Business Partners – Love them?

Whenever two business partners come to me to start a new medical practice, they will ask all sorts of questions from profit splits, taxation, structure and making money.

Most also accept the cost of setting up and taking advise.

One thing is almost certain. None will ever discuss splitting up. I’m talking about potential business divorce.

Now I get it. You don’t want to talk about a divorce when you are about to get into bed together. It’s not the most romantic of discussions.

Now having a business partner makes sense. You can split the responsibility and the chances are you will have different skill sets too. 

In the beginning, things start out perfect. You have shared vision and goals and when you get together, they are rarely any major disagreements.

But a business relationship, like any relationship, can often be complicated just like being married. There’s more because as Princess Diana found having three in a relationship is a bit of a problem. In a medical practice there may be three or more partners.

If there is one thing I have learnt is that at some stage there will be divergence of vision and goals. Rarely does this not happen. But when is does, it comes when you least expect it.

And that means there is a need for one business partner to exit the business.

The problem? The person leaving wants money. Usually more than the business is worth due to the time, effort and sweat they put in.

The person staying wants to pay the lowest amount to their partner to leave. This results is a stalemate. Now if the ownership is different the one that owns more can use bulging muscles to push the other out.

But most partners have equal shares and could mean not one person as overall control.

The stalemate usually means the one who wants to leave cannot and the one who wants to take over cannot. This results in a stressful business not just for the owners but also for all team members. And it affects the business big time. I have seen everything from reduced fee income and profits to key team members leaving.

It is, therefore, essential to have a plan or rules for the potential exit of business partners.

The only way you can do that is to think about the worst before it becomes worse.

I always recommend shareholder agreements and rarely are they acted upon. When a medical business is about to start up and funds are tight most business partners are reluctant to have these done. From a business point of view why pay to solve a problem that does not yet exist. Why spend the best part of $5K when that can be diverted elsewhere? So, it is decided that this will be done at a later stage. Except a later stage never arises.

But I believe these agreements are critical. Here’s why:

When it Goes Wrong You Will Pay More

Without written agreement or rules there are arguments. At some stage lawyers will get involved. And most lawyers charge for every 6 minutes which means it starts adding up.

I have seen several of these happen. On average the cost of legal expenses will be at least $100,000 on each side and you have gone nowhere near a court room.

Spending $5,000 knowing you could save $200,000 starts to make sense

A procedure for Disputes

A shareholder’s agreement is designed so that if problems arise there is a path and set of rules to follow to avoid arguments. For example, as stated above the person selling wants highest price and the one buying wants a lower price. It is not unusual for agreement to state how the price will be determined

Expectations are documented

These agreements can include whatever you like and what the business expects from its shareholders. I can have minimum weekly hours and even leave time in year.

Buy-Sell Agreements

This is always best explained via an example.

Dr Joe and Dr Jane are business partners and have been operating a successful medical GP business owning 50% each. The medical centre is established with a loyal patient base who have very happy with the medical care received.

Dr Jane collapses from a heart attack and dies. Dr Jane has no will but is married to Jim, someone Dr Joe has met a few times but does not really know.

Dr Joe now has a new business partner, Jim.

Jim is sceptic of modern healthcare and believes traditional medical centres that offer commercial medication are damaging patient health. He also believes that natural remedies, spiritual healing and relaxed exercise is the cure to most problems.

Jim believes the medical centre should be converted to a natural remedies and wellness centre.

You see the problem? Dr Joe does not know Jim and may not even like him. All of a sudden, they are business partners with different ideas of how the business should be run.

Now the above situation is extreme, but I know of spouses that previously had no idea how a medical centre is run, what is involved or having any experience of business suddenly becoming business partners and thinking they can run the business better.

But don’t think one has to die. It could be anything from no longer interested in the business, to fraud, to a divergence of what goals are.

To avoid these kinds of issues you can agree to have buy and sell agreements.

In the above case when Joe dies, Jim has the option to buy Joe’s share out which means he controls the company and Matthew can go and retire on Waikiki Beach.

There are still issues. If the business is worth $2m, Jim still has to come up with $1m to pay Matthew off. In this case Keyman insurance, TPD and life insurance where the policy holder is either the company or Jim can be used to cover the cost of purchase.

Out of every 10 businesses where are there 2 of more business partners I would believe there would be 1 business where partners separate amicably. That means 9 or 90% will argue create stress, anger and lose money.

Or you could spend $5,000 and have a good nights sleep.