Your Top Start-Up Questions Answered

Partnerships

Contracts

Q: I am considering starting a hair salon with two other people. We have an opportunity to buy an existing salon at a very reasonable price. One partner is very experienced with running salons and is also a licensed beautician. She will be hired only to run the business, but she will not have ownership of the business. The other partner and I will split the upfront financial requirements and handle the books, bills, etc. We are planning to incorporate the business and split ownership. However, I want to know how the business contract should be organized so that my financial interest will be protected. How is this explained in the contract?

A: It sounds like this is a reasonably simple deal, but there is only one place to go to be sure that your interests are protected. You definitely need to talk to an attorney and get them to draw up a contract for you. There are tons of gotchas in something like this, and unless you've done it a lot, you won't think of all of them.

That said, I do have one piece of advice: While it is important to have an attorney to draw up a contract, I don't believe a business relationship should be based on the letter of the contract. By that I mean that you must draw up the contract so that it is fair to everyone and so that everyone gets what they want out of the deal. Also, make the contract such that everyone can have a way out, if they want it, that doesn't hurt the other partners. I say this because if you ever have problems in the relationship with either partner (and the odds are that you will), you'll need a way to gracefully separate. Long term, if everyone isn't happy and doesn't think they got a good deal, then it won't work. And even though you may have a legal right to force someone to do something, if they aren't willing, you will have a very hard time running a successful business. So get an attorney to draw up a contract that is fair to all parties and spells out what is expected of everyone.

Do You Need a Partner?

Q: I will be graduating from Penn State University next December, and I am seriously interested in starting my own business. I served four years in the military, and during that time I was successful in writing a business plan that was approved by a bank for financing. I turned that offer down because I was not ready to live in that part of the country. My question is this: I have a plan for a business, but I could really use the help of having a partner. What should I look for in that person?

A: That's a tough question. I think finding a partner is like finding a mentor. (See my article "Finding a Mentor" for more on mentors.) However, since you will depend much more on a partner than you would on a mentor, you should choose carefully!

Have you considered why you really need a partner? Is it moral support? Is it that you have a big hole in your knowledge or skill base and need someone to complement your skills? I've started a business with someone I didn't know, and it didn't work out very well. The last few that I've started have been with people I've known and trusted for a long time. You can never be completely sure if you've selected the right person, but the better you know them, the more likely you'll make a good choice.

If you decide you really need a partner, then get as many personal references as possible, and check them carefully.

Who's the Founder?

Q: My partner and I are having a hard time determining the correct usage of the term "founder." Initially my partner, Jill, and I had a previous business relationship. Because of this, when Jill suggested selling gourmet foods through home parties, she called me. My response was, "I'd invest in that," and I did.

For two years, the company operated out of a building on my property, and Jill put in countless hours getting the business off and running. For four and a half years, I had little involvement other than some encouragement now and then. At that point, the business grew to the point that it needed someone like me to play the role of COO. Until recently, Jill and I titled ourselves president (Jill) and vice president (me). Because neither title refers to foundership, we are struggling with correct usage of the word founder. Is she the founder and I co-founder? Are we both founders? Are we both co-founders?

A: I would consider you both co-founders-you both started the company (you with money, her with time). My advice is not to worry too much about that. If you are searching for a way to refer to yourselves, I think co-founders sounds fine. You might also consider "principal"-that's more of a financial industry term, but it sounds pretty good and seems to fit here. I wrote an article on titles that you might find helpful, "The Relevance of Employee Titles."

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