under what circumstances each can leave the company. Each issue by itself could wreck the company if the owners can't reach an agreement. That's why having a business owner agreement - whether a partnership agreement for a partnership, a shareholders' agreement for a corporation, or an operating agreement for an LLC - is such an essential first step . . . perhaps even more important than forming the company itself. You can always form a company after you reach an agreement with your co-owner. But dissolving a company because you can't reach an agreement with your co-owners is, well, a sad waste of money and time.

David learned this lesson all too well. He and his potential business partner, Kevin, were eager to start an animation company. They had worked together at Disney Studios a number of years ago, got along well, and when the time was right, looked to each other for the camaraderie and "brain trust" they had shared in the corporate world. So they started to discuss the possibilities of setting up shop together and began negotiating the terms of a business owners' agreement. They were trying to work out the company's operations - who would be responsible for what - when Kevin decided to totally renovate his apartment. This, despite the fact that Kevin was not in corporate America drawing a salary, but an entrepreneur trying to build his business. "All my friends in corporate America were getting something new," Kevin explained. "A new apartment, a weekend place in the country, a new car, a long vacation - I deserved something new, too." The contractor made a real mess of the place, so Kevin had to deal with that situation. This put negotiations with David on hold for a bit. Negotiations resumed, but several weeks later, Kevin developed some kind of debilitating stomach virus.

Then, a special (and time-consuming project) dropped in Kevin's lap, which took him to Tokyo for several months on assignment. Then, Kevin's father suffered a terrible stroke, and Kevin flew to Wisconsin to spend time with him. David hasn't heard from Kevin in over a year. "Thank God we didn't actually start something," said David. "I would have had to spend all my time chasing after Kevin and following up after him. I'm glad I took the time to try to negotiate the deal instead of rushing into it." In other words, David looked before he leapt and, in hindsight, he didn't like what he saw.

So what should you look at before deciding to go into business with someone else?

1. Do you really need to do this? What's your motivation? Are you lonely working alone, or does this person really offer another skill set that you don't have? Think creatively about whether you can get your real needs met in an employee or outsourced contractor situation . . . or by developing a mastermind alliance.

2. Be honest with your own strengths and weaknesses. Like #1, above, it helps to know yourself and how you need the other person to contribute. Are you looking for a financial partner? Someone to share the workload? Do you need a creative mind to balance your managerial one? What strengths and weaknesses overlap?

3. Don't fool yourself. As with personal relationships, we may turn a blind eye toward certain behaviors because we really just want the relationship to work out . . . for reasons having nothing to do with the other person. David saw Kevin undertaking major financial burdens (in the form of apartment renovation), and doing so at a time when Kevin did not have a lot of disposable cash. And why? For the adult equivalent of "all my friends have [one]." Kevin's financial irresponsibility was a definite warning signal. David was wise to keep his eyes open.

4. It's never too late. Entrepreneurs often feel pressured to start a business right away because they might lose a competitive advantage, or the potential business partner might walk away. In some cases, you might be right that you can't wait forever. Nevertheless, that doesn't mean that rushing into a new venture is right for you, either. If David had rushed to form a company with Kevin, he would have found himself tethered to a company with an AWOL owner, and possibly incurring a lot more in expenses to either keep the company running or dissolving it altogether.

5. Get it in writing. Mr. Goat didn't think through what would happen if he went down the well. And many entrepreneurs don't think through the possible permutations and options in starting a business with another. That's why having advisors on board - legal, accounting, coaching, etc. - are so important in guiding you through this process. Putting your observations and desires in writing helps crystallize your thinking about the relationship.

Entrepreneurship is a calculated gamble. That's why making sure you have a business owner agreement before you form the business is so important. If you "look before you leap" - especially when choosing a business partner - you can ensure that you'll leap into abundance instead of a dry well!

© 2004-2009 The Legal Edge LLC. Nina L. Kaufman, Esq. is an award-winning business attorney, author, and speaker. Under her Ask The Business Lawyer umbrella, Nina offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "LexAppeal" ezine, visit http://www.GreatBusinessLawTips.com  or contact Contact Us. This article is for your general information only. Be sure to consult with an attorney regarding your particular situation to make sure you get the specific advice you need.

Nina Kaufman, Esq. Award Winning Business Lawyer, Author & Speaker