Get The Answers: Much to gain in teaming up with another business but there are risks

Paul Davies is the head of commercial law firm Paul Davies Law. Photo / Supplied

Partnering with a complementary business in your industry can take the combined entity on in leaps and bounds if done right.

We are considering going into partnership with a small, complementary business. What should we be thinking about as we go into this? We will have 50 per cent each of the new business.

Working through the various contracts which are likely to be needed will raise a number of important commercial issues to resolve, including:

* How each business is valued and how unequal values will be made up by one person.

* How the new entity will be financed.

* What premises the business will operate from.

* What roles the key principals will have in the new business and how much they will be paid.

* How many directors the principals can each appoint.

* How to transition employees from each of the businesses and share any redundancy costs.

* What happens if one of the key principals wants to leave the new business or becomes sick or incapacitated and cannot carry on working.

* How to resolve disputes.

Contracts which are likely to be needed include a business sale and purchase agreement for each business and a shareholder agreement between the owners of the new business. It may also be necessary to arrange new bank facilities and deal with assignments of leases and other important contracts.

Have you seen partnerships work well? And badly?

A newly merged venture is likely to work well where the principals of two businesses are upfront about intentions and aspirations and each have a good idea of their respective strengths, weaknesses and abilities to resolve business issues. A new venture which is established rapidly without thoroughly working through these things is more likely to fail.

Ventures where the principals are in different countries need regular communication.

We have known this other business for a number of years so feel we have our eyes open, but what should our exit route be if it goes wrong?

An exit route is one of the important parts of every shareholder agreement. Often people starting in business are less enthusiastic about focusing on failure of either the merged business or their relationship.

The desire for one party to exit may be triggered by a dispute in relation to the management of the company, a desire to pursue a new opportunity, changing personal circumstances or perhaps a third party buyout offer.

It is important there is a clear mechanism in the shareholder agreement to resolve disputes. Some agreements provide for buyouts using a formula depending on the reason for exit and some provide for expert valuation. Payment over time of any buyout price is usually built into the shareholder agreement so the remaining shareholder has a realistic chance of being able to make any buyout payments.

How and when do we tell our customers about the partnership?

Until all the arrangements are locked into place it is best to keep the proposed arrangements confidential. Once the legal agreements are in place a joint communication strategy is best. These are usually handled differently depending on the audience. Slightly different communications are likely for employees, key customers, suppliers and all others.