Partnerships are special relationships. It could be related to your personal life or to your business. No matter how great the partnership looks in the beginning, it will undergo trials. The best example is the partnership of marriage. Each person is a unique individual. No matter how happily married they are, there will be situations that will need real discussions, understanding and agreement. This is why there is an engagement period when they should be sharing their real personalities and discussing their individual joys and fears. When both have “stars in their eyes”, everything looks good and nobody believes anything can go wrong. Precisely, this is the time to agree on the issues where there could be differences in opinion, to understand how each reacts to certain sensitive issues and accepts each other’s point of view. After marriage and especially after the honeymoon, unfortunately, irritants can make either spouse less open to seeing the other’s point of view. No such thing as changing the spouse after marriage. If you can’t accept your fiancé/fiancée, as is, with warts and all, don’t get married.

Partnership is Leverage. Leverage is the pooling of resources (funds, talent or physical assets) to accomplish things with less resource and/or with less effort. As such, it is one of the most powerful tools to create and grow wealth. In its simplest form, any individual can avail of this power by entering into any form of partnership with one or more individuals. In this sense, any form of partnership is leverage.

Let’s now talk about business partnerships, which is the real focus of this article. Happily, aside from issues on integrity and honesty, you don’t have to accept everything about your partner. Of course, it is easier to like your partner completely but even if you don’t, you can work together if you have a very clear agreement. In fact, it is many times easier not to be involved emotionally with your business partner.

A business partnership should always be covered by written and formal agreement that defines the basis of the partnership in terms of its long-term vision or goal, the operating, financial and legal roles of each partner. As a minimum, these rules must address administrative, financial and operational matters related to form of organization, administrative and financial policies related to voting, capitalization, compensation policies, number and positions of employees, bank signatories and others. The agreement must also provide for rules and procedures for resolving possible conflicts between and among the partners up to and including buy-out or sell-out procedures. This is best prepared in consultation with a lawyer to ensure that the partnership agreement is indeed legal and enforceable. In business, it is important that everything is in writing because that defines the rationale and intent of each party in entering into the partnership agreement in the first place. This then forms the basis for determining the right judgment or decision in case conflicts arise. In the tragic event that legal cases are filed by any partner against the other, resolution becomes easier and more importantly, faster.

I’d like to share with you an email that is a good basis for this article.

Ms. MJ said: “My friend and I are planning to establish a computer shop business. At this time we have no plans yet and I will start to make the plan after you help me answer some questions regarding the business.

This business will be a partnership. My friend will invest 150,000 and I will invest 100,000. We plan to hire 2 working students to be our part time employees. The location is not yet planned.

At this moment my friend is working abroad and I will be the over all manager, planner, marketer, administrator of our business to be.”

Ms. MJ: From your email, it seems that you are concerned about potential issues in having a partner in a business you are thinking of establishing. You are on the right track because it is really quite serious to enter a business with a partner especially if he/she is a personal friend. So many friendships have been lost because of failed business partnerships brought about by personal (rather than professional or commercial) disagreements. As a general rule, you have to talk about the details carefully on the assumption that you are not friends. If you get into problems that you cannot resolve, you will really not be friends anyway so it is better to think objectively from the beginning.

The key to any partnership is for the two of you to have what is called an “INVESTORS’ OR PARTNERSHIP AGREEMENT” or an I/PA. Under this document, you have to anticipate all problems and the mutually agreed solutions before you start the business. It is easy to get along when the business is good but the real test of a partnership is when the business goes bad. For sure, at some time in the future you will encounter serious problems due to so many things, some or most of which are beyond your control. How do you propose to handle those problems when they happen? These have to be anticipated and a solution must be agreed now before you start.

Ms. MJ. had seven questions

1. If the business will earn net profit of 5,000+ monthly how will it be divided between us if she will invest more than me?

Profits can be divided as the partners choose to. Distributed profits are called dividends. Most of the time it is proportionate to the money invested by each but it could be in any way by mutual consent. If either of you feel that you have a special contribution to the partnership, that person could be compensated in a way that is more than just salary or dividends.

2. Do I need to ask for a salary for myself since she will only receive money and I will be the one working for the business?

The person actually working should definitely receive a salary even if he/she is the owner. This is the usual big mistake of people who own businesses. Whether or not you have a partner, you need to pay yourself a salary. In your partnership, all the more you need to make sure that you understand your individual responsibilities. This should be clarified in the I/PA. In addition, you will want to agree on the limits of authority of the managing partner, specific responsibilities, decision processes on big expenses and especially on capital expenditure and definition of conflicts of interests among the investors.

3. Is there a difference between a partner and an investor when one cannot be present in the business? My possible partner is working abroad so she will have no direct participation in the business. She will just give the money for us to start the business.

Investors are those who put in their money as business owners. Partners are those who work together whether as pure investors or actively engaged in the business operations. If she is the investor and you are the one operating the business, you are still partners but she is what may be called a passive investor, as her only contribution is money. If you are not actually contributing any capital, you can be an “INDUSTRIAL PARTNER” OR “SWEAT EQUITY PARTNER”’ for which you could be entitled to some equity that you can pay for with whatever profits you may get in the future. In your present case, you are actually investing capital of PhP100,000. This makes you the managing partner though a minority investor. As the managing partner, you should be entitled to performance bonuses in case of good financial results. The actual formula must of course, be also acceptable to your partner/s.

4. Can I add some money to our investment in case I have the opportunity to do it?

Again, the possible need to infuse more capital in the future must be addressed in your I/PA. If your business needs the money, you should make sure that you and/or your partner can always add money in the future in the form of equity or in the form of advances. Advances are like loans to the business. Advances or Loans can have a specific interest rate and term. Advances or loans usually have to be paid off first before dividends or profits are shared.

5. How many shares will each of us have if she will invest 150K and I will invest 100K? How much will each share cost at our business start-up if our total capital is 250K?

You can price your shares the way you want to from PhP1/share or P10/share and up. The number of shares is the basis to determine the exact participation of each partner investor. The number of shares also determines the specific value of each share that you own in the business over time. This information is what is called the Net Asset Value Per Share in your business. Net Asset Value is the Total Assets minus the Total Liabilities. Divide this number into the number of shares and you get the Net Asset Value Per Share or NAV/Share. This is also sometimes called the book value per share.

6. How much do I need to buy each share if in case after one year I will buy some shares when our business has made an annual net profit of 60K? Do I need to buy it at the same price per share? If not how much do I need to buy it?

Buying of shares is very relative and personal. The NAV/ Share is important but how you personally value it for your own needs is just as important. You can also buy shares two ways, namely, a) buy new shares to be issued and b) buy shares already issued and owned by your partners. Your I/PA should anticipate a solution if one of you wants to get out of the business for any reason. You should agree on who may buy the shares and at what price. (Generally, the price of ownership in a business is determined by how much income is produced by the business.) You will also need to agree whether or not you will allow each partner to sell his share to anyone or are the partners limited to sell only to existing partners first. if you can only sell to each other, this needs to be clarified.

There are so many ways of investing and partnering but what is more important is that you truly understand your business and you are competent to run it. But that is another subject matter altogether. If you have any questions, do not hesitate to write at info@colaycofoundation.com.

FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE), a prime mover of the financial literacy movement. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save." For questions, you may email Mr. Colayco at info@colaycofoundation.com or text +63917-8537333.

CFE is the publisher of Mr. Colayco's bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, Powerbooks, Fully Booked, Pandayan or directly from CFE. CFE is also the producer of the PISOBILITIES DVD series, available at all SM record bars, National Bookstore, Odyssey, Astrovision, Astroplus and other major audio-video stores nationwide. CFE also conducts personal finance management talks, seminars, and workshops. For more information on CFE programs, visit www.colaycofoundation.com or call (632) 637-3731 or 637-3741.