Taking on a business partner - should I & what does it involve?

Question

Currently, my husband & I run a small UK clothing business as a limited company but I am thinking of expanding and renting a shop. I have been advised by other people in similar businesses that having a partner is key. My husband is a sleeping partner really but I have several friends, one in particular, who would like to be involved & would brings lots of ideas, enthusiasm, etc.

But should I offer her a profit-sharing arrangement at first rather than taking her on as a director/offering her shares. We have invested several £000's as directors loans which we will be able to take out again but should I ask her for an investment over & above the share price if I do make her a partner?

Any advice or links to sources of advice gratefully received.

Victoria

Answer 1

Don't enter into any arrangement that you can't dissolve easily.  Particularly, don't hand over part of the ownership of the business that you and your husband have built up to someone who you haven't worked with before.  Speaking from personal experience, friends can be very enthusiastic about wanting part of the action of your business but when you bring them in their contribution is a lot less than what you hoped for.

Weigh up whether you really need another pair of hands in the business and what they will do for you.  It's a lot less complicated to employ someone or outsource certain tasks than bring in partners/co-directors.  Anyone can be enthusiastic about your business when they see an opportunity to latch onto your success.  Be really hard-nosed about it.

For some independent advice, contact your local Business Link.  They offer a free business review that looks at where you are and where you're going.  They come up with things that you haven't thought of because they're able to stand back from your business.  We used them earlier this year for one of our companies.  Well worth doing.

Good luck!

Answer 2

Firstly, I think you should be clear on your terminology. A partner is very different from a director with different legal iImplications. If you are trading as a limited company, the first question you need to ask is why specifically do I need to bring a director on board? what contribution will the director make? ie what does he/she bring to the table. Remember that you can appoint a director without he/she being a shareholder. I would caution against giving away equity in your company without good legal and accounting advice. At least a shareholder's agreement should be put in place. You also need to consider whether a paid employee could bring the skills you may need. I don't agree that having a partner (additional director) is key. Having an additional director who can complement the skills and experience you have and perhaps supplementing some lacking skill eg sales or financial control might be desirable. Remember, also, that issuing shares may create its own problems in the event of a future fall out.

Answer 3

Personally, I would offer your friend a profit sharing arrangement first of all.  I know it sounds negative but you really shouldn't offer her shares or a directorship straight away just in case things don't work out as you wish - particularly if you have not worked together before.  Perhaps after an initial period you could offer shares etc - when you know you can work well together and the shop has worked out.

Answer 4

What do you think she could bring to the business? Can you value her potential contribution? Does she want a salary + profit share? Can you afford that? Is she interested in an equity share?

Shares are really worthless unless you propose to pay dividends or there is the possibility of an exit route. I think the best way would be profit sharing.

Would she put money into the business? She must be mad, unless she has an equal stake and there is a good dividend policy.