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Legal VIEW

An Attorney's Role in Your Partnership

January 21, 1988|JEFFREY S. KLEIN

One of the best ways to stay out of court and avoid lawyers is to know when to use a lawyer in the first place--and that is especially true if you are thinking of starting a business with a friend or colleague.

Whether you plan to open a frozen yogurt cafe or market a new line of bikinis, you should assume at the beginning that the joint venture will fail.

That may sound harsh, and it might temper some of the enthusiasm you'll need to succeed, but you and your partner will be better off in the long run.

Planning on Failure

When you visit a lawyer to have a written partnership or joint venture agreement prepared (and you definitely should have one), you'll find that a good lawyer will also plan on failure. Lawyers are trained to assume the worst, so they can focus on the consequences of failure that can be taken into account by advance planning.

By assuming the partnership will fail, you can decide in advance how to allocate losses, sell the assets if necessary or set up a mechanism for one partner to buy out the other. These are all subjects that should be described in detail in the agreement.

One way to avoid failure is to get involved only with someone who is on a relatively equal financial footing. Otherwise, you may find that you are willing to lose money for a period of time, in anticipation of a long-term payoff, while your partner needs cash now.

Viewing All Scenarios

Many times it may be impossible to find someone in a similar financial position--you may be contributing talent and ideas while your partner is financing the project--but, at the minimum, you should discuss and budget for different financial scenarios.

The partnership agreement should try to consider all contingencies. "Spell out in detail what is to be accomplished in the venture, how losses as well as profits, expenses and tax benefits are to be shared--and have an attorney write this agreement; don't rely on handshake deals with friends from the club, on notes jotted down on cocktail napkins or upon homemade forms," says Thomas E. Stindt, a Woodland Hills lawyer who recently helped a client extricate himself from a failed joint venture.

Other issues that should be resolved are management and control, decision-making procedures, legal liability, legal nature of the entity (corporation, partnership or joint venture), dispute resolution (arbitration is a less costly alternative to litigation) and the possible sale of one partner's interest to a third party. A helpful resource is "The Partnership Book" by Ralph Warner and Denis Clifford.

Every partnership agreement should spell out how and when one partner can buy out the other. You'll have to decide how to appraise the business and determine a fair price. Some partners allow the first partner to set the price, and if the other one won't buy at that price, the first partner has to buy at the price he set. That breeds evenhandedness.

It reminds me of the scene in an Elvis Presly movie of two bothers who share a candy bar. One breaks it in half and also picks which half to eat. By the end of the movie, the other boy has learned that if his brother is going to break the candy bar, then he should decide which piece to eat.

Business probably isn't much different.

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