Sometimes there truly is strength in numbers and teaming up can be the key to success. But it’s common knowledge that entering into a professional partnership is one of the chanciest moves one can make in business. Differing motivations, unequal levels of effort and power tussles are among the top reasons these relationships fail.

Therefore, Forbes magazine reports, 70% of business partnerships fail. (“How to Keep your Business Partnership from Imploding,” March 13, 2019).

For those who are considering joining a business partnership, Gulfshore Business asked for advice from three Southwest Florida business lawyers: contract and bankruptcy attorney Brian Zinn of Fort Myers; third-generation business lawyer Frank Aloia Jr. of Aloia Roland; and Ray Placid, a Naples-based contract attorney who now teaches commercial law and contract litigation at Florida Gulf Coast University.

First Principles

The initial step is to determine how the partnership is organized and the pros and cons of that decision. Options include general, limited and limited liability partnerships. In a general partnership, the partners may be personally liable for the partnership’s debts and obligations. In a limited partnership, personal liability is limited. Partners are only responsible for the amount invested in the limited partnership, but limited partners cannot contribute to business decisions. A limited liability company, or LLC, legally exists as a separate entity from its owners, so owners typically cannot be held personally responsible for the business debts and liabilities.

“A lot of people prefer forming an LLC,” says Aloia, who has helped clients buy and sell every type of business from day care operations, restaurant partnerships and HVAC companies to electrical and plumbing contracting companies.

Speaking of firsts, here’s a primary piece of advice: Put everything in writing. “The best thing to do is think of it as a marriage; and just like a marriage, some people do a prenup,” Zinn says. “If you’re thinking about a corporate marriage, you always have a prenup. It’s known as a partnership operation agreement.”

Aloia, Zinn and Placid also suggest thorough due diligence before buying into a partnership. The Internet is full of free due diligence checklists—including from Dow Jones Risk & Compliance—for analyzing a potential partnership. The checklists, some of which contain hundreds of items, can include reviewing the company’s articles of association, in effect the partnership’s constitution, studying its by-laws and amendments, as well as taking careful note of any pending and threatened litigation. Study the company’s financial reports and its list of physical assets.

“Before you join the partnership, ask the partners to provide you with all the information of what it costs to run the business, the partnership’s liabilities and the physical assets the company owns,” Aloia says. “New buyers should request documentation of what the partners are claiming.”

Zinn suggested thoroughly examining the business’ books and records. “If the person that has the business wants you to join them, at some point, he will have to let you see them. There’s usually a preliminary agreement where they provide a certain amount of time to do the due diligence.”

By the way, Zinn said, business owners on rare occasions will keep double records—one set is accurate, the other set of books are illegitimate, false, fictional. “I had a client who discovered a seller had three sets of books,” Placid says. That’s … pretty much always a red flag.

The best partnerships, on the other hand, hire outside auditors to review their finances and operations—ask to see the latest audit. One also can ask for copies of any recent IRS audits. To get a good idea of the health of the company, check the bank balance, said Placid, who has represented hundreds of clients in business transactions over the years. “If you buy into a company that never had an external review, look at the cash. The cash doesn’t lie. They can fake revenue but they can’t fake cash,” he says.

Further advice suggests that if you get pushback on examining the books and records, have a forensic accountant to help you. “They can suggest places where adverse information might be hidden, and whether the books and records are the actual books and records,” Zinn says.

Settled in Advance

Before you enter the partnership, find out whether you’ll be responsible for a portion of the debt the company already holds. And make sure the partnership agreement lays out each partner’s responsibility and compensation.

Other questions to ask: Who is responsible for licenses the company must maintain? Who orders materials and supplies? Who gets a salary? How much? How is the profit distributed among partners? What other exposure does the company have? If it is leasing space, for instance, how much is the lease and how long does it last? Does the company face any ongoing civil lawsuits or criminal charges, such as pollution or negligence cases?

The lawyers agree on avoiding another pitfall: The question of who is responsible for loans. Aloia cautioned would-be business partners on this point. It is not uncommon for those joining a partnership or buying a business to seek financing from the owners, he said.

When the buyer pays $750,000 in cash and asks the partners to finance another $250,000 for a $1 million buy-in, for instance, Aloia suggested the seller take the time to teach the buyer the ins and outs of the business. “I tell the seller, be prepared to lose every dollar you finance if they don’t know how to run the business,” he says. “If the business crashes, you won’t get your finances back.”

Zinn similarly cautioned newcomers to a partnership that they may be used to obtain loans for the company. “Let’s say a business wants a loan and you’re joining the business,” he says. “As part of you joining the business, you may have to personally guarantee that loan as the new guy.” If you realize a few months later that the partnership wasn’t what it was cracked up to be and you want out, you could still be on the hook for that loan, he said.

Getting Out

One common exit strategy is to sell one’s interest in the partnership to a third party. Limited partners can sell either a part of their interest or its entirety to a new investor. “Can that partner sell that share to a member of the public, or do the other partners have the opportunity to buy them out first?” Zinn says. “An operating agreement would include the right of first refusal.”

Continuing partnerships know that people change their minds, their health fails or they want to try something else. “You want strong guarantees and remedies on the front end in case the partners did not tell you the truth,” he says. “If the person hands you a bad business, you will know within six months to a year. Skeletons come right out of the closet.”

Placid said those exiting the partnership concentrate on how much money they are going to collect on the way out, but don’t necessarily appreciate the hidden liabilities. “The exiting partner estimates the assets, agrees on a buyout price and collects, but years after he or she leaves the partnership, the IRS decides to audit the partnership—including the years the partner was involved with the company,” he says. “Three to six years after leaving the partnership, one can be suddenly liable for an IRS bill of some size.”

He especially cautions partners to pay attention to the rules governing disproportionate distribution to avoid tax liabilities. The rules are complex and can have you reaching into your pocket to pay the IRS again.

“I can’t emphasize this enough: You have to be careful in partnerships regarding disproportionate distribution. Get a tax lawyer to guide you in your distribution,” Placid says.

Unforeseen lawsuits also can arise, he said. Imagine that during the time you were a partner in a multistore pizza delivery business, one of your delivery drivers critically injures another motorist in an accident: “Now you’re one of the 10 partners who owned the business at the time of the accident. It might take five or six years for the lawsuit to mature, but you were a partner at the time of the crash.”

So, if you want to spread the risk, share in the profits and enjoy a meaningful business venture, a partnership may be the way to go. But make sure the partnership agreement spells out as much as possible.

“Most people don’t run worst-case scenarios through their minds before joining a partnership,” Zinn says. “I can tell you that the divorce rate of married people is 50%. The breakup of startup companies is 20% to 30% higher than that. It’s 70% to 80%.”

It takes two

There’s a popular neighborhood restaurant in Fort Myers where generations of families have stopped to eat and visit with owners Bonnie Grunberg and Tammie Shockey.

The Oasis Restaurant, serving breakfast and lunch, originally opened in 1989 on McGregor Boulevard. The 60-seat restaurant closed when the shopping center in which it was located began renovations. The business partners built a new, 150-seat location at 2260 Dr. Martin Luther King Jr. Blvd., where it has operated since 2003.

Most independent business owners contacted by Gulfshore Business said they preferred not to have a business partner. They said experience has taught them that being a sole proprietor is the only way to go.

That is not the case for this engaging pair of business owners. The first restaurant began to fail shortly after Grunberg, Shockey and other business partners opened the location, Grunberg said. In fact, the pair bought out two other partners when the business showed signs of failing.

Grunberg and Shockey realized they had to work together to turn things around. They also knew in some ways they were unintentionally working against each other.

“We realized we better use boundaries, or we’d kill each other,” Grunberg says, laughing. “Rather than cross over those boundaries, we’d talk about our ideas—rather than introducing them without telling the other person.”

The two compromised and something clicked: Diners began to fill the Oasis dining room. Shockey, who enjoyed talking with customers, took on the kitchen responsibilities out of necessity. As she cooked and ordered supplies, Grunberg managed the front, serving customers and ringing up checks. Grunberg, however, could see that Shockey—who also has a talent for engaging the public—was unhappy in her singular role.

“When we opened the restaurant, Tammie ran the back of the house, and I ran the front of the house,” Grunberg says. “No one can flip eggs like Tammie, but I could see her frustration as the restaurant was growing.”

Shockey said she felt liberated when she found time to chat with customers, something that attracted return diners. “I liked the front of the house, but someone had to be in the back,” she says. “I missed talking to customers, and after a year and a half of being in the kitchen, I hired people to help cover the back. I could come out to the front from time to time.”

Grunberg and Shockey’s friendly rapport with customers makes Oasis a special place in Fort Myers. According to Grunberg, their original customers bring their grandchildren and even great-grandchildren to the restaurant these days.

“We were going to close our doors those 35 years ago,” Grunberg says. “Ultimately, we had that conversation where we divided our duties, respected each other’s boundaries and communicated. That got us through.”