Howdy, Pardner
Internet search giant Google was started by friends Larry Page and Sergei Brin in a university dorm room. Though they shared a goal – to find a way to ‘retrieve relevant information from a massive set of data’ – the two argued about everything.
But through their fights they were able to put together a business plan and some capital, and today Google is the biggest search engine in the world, worth billions.
Going into business with a partner, friend or family member can be stressful. But if you’ve got all the important bits in place early on – such as finances, a sound business plan, marketable skills, all the legal requirements – you could be on your way to becoming the next Page/Brin success story.
BRING A FRIEND
‘Going into business with someone is like getting married,’ says Buhle Dlamini, managing director of Young and Able, a company aimed at helping young entrepreneurs reach their potential. ‘It’s important to find the right people to align yourself with. You have to be comfortable with each other and you need to trust that you have each other’s best interests at heart,’ he says. Remember: the time you spend with your new partner during office hours is not going to be the same as when you socialise after hours and on weekends. At work, you have to maintain your professionalism around each other at all times in order for the business to be successful.
According to the Small Enterprise Development Agency (Seda), people choose to go into partnerships for four reasons: to supplement their skills set, to get a boost of capital, to get help managing the business once it’s grown, or to be able to take a step back by becoming a ‘silent partner’.
Deciding on your roles upfront is essential. Louise Churches, 29, started Jo’burg public-relations firm Simon Says Communications with her friend Melanie Letcher. ‘Although we’re very alike, Mel and I have different strengths that we bring to the business,’ she says. But they try to overlap in every aspect of the business to ensure a sense of security for their staff and clients. ‘Nothing needs to fall apart just because one of us is out of the office,’ says Churches.
Dlamini believes your skills should complement one another, so if one of you is a leader, the other should be good at following through. ‘People should be given roles they can deliver on, which should be decided in advance,’ he says. ‘The business won’t work if functions are dished out randomly. Both people are accountable to each other. Agree to meet once a month or every two weeks to catch up on how the business stands and for brainstorming new ideas.’
PAPER TALE
There’s also a lot of legal stuff to take care of. First, you need to decide on what kind of business you’re going to set up in terms of the law. There are a number of options. The most common forms are the partnership, close corporation (CC) or private company, says Intikab Esat, a lawyer at international law firm Shepstone and Wylie.
‘The advantage of a partnership is that it can be set up quickly and fewer formalities are required,’ he says. ‘The business is owned directly by the partners in their names, although a trading name is often used. The main drawback is that the partners will be personally liable for the debts of the business should things go wrong, which is a big risk.’
Esat points out that this is the reason many businesses opt to form a CC or private company because, by law, the company itself is seen as a separate legal entity, so the partners’ personal assets won’t be seized if the company folds.
Next, you need a written agreement. According to Esat, a partnership can be established without a written contract, but it is sensible to seek legal advice to ensure that your interests in the business are protected. ‘In the partnership agreement, you need to address the legal and practical issues of being in business,’ he says. ‘It will cover matters such as financing, how profits will be shared, management rights, the expectations of the partners and their roles, the reporting structure, meetings, accounting and what to do if one or both of you wants to get out.’ The partners may periodically adjust the agreement as the business grows.
You may need to register for any or all of the following, depending on your type of business: provisional tax, employees’ tax, income tax, value-added tax, trading licences, your business name, Unemployment Insurance Fund, workmen’s compensation insurance, trademarks, patents or designs.
The Department of Labour, the Department of Trade and Industry, Seda and their affiliates are useful sources of advice, as is the website www.freelegaldocs.co.za, where you can download a basic partnership-agreement or CC form.
BIG TIME OR BUST
‘Your business plan is there to tell people what you’re about as a company,’ says Dlamini. In it, you and your partner should lay out your plans and values in a succinct yet comprehensive manner. ‘A good business plan addresses what goals and targets you aim to achieve as a business and shows potential investors how you plan to do that,’ he says. The document needs to be updated continually as your business grows.
More than 70% of new businesses fail within the first three years. But if your business is growing and doing well, it may be time to bring in new people. Says Dlamini, ‘As the business grows, you may need to assume a different, much bigger leadership role. You will have to set the tone for the business and may need to learn to let go and allow others to take over its day-to-day running.’
If the business is not working out as you hoped it would and you no longer wish to be associated with the company, ‘the outgoing partner’s shares can be bought out by the remaining partners or by an approved third party,’ says Esat. Otherwise, you could both decide to sell the business outright or liquidate and distribute the proceeds according to the original partnership agreement.
An important factor that contributes to your potential for success is keeping your partnership strong through mutual respect and communication. Churches says, ‘We take our business partnership – and our friendship – very seriously, and feel a strong sense of moral obligation to each other. It’s all about accountability, so if I let Mel down, I’m letting myself down too.’