Making It Legal:

Not that I’m a big follower of the Kardashian sisters, but it always amazes me what people will stoop to for fame. 

Take Khloe Kardashian’s shotgun wedding to L.A. Lakers basketball player Lamar Odom.  Apparently, after a one-month romance, they timed their 2009 wedding with Kardashian sister Kourtney’s pregnancy—so that they could be aired in the same season.  (The E! television network, which airs Keeping Up with the Kardashians, paid for the 250-person Bel Air wedding).  Since shortly after the wedding, rumors have been swirling that the couple is on the verge of divorce.  This could cause huge complications for Lamar and his four children from a previous marriage, and Khloe and her … money.

We’ve all heard the stories (and seen the Jerry Springer episodes) where romantic couples, having married within nanoseconds of meeting each other, grow to realize that their partner:

• Cheats
• Has really annoying habits
• Is completely irresponsible with money, or
• Wants to a totally different lifestyle (you’d like time with the kids; your partner is a workaholic)

Whatever the reason for the disagreement, it’s very likely that with a little digging and probing questions, your incompatibilities could have been uncovered far earlier. Same thing happens with business partners. Entrepreneurs are often so taken with the first flush of start-up fervor that they don’t take the time to see whether their potential business partner will be right for them for the long term, or only the short-term.

There’s more that goes into the partner-screening process than you think, and you certainly don’t want to look in the mirror this time next year, realizing that you’ve hitched your wagon to an albatross.

When you’re thinking about business divorce, there are a couple of hot button items that come to mind. First, you want to know which events trigger a buyout.  The three D’s usually factor into the most well-drafted partnership agreements: death (pretty obvious), disability (perhaps less obvious–how would you define “disability”?), and dissolution (you and your partner agree to close up shop).

Next, you need to know where the money will come from. In the case of death, it can come from life insurance proceeds.

But the kicker is often how much will you pay?

Chris Mercer, author of the newly released Buy-Sell Agreements for Closely Held and Family Business Owners,  raised this issue in an earlier treatment of the subject of buy/sell agreements.

Well, to take the poet, Elizabeth Barrett Browning, out of context, “Let me count the ways”:

• You could agree on a fixed price. Problem is, the price you establish at the inception may not be fair 10 years down the road.
• You could develop a formula, such as a multiple of earnings. But you need to be sure the formula makes sense for your industry.
• You could go to an appraiser (or appraisers) and let her figure it out. However, who will choose the appraiser? Will they be biased toward one side or another? If you get multiple appraisers, those professional fees can mount quickly.
• You could take a shotgun approach. No, I’m not advocating Winchester or Smith & Wesson. Under this approach, you name your price, and the other owner can choose to buy you out, or be bought out at that price. Set the price too low, and you’ll get very little. Set the price too high, and your former partner will be basking in Bora Bora before you can say “blindsided.”

Do you see how much is involved in putting together a buy/sell ownership agreement properly? That, my friends, is why these kinds of agreements aren’t “one-pagers.”

There are so many parallels between business partnering and romantic relationships.  “Date before you marry,” “Know who you are and what you need before you look for someone to complete you,” and one of my favorites, “Sometimes, you gotta kiss a few frogs ….”

So I was tickled when I came across Rosabeth Moss Kantor’s article, “15 Steps to Successful Strategic Alliances,” which opened with this clever description of the distinction between business partnerships and strategic alliances:

Unlike full-blown mergers, in which two really do become one because one company disappears, alliances and partnerships resemble modern marriages: separate careers, individual checkbooks, sometimes different names, but the need to work out the operational overlap around household and offspring.

She goes on to outline a number of solid, thoughtful hints (15 of them, in fact) to guide business owners who are considering strategic alliances for their companies. Among them are:

• Be open, but court carefully
• Know yourself
• Seek compatibility in values
• Commit to a first project
• Keep communicating, especially face-to-face
• Respect differences
• Help everyone win

Good advice, both professional and personal.

You can probably guess the tell-tale signs of needing to leave your business partnership (they’re similar to the signs for leaving your college boyfriend or girlfriend): Everything they do is wrong. You’re stressed and unhappy all the time. You wake up in the middle of the night with a knot in your stomach.  In short, your business partnership is making you miserable.  So what’s an entrepreneur to do?

Follow these steps to help you get a solid perspective on your business partnership and exit (reasonably) gracefully:

1. Know what’s really bugging you.  For many small business owners, blaming the partnership is much easier than, well, looking within. Are you lashing out at your business partner because of marital problems at home?  I’ve encountered many business owners whose significant others didn’t understand the entrepreneurial life and the long hours and sacrifices it requires to grow a business. So ask yourself, “Is the business partnership really the problem? Or, is it that I don’t have support at home and feel pressured to choose one over the other?”
2. See what can be changed to suit you. Because entrepreneurship can be frustrating, it can be tempting to throw our hands and say, “I’m mad as hell and I’m not going to take this anymore.”  Not so fast. If you have determined your business partnership is the problem, first see if there’s anything that can be fixed. Is it a matter of not reaching revenue targets (do you even have revenue targets?)? If so, new initiatives may help you reach those goals. Is it dissatisfaction with staff? If so, fire and hire as needed. Is it a lifestyle issue–where you require more time with family? If so, see what can be better automated or delegated. Bringing in an outside facilitator can help smooth these discussions.
3. Leave emotions at the door.  If the business partnership ultimately doesn’t evolve, the best way to get out gracefully is to keep matters as dispassionate as possible. If the problem really is your business partner, don’t play the blame game — focus on explaining your needs instead, which can range from preferring a different work environment to needing a certain guaranteed income to support your family or even wanting to work in a different industry altogether. Yes, your business partner will probably take this personally. But if you focus on your needs and how the business can’t meet them, there’s little your business partner can argue with.
4. Don’t go it alone. When exiting a business partnership– with or without a written partnership agreement–you need to take some practical steps. Make sure you value the business to determine the worth of your ownership interest. [Smaller companies may prefer to rely on their accountant’s independent determination]. You’ll need to work out a payout plan and assess whether or not you have the right to use (or take back) any intellectual property of the company. Remember to also look at your client list to see who stays and who can come with you. And sometimes, the departure of a business partner means that the company itself has to dissolve.

Leaving a business partnership can be a thorny experience. You may feel guilty, and be tempted to discount what you’re entitled to. So remember to have a strong team advising you–accountants, attorneys, and coaches–and you’ll get the counseling you need to get out of the situation as quickly and inexpensively as possible.

Today’s basic training involves a sad story. A woman gave her heart to another . . . and to his business. What thanks does she get? She gets jilted, in more ways than one. Yet another reason to have a business prenup if your personal relationship sours.  Read on . . .

Q.:  I was working with my fiancé on a business idea we both developed. We are co-founders of this business. However, while I was working around the clock on this business, he went behind my back and put it in his name. He did this because, he says, he had the intentions of marrying me and thought it would be “cleaner” to just get married and split half (I have e-mail records of all of this). I also have e-mail records of our correspondence of our business, as well as my booking of a social conference for us to attend, plane tickets, etc. I created this entire website with him, and have even been a ghost writer on his account as well.

Sadly, a month before we got married, he decided to leave me. Is there some legal way to keep some of the business, or at least get a stake in it? 

A.:  Unfortunately, in these kinds of situations, your only recourse is to sue him and hope that the e-mail trail that you have — and the intellectual property you have created — is sufficient to support your claims. This can be an expensive prospect, so I’d recommend that you speak to an attorney in your area who focuses on business litigation to evaluate the strength of your position and the evidence you have, and to estimate the fees and costs. You may find from that consultation that you would be better off putting your time, money and energy into developing a competing business that outdoes your ex-fiance’s. As they say, “Living well is the best revenge.”

What do you want to know about business partnerships?  Join me and Melinda Emerson, The Small Biz Lady, for a TweetChat at 8pm (ET) on Wednesday, September 22nd.  I’ll be sharing my insights on business partners, what makes for a solid partnership, and what parts of the process you DON’T want to DIY.  Sign up for Melinda’s weekly #smallbizchat show, which focuses on all the things that small business owners need to know to run and sustain a thriving company. Follow @SmallBizLady for her regular small biz updates.  AND, to get a preview of the tasty morsels I’ll be sharing, make sure to follow my Twitter updates on @NinaKaufman!

Have questions about business partnerships you’d want to “Ask The Business Lawyer“?  Listen in–TOMORROW, 7/30 at 2 p.m. Eastern, I’ll be on BlogTalkRadio, speaking with The Sassy Ladies about “Business Prenups: How They Can Save Your Business From Going Bust!” Business partners are like spouses: Choose the wrong one, and you’re in for a hellish ride. Your business partner can boom or bust your business. Find out how to make the right choice for you, and why written business partner agreements are vital to your business health.  Avoid business divorce by handling it right from the start!

Q: I have a business partner (”John”). He is majority shareholder with a 55/45 split. We act primarily as a subcontractor for a small number of other companies. We do not have an operating agreement. We typically travel and complete projects together. Due to a scheduling conflict, I cannot go on our next project. Knowing this, he has contacted a friend to go with him (my partner does not currently have a valid driver’s license) without my knowledge. John has purchased airfare with his own money and I believe his intent is to have the final payment made to him. In the past, we have not always been able to complete projects together but have still had our 55/45 split. Is he essentially stealing (embezzling) from me?

A: From what little you’ve shared, there isn’t enough evidence to prove that your partner is embezzling from you. The fact that he contacted a friend to join him on the business trip could have a very innocent explanation–such as (as you noted) that he needs someone to handle the driving because you can’t be there. There could also be a personal explanation–such as, the friend is having marital difficulties and getting out of town with your partner is a welcome diversion. As your partner is a 55 percent shareholder, in theory, he has the right to ask a non-owner to accompany him on the project without your prior consent, as long as you are not required to pay for the non-owner’s travel expenses, and that the confidentiality of your client’s information remains intact.

Your belief that your partner is embezzling from you–on its own–is not enough to prove that’s what’s really going on. As they say, “the proof is in the pudding.” Know what the project should have generated for your company (in other words, review your contract with that client). Keep close tabs on the financial records so you’ll know when payment is made. More important, if you are starting to harbor suspicions about the integrity of your partner, this would be a good time to invite in a third-party facilitator to help get your communication with your partner back on track. Or, if it’s time that you and your partner parted company, to work out your mutual exit in an amicable manner.

Q: I have an S Corp that includes myself and my partner, 50/50 ownership. I put in all the capital and do 90 percent of the work. I cannot get my partner to leave the business. What do I do?

A: Whether, and how, you can “kick the bum out” depends on whether you have a written shareholders’ agreement. If you do, and if it addresses issues such as “deadlock,” then you can follow the procedures in the agreement. If the agreement is silent about deadlocks (or if you don’t have a written agreement), then it’s very likely you’ll have to bring a lawsuit to either buy your partner out of the business or dissolve the business. Neither is a particularly attractive option, but the “heavy hand” may be just the leverage you need to get this partner to see sense/cents–as litigation can be costly. 

Also, if you’re doing 90 percent of the work, you may want to consider the pros and cons of threatening to walk away from the business–as without you, there may be no business. Best to consult with a corporate litigation attorney in your area to understand all your options under your state’s law and to get a rough estimate of what it might cost.

Q: I’m an independent/freelance software developer by profession. Over the past last few months I came up with an innovative idea for a web-based-to-mobile-device business solution.  I’ve tested it and, suffice it to say, it works.  I was contacted by one of the leading global telecommunication giants, who expressed interest in talks that might reveal ‘’synergies in going forward.”  My concerns are:

1. To what legal extent can a business owner/creator/founder maintain control when the business becomes “larger” than the individual?
2. How can I protect my intellectual property?  What would prevent others from developing the same solution in other parts of the world?
3. Given that this would appear to be a global opportunity, what checks and balances can be put in place when developing a strategic partnership?

A: This question came to me from an eager and seemingly successful entrepreneur based in Kenya. (I love questions like this, especially when people want answers for free.)

Let me start by saying that anyone in a position of doing business globally will be best served by having a face-to-face consultation with a local attorney (not one based in another country) who has experience with international transactions.

Now, on to answering the questions:

1.  The extent of control that the owner of the business maintains can depend on a number of factors. An important factor will involve the extent to which the owner needs outside capital in order to more fully develop the product and get it to market. If the owner will be seeking outside capital (and not just a bank loan), the extent of control the owner maintains over the business is an issue of negotiation with equity investors. That can depend on the amount of money invested, the management style of the investor and the extent to which the owner needs to maintain flexibility for bringing on additional investors. If your company will be formed in Nairobi, Kenya, you will be best served by speaking with a local attorney who understands these issues.

2. Generally, patent protection is obtained on a country-by-country basis. There is nothing that can prevent others in other parts of the world from independently developing the same product (obviously, provided that their development of the product does not involve reverse-engineering yours).  Some countries are party to international patent treaties, which is why it’s best to consult with an attorney who’s familiar with this area. The attorney may be able to help determine which countries will provide the most advantageous patent protection.

3. Anytime an entrepreneur enters into negotiations for the marketing and distribution of a prospective product, there is a risk that your negotiating partner might not act ethically and might cut you out of an eventual licensing deal. One of the ways to combat this is with a confidentiality and nondisclosure agreement. In addition, your intellectual property protection strategy–and the extent to which you have begun that process–will play a key role in determining your negotiating leverage.

Although written from a not-for-profit perspective, Alison Rapping of Alison & Associates (a not-for-profit consultancy based in Arizona) shares my view that “collaborations are going to be a driving force in building stronger relationships.”

In particular, I think that collaboration (or what I would call “alliances” in the for-profit sphere) will become more and more in vogue for a couple of reasons. First, it enables entrepreneurs to leverage OPR–other people’s resources–and gain the benefits without necessarily adding the infrastructure. Second, with more and more companies being started by solopreneurs working from home and/or working in silos, an alliance creates community.

Rapping highlights some very helpful descriptions of how the different collaboration models work; namely, coalitions, collaborations, strategic alliances, joint ventures and mergers. She also provides her top five tips for collaboration success, which include:

1. Intention
2. Vision
3. Goals and accountability
4. Evaluation
5. Celebration

In other words, “Plan, implement, evaluate and celebrate!” We entrepreneurs tend to forget to give ourselves a pat on the back for work well done.

My colleague, Geri Stengel of Ventureneer, conducted a survey several months ago that examined the importance of peer advisors to help entrepreneurs deal with their business challenges. Maybe it doesn’t come as any surprise but, according to the survey, the results clearly showed that business owners achieve greater success and ease in solving problems when they have peers and advisors with whom they can brainstorm.

There’s more to know about starting or running a business than one person could ever hope to keep in her head. So why try? When you read the survey results, make sure you see the summary of how Rob Levin, publisher of New York Enterprise Report, has successfully harnessed the power of peers.

I can’t begin to describe the extraordinary value I’ve received from my peer advisors. With some of them, we’re simply there for each other when we need a pick-me-up to get the week started on a rough Monday morning or want to kvetch about a difficult client. With others, I engage their professional services . . .  and they engage mine. But because of the peer relationship, we have an even greater comfort level reaching out to each other (off the meter) for guidance in developing best practices for our businesses. Let’s face it, if you’re not having fun, you might as well go work for someone else.