Making a Partnership Work

Making a partnership work can be difficult. Key factors include having a shared vision for the company, sharing equally in the work of the company, and having compatible skills among the company owners. All of this requires that the partners be honest and transparent with one another. Most important, the partners must have clear responsibilities within the company. Partners must be accountable to one another for their responsibilities. We saw the breakdown of a partnership in a recent episode of The Profit.

Partnerships can be created from scratch by both partners pooling their moneys to purchase needed equipment and working capital. But often, partnerships are formed by investing a combination of cash and assets. Placing a value on each partners investment requires calculating each partners net worth. Net worth is simply calculated by adding up assets and cash and subtracting liabilities or debts.

Exercises: Create a Google Docs file and make the following calculations.

1. Calculate your own net worth by listing your total assets and total liabilities. At this stage in your life, this should be simple. You have a few assets such as clothes and sporting goods. You may even own a car.

• Simply list your total assets, place a value on each of them and add up the total.
• Next, add up your debts or what you owe. You may not have any debts or you may have a car note. 
• Finally, subtract your debts from your assets to get a total net worth.

2. Now lets fast forward 15 years. You've accumulated some assets as well as liabilities.

Assets:
Home $85,000
Car $15,000
Personal possessions: $10,000
Retirement Account: $10,000
Cash: $5000
Total- $125,000

Liabilities:
Home Mortgage: $60,000
Car Note: $5000
Student Loans: $30,000
Total: $95,000

• Calculate your net worth given the assets and liabilities above.
• Calculate the amount of equity in your home.

3.  Your friend Robert, an experienced web designer, approaches you about starting up a web site design business. He knows that you have many contacts in the business community and you could open many opportunities for a new company. Robert has the computer equipment valued at $10,000. You find an office space that would be perfect for the business at $500 per month or you could use the bonus room above your garage. You figure you'll need about $30,000 of start-up money to renovate the office space and have some working capital. It will take about a year to get this business going to the point where you and Robert could draw a salary.

• Describe how you would structure the partnership and who would be responsible for what.

Here are your calculations of what it will take to run your business for the first year.

Office space rent - $500/ mo. $6000
Computer equipment - $10,000
Working capital and start-up expenses - $30,000
Total - $46,000

• What would each partner contribute in terms of cash and assets?

4. After running the business for a year, you've made some money and bought some additional equipment. You're still working out of the space above your garage. Your balance sheet looks like this:

Assets:
Cash - $15,000
Accounts Receivable - $5000
Equipment - $15,000

Liabilities:
Accounts Payable - $ 2000
Bank Loan  $10,000

• Calculate the net worth of the business. 
• How much capital do you and Robert have individually in the business?

5. With the addition of new clients, you have outgrown your bonus room. With the growth of the business, you also need help managing your current accounts To grow, you need additional capital to grow. You could also use some management expertise. You both know Keisha, an experienced business manager and you think she might make a good partner. How much capital would she have to pay in to become a 33% partner in the business?

• First, you have to look at how know how much capital both you and Robert have in the business, then you can calculate the amount Keisha would have to pay in to become a partner.
• Draw up a list of responsibilities for each of the three partners. 

6. One of the key parts of a partnership is the partnership agreement.

While Keisha, and Robert are trustworthy partners, you fear that one of the partners could withdraw from the partnership and go into competition with the other two.

• Write something into the partnership agreement that will discourage this from happening.Use the following as an example:

1. Leaving partner must offer shares at  book value of the equity to the remaining partners.
2. Leaving partner cannot compete for 2 years after leaving the business.
3. Leaving partner cannot call on customers within a 500 mile radius.
4. If partner breaks the agreement, the leaving partner will owe the remaining partners 2x book value. 

Notice that the above agreement had a time clause, a distance clause, and a remedy if the agreemtn is broken. A non compete agreement. would also outline what knowlege the leaving partner would have of the business that could be used against them.

Prepare for the test!

• List the advantages and disadvantages of partnerships. Make sure you know these for the upcoming test.
• Study the additional terms in Quizlet. http://quizlet.com/_zxbiy
• Download the Quizlet app from the Android or iTunes store so you can study on the go.