Recently many management rights agents have been advertising buildings as the perfect for purchase for a partnership. So what makes a good building for a partnership and what are the best steps to forming a partnership?
What is a partnership? And why enter into a partnership.
Definition: A partnership is when two or more people/entities co-own a business and share in the profits and losses of the business. Each person contributes something to the business, such as ideas, money or property.
Economically, it is much better to combine funds and thoughts in running a business. In recent times partnerships have become more popular in the management rights industry. The opportunity of pooling finances has enabled people seeking to buy a management rights business (such as a husband and wife team) to buy a business that is significantly larger with the assistance of non-working partners. Giving them a greater return on their contributing fund than by acquiring a business alone.
Recent articles in Resort News have raised some problems with entering into partnerships to buy a business. However, they all had the common denominator, being that they did it informally or entered into the transaction on a hand shake deal or did not seek legal advice.
The buildings that often make the best partnerships are buildings with a net income over $400,000, have a reasonably priced unit (the less the unit price compared to business the better) but, most importantly for a non-working partner, the return of income compared to the funds contributed to the total asset purchase.
So what are some steps that you should take when entering in to a partnership?
Firstly deal with professionals and always act in professional mind frame yourself.
• Talk to your financier so you know how much you can contribute financially.
• Talk to your accountant about what entity you should be entering into the partnership with, and tax implications this entity might have when selling out and entering into the next business transaction.
• Talk to a solicitor about any legal implications, keep in mind that the partnership will need to appoint a solicitor and that solicitor may then be unable to act for individual partners in the future.
• Find a business.
Common problems in partnerships include who are your partners, are they friends, relatives, business people, you know or not?
Experience has shown that a partner that creates the most difficult problems, is one where the non-working partner and working partners are friends or family. The problems often occur over family/friend matters and the problem that they may not have entered into a sound partnership due to the belief that their relationship exceeds any money/business problems that may arise. PCS has arranged scores of partnerships between people who have previously not known each other and have entered into contracts on large management rights within a day or two of meeting. These have been very successful in business.
When you trust someone too much it is easy to overlook the simplest things, such as ensuring that the person you have gone into business with is entering into the partnership agreement in their correct personal identity details; Australia has a great privacy act that can sometimes hinder or provide for people to hide their identity and details from others. PCS must attain all partners details and identification as part of the financial application.
Experience has shown that partnerships with two working partners are more likely to fall apart then a silent and working partnership team.
There are advantages with two working partners, not the least being sharing the workload and time commitment. Although some partnerships work perfectly, many fail due to fact that one working partner will often want to do things one way and the other may want to run the business another way, if you have only one working partner then generally the non-working partner will only want to assist with the direction of the business and not control the day-to-day running of the business. The partnership agreement can also be a source of problems like the set up costs of a partnership and how partners should pay their funds.
There is an old saying that one should make sure they can get out of a partnership before they enter into one. Most partnership agreements have a stability clause for two or three years so the non-working partners have a reasonable term for their investment. When one partner wants to leave the business generally the others have first right of refusal to purchase all or part of the share.
Listen to the lawyers, although they can be expensive and sometimes seem a little over cautious they have seen the bad outcomes from a partnership and have clauses in the partnership agreements and matters of discussion you should be aware of. The partnership agreement is only a small cost compared to not having one, meaning that if there is no written documentation to show what each partners rights and responsibilities are then history has shown it often resolves in conflict and a humongous lawyer’s bill later on and sometimes the business has had be sold to dissolve the partnerships an its assets and resulted in loss of capital funds for each partner.
Steps to take to help a partnership to succeed:
To be done alongside the normal procedures of purchasing a management rights business.
• Find a building that you would like to purchase
• Talk to a finance company about funding and other potential investment partners
• Speak to a solicitor and organise a partnership agreement (ensure you use a lawyer that has specialised in management rights partnerships).
• Discuss any possible tax implications with your accountant and what entity your should be entering into the partnership in.
• Go to contract
• Organise deposit funds in the same percentages to the partners and clause in the partnership agreement.
• Finalise requirements of contract, like an accountant’s verification, solicitors due diligence, valuation and finance.
• Pay remaining funds to solicitor’s account in proportion of the partnership.
• Finalise any other requirements with solicitors prior to settlement such as body corporate meetings.
• Pay settlement funds in accordance with partnership agreement. (Have the solicitor/ accountant clarify that all funds paid by each partner is correct. Refund any partner that is out of pocket for items that should have been paid by the partnership.
• Settle.
• Post Settlement
• Disburse funds monthly, or according to the partnership agreement.
• Distribute data of how the business is going and documentation of funds disbursed.
• Have regular meetings, take minutes
• If problems arise, revert back to the partnership agreement.
(Make sure each partner is financially committed prior to going unconditional).
I have now entered into numerous business partnership, many of them within the management rights industry. Ensuring that we trust each other and are financially equipped and that all partners have respect for each other, however, I have never entered into a business partnership without going through the basic steps to ensure that the business transaction and partnership structure is prosperous.
To download the full Tips for Partnerships in a PDF version click here
