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Briefs

FSOlegal
briefs

 

 

QUESTIONS TO ASK BEFORE YOU GO INTO BUSINESS WITH THAT FRIEND

You have a concept for a new business and you and your buddies have been discussing how great the potential might be. Thinking about going into business together in these “heady” days, all you can think about is the upside. But, there is a nagging voice telling you that you should think about some risk issues. Here are a few that might not have occurred to you.

How well do you know your prospective business partners? The best legal structure in the world cannot completely insulate you from bad character. It also cannot protect you from incompatible personalities. Are the people you are talking to the types of folks that you would want to stand with through both good times and bad?

As part of your business plan, you have certainly addressed the issue of having adequate funds available to get the business off the ground. But, what do you expect from your partners if you have underestimated that need? Are you expecting the partners to put in more money? If so, is it mandatory? Do your potential partners have the wherewithal to make further investment in the business? If it is mandatory, are you willing to put in more money even if others default? Most businesses go through a period of struggle when they are starting and planning for additional capital needs is important. Whether or not that capital will be forthcoming is a matter of both financial capacity and character.

Who is going to call the shots? At the end of the day, decision making authority needs to be clear for a business to be successful. Who is going to have authority to make what type of decision? Relying simply on voting percentages based on ownership has a certain attractiveness, but sometimes it is too cumbersome to be effective. Also keep in mind that in Indiana, closely held businesses place the owners in a fiduciary relationship. Just because someone has voting control does not mean they have unfettered rights to make decisions on behalf of the company. And certain structures do not naturally have officers or even managers. These issues should be an early part of the discussion.

Author Stephen Covey identified as one of his 7 habits of highly effective people the habit of beginning with the end in mind. In that spirit, how do you see this business ending? Does there need to be a succession plan? Will the business be sold? Will you simply close the business and liquidate the assets? Will it be perpetual, with the business providing a market for departing owner’s shares? If so, will it be able to pay for it?

Have you had frank conversations with your prospective partners about individual responsibilities and obligations to the business? Do some of them have other business interests? If so, how much time are they required to devote to this business? Do their side interests in any way compete with the plan for the new business? Is everyone expected to be active in the business, or are some more or less passive investors?

In starting a new business, there are important issues to be answered about legal structure, tax efficiency, and insurance. These are only part of the puzzle. In choosing to enter a new business relationship with other individuals, it is important to consider the human dynamics as they are the most likely determinate of a successful outcome. One of my mentors used to say, “I’d rather be in a bad deal with good people than in a good deal with bad people.” I have always taken those words to heart.