Starting a Franchise with Partners- What Should I be Thinking Of?
What You Should Think About When Creating Partners
I have several clients that have asked what should I do if I partner with someone in the franchise.
The first thing you should do is really think about the partner and yourself to determine whether or not the two of you would be a good team. Much like when your dating you try to determine whether or not that individual would make a great partner in life you should do that same thing in business. Do you complement each other, does one have sales and one have back office skills. If the business is sales heavy then do you both have sales and so on and so on. Will it be a 50/50 partnership or 60/40. Who will have final say for important decisions and who will mediate an impasse. What you want to be sure of is that the partnership is level headed and you both can work through the issues that will a rise in business. The best way to enter the partnership with level heads is to create what is called a buy-sell agreement or partnership agreement for the corporation you create that purchases the franchise.
When I started my franchise with a partner we worked with an attorney to create a buy-sell agreement that outlined a lot of different scenarios that we could all think of that might arise in the partnership and what would happen to resolve any of those issues. The first item we addressed was the issue of death. How is the deceased owners percentage taken care of? Are you willing to work with their spouse, are you willing to allow them to maintain the ownership etc. In my case my partner was single at the start of the business and I didn't know who he might marry in the future and whether or not we would get along. So we created a clause for the surviving owner to buy out the estate of the other partner regardless of what the spouse wanted to do. We also addressed participation in the business and what if one of us decided to stop working. We had a 50/50 ownership scenario and I did all the sales while he did all the back office. I have heard time and time again that a failure in a partnership was one feeling like they did all the work and the other just went along for the ride collecting 50% at the end. If not laid out in the agreement then there may be no recourse for the working partner.
One thing we missed, as do a lot of partners, was funding the agreement to pay for the scenarios that might arise. For instance the death of a partner, how is the buyout paid for? If you have not secured a life insurance policy on the owner with the business as the beneficiary then you may have to use cash from operations or sell assets to pay for the buyout. What if your home is the only money you can access at the time and you have to use that. The surviving spouse is entitled to the benefits of the partner and you may have to keep them around if you cannot buy them out. Fortunately there are life insurance policies that can be purchased on the owners, but the buyout can also be done by other means. You should consult your attorney along with your accountant to determine the best solution for your partnership and what issues you will need to address.
If you would like to learn more about investigating a franchise and what else to think about with a partnership, please reach out to me at 310-773-7662 or stephen@thefranchiseconsultingcompany.com
Stephen Winterrowd
