What’s the most important thing to do when you start thinking about developing a partnership? The correct answer is to make sure that you have a clear out at the beginning.
The very first clause in every partnership needs to be “how do we dissolve this partnership?” It sounds ridiculous, because at the beginning of the partnership, everybody’s happy, everybody’s great. Nobody’s thinking about the end, everybody’s looking forward to how great things are going to be, and how this will grow and change the world. It’s important not to get caught up in the euphoria of the moment.
At the beginning of the partnership, take a moment to step back and think logically. Ask your partner what you’ll need to do if you decide to undo this partnership. Decide who will owe money, who they’ll owe the money to, and how much they’ll owe, so you can dissolve the partnership.
It’s important to establish this early because you don’t know what’s going to happen, both in terms of the company and the partnership. You don’t know if the partnership is going to work out. A business partnership is much different from a friendship.
There’s only one partnership that I’ve ever seen that truly worked where each guy owned half of the company, and it was two guys up in Ohio. They ran it great for many years, but eventually, their lives diverged. One of the guys had an empty nest at home and decided that he wanted to travel. The other guy had a special needs child and wanted to devote more time to his family. Because these two goals differ wildly from each other and their lives were going in completely different directions, they had an extremely difficult decision to make.
Because they didn’t take the opportunity at the beginning of the partnership to have an out clause, they found themselves in a difficult situation. One of them offered to buy, and the other offered to sell, but only for a certain amount. Dissolving the partnership and moving forward created a huge headache and left a lot of bad blood between the two men.
Taking my own advice
I’ve been in a number of different partnerships, both great and not so great. In one of these partnerships, I decided that I wanted to start a geothermal installation company. I thought it was a great idea because I had recently done it on my house, it worked great, it was green, and I was now eligible for government subsidies.
This is when I immediately set up my out clause.
I had a partner that wanted to join the company and be part of it, so we brought him in. The clause that he agreed to stated that if anybody wanted to get out of this partnership, this is what it’d cost to get out and dissolve the partnership.
Within three weeks, it was evident that we weren’t going to be able to work together.
It seemed like a good idea, but he had a completely different idea of what it took to develop a company. He wasn’t willing to do the work that needed to be done in order for the company to be successful. I exercised my option to get out of the partnership and informed him that he was going to receive the whole company. However, per the out clause we established at the beginning of the partnership, he’d need to pay me $3,000. Because we had an out clause, there was no hostility, and we’re still friends to this day.
The most important thing you can know about partnerships is how you’re going to dissolve them.