• Mathieu Maréchal •
Should you have a business partner when opening an organic shop?
Opening an organic shop requires a significant amount of work and resources. Consequently, it’s often tempting to work with a business partner when setting up a business.
Working with a business partner can have many advantages, although there are potential and significant disadvantages as well, as we shall see. There are also many pitfalls you must avoid if your business and your relationship with your business partner are to be a success.
To avoid any difficulties or problems later on, I’m going to tell you about a very useful legal tool: the partnership agreement.
Afterwards, I’ll provide you with a simple method to make your partnership a success.
An important clarification: in this article, we’ll talk about working with someone who is an equity partner in your company. The legal forms for business partnerships vary from one country to another. These types of companies are legal entities and natural persons (the partners) can contribute to these companies’ share capital.
For example, in the case of a limited liability company with two partners, who respectively contribute €2,000 and €3,000, this is a limited liability company with capital of €5,000, with one of the partners having a majority stake and the other having a minority stake.
With that in mind, let’s look at the advantages and disadvantages of working with a business partner to set up your own organic shop.
The pros and cons of having a business partner
The pros of having a business partner
The first advantage is simple: having a business partner increases the amount of work you can do and makes it possible for your business partner to work in the shop, without the need for an employment contract or remuneration. In this way, you can both work as much as you want, without having to count your hours. Much more flexible and convenient than an employment contract!
Another advantage is that your business partner can be a so-called passive investor. In providing capital when the company is founded, he or she will have a very limited role (if any) in the day-to-day management of the business.
But the money provided at the beginning of the process can be critical: often, investors help businesses to get off the ground.
If your organic shop requires skills which you don’t have, having a business partner is a good way to add these skills to your team. Let’s focus on an example which crops up frequently in our community of organic shopkeepers: digital skills. For example, an organic shopkeeper may have good retail experience and training in selling food but not have any online skills. He or she could partner with someone who has these skills; they are particularly useful when it comes to marketing the business.
Your business partner will also be a real ally: someone with whom you can share the highs and lows and discuss your strategy and daily decisions.
The cons of having a business partner
Having a business partner is a bit like getting married. It’s a real commitment and it’s usually difficult (and/or expensive) to get out of this contractual relationship. If you realise that you’ve picked the wrong person, you may find yourself stuck with a partner with whom you no longer get on, who’s incompetent or not very motivated.
When you work with a business partner, you also give up some control of your company. If your business partner has 5% of the capital and you have 95%, this isn’t necessarily a major issue. But if you both have an equal share, this can be more problematic. Imagine the following situation: everything goes well with your business partner for the first few months, but then your business partner decides that he or she is no longer interested in the business and leaves. You keep working on your own, but your business partner continues to profit from the value you create by developing the business.
You must agree with your business partner when it comes to major decisions which affect the company: this can be time-consuming and may slow down the decision-making process.
Finally, having a business partner requires slightly more effort in terms of administrative and legal paperwork. However, this is a minor issue if you work with a good accounting firm.
The pitfalls to avoid when entering into a business partnership
Capital structure pitfalls
The first potential pitfall, as already mentioned, is a 50/50 partnership.
Why? Because neither business partner will be able to decide when a major disagreement arises. For example, what happens if you don’t agree on taking out a loan to develop the business? The situation will be complicated.
With a 50/50 partnership, business partners who cannot agree are stuck. They have to call in a mediator or just give up on the decision to be taken, even if it means putting the company at risk.
Please note that 50/50 partnerships can also work very well: it’s my job here to make you aware of the potential risks.
Other capital distributions can also be problematic. For example, if you have a passive investor who ends up with a majority stake: you lose control of your shop and the investor will be able to make decisions, even though he or she is not as knowledgeable about the shop as you are.
You can also have a business with various business partners: spouses, brothers, cousins, sisters-in-law and even grandparents. In the end, this makes it very difficult to manage the company’s governance and administrative matters.
Pitfalls related to your business partner’s profile
How did you choose your other half? It's hard to answer this question, because we just take love for granted!
In reality, you probably made unconscious choices, focusing on three different aspects:
- your partners characteristics and skills,
- their perceived stability,
- their motivation.
Ideally, you need to make sure that you find a business partner who excels in all three areas as well:
- he or she has the skills you need or can easily acquire them
- he or she will contribute to the business in a stable, regular and long-term way,
- he or she has demonstrated real enthusiasm for the company!
If you’re not particularly attentive to these three areas, you may end up with an incompetent business partner who slows the project down, who leaves after six months because he or she wants to move to another region or who isn’t very motivated and drags his or her feet.
The partnership agreement to anticipate and manage problems
I advise you to create a partnership agreement containing all the relevant clauses for your business with the help of a specialist lawyer who can advise you.
The purpose of this contractual document is to list the terms of the business partnership. It anticipates a number of situations which could arise in the course of the business and the appropriate solutions.
Drafting a partnership agreement is a good thing because it forces business partners to ask themselves the necessary questions about their company and encourages them to consider various potential situations (which are often complicated, such as the enforced departure of a business partner) in advance. The partnership agreement is therefore an excellent way of anticipating and dealing with problems in advance.
The Pitfalls To Avoid When Entering Into A Business Partnership
You’ve decided to work with a business partner: congratulations on making this decision. It’s going to help you to speed things up with your business!
I suggest that you follow this simple process:
- do you really need to work with a business partner or could you have this person work for you in a different way (on a freelance basis, as an employee or something else)?
- if you do need a business partner, are you 100% sure that you’ve addressed every potential issue?
- lastly, if the answer to the two previous questions is “yes”, before you open your shop, start working together on the business so that you can learn to work together as soon as possible! Because working effectively with someone takes time. :)
Quickbooks has a good list of questions to ask a potential business partner!I strongly recommend that you go through this list and take time with your business partner to answer all the questions: this is another excellent exercise to ensure that you choose the right business partner.
In conclusion to this article on the decision to work with a business partner to open your organic shop, be aware that this is an important decision which should not be taken lightly. It commits you for many years, possibly even for the entire existence of your business.
Our final piece of advice is a simple reminder: it’s often far more cost-effective to spend a few days at the beginning of the process to ensure that you’ve chosen the right business partner than to rush things and then spend years dealing with problems caused by working with the wrong business partner!