How to Bring in
a New Partner
By Matt Dickstein
this article I will give you a quick overview on
how to bring in a new shareholder or partner to
help with your business. If you are on the other side of the table as the
new partner, read this article to learn the issues at stake when you step
into the business.
Culture Fit. The primary risk in
bringing in the new partner is that your existing group and the new partner
might not fit well together. For example, you and the new partner might
differ on the group’s guiding principles or work ethic, or the new partner’s
skills might not be a good fit.
Compensation. Once you are confident
that the new partner will fit in with the existing group, you must set a
level of compensation for the new partner that is fair to him or her and to
the existing partners. It can be hard to get right and keep right a group’s
Buying into the Company. After salary,
ownership is the next major obstacle. You must decide the percentage
ownership that the new partner will receive. Then you must decide how much
the new partner will pay for his or her stake, and whether the new partner
will pay in installments and/or through salary reduction. You will find
that, for many reasons, existing partners will want a high buy-in price.
Liabilities. If the existing partners
are liable for company debts, then be clear about the liabilities that the
new partner will become responsible for. Will the new partner guarantee
existing loans or leases? Will the new partner step into a capital call?
Exit Strategy. Now that you have agreed
to the entry of the new partner, you must agree to his or her exit. The
existing partners and the incoming partner all need to have an exit strategy
in mind. The most common exit is the termination of the partner’s
employment plus the buy-back of his or her equity. The company might also
give severance pay to the departing partner/employee.
This is where a buy/sell agreement comes in. A buy/sell agreement is
essentially an agreement for exiting a company. A buy/sell agreement works
like this – the agreement names certain trigger events for buy-back (e.g.
termination of employment, death) then it either requires or permits the
buy-back of the partner’s equity on the occurrence of that specific event.
Then the agreement sets a price for the buy-back. Check out my
article, Buy/Sell Agreements.
No-Competes. The last item to keep in
mind is whether the company will lock up the departing partner with a
non-competition covenant. A partnership agreement may prohibit a
withdrawing partner’s competition in a limited geographic area for a limited
time. Check out my article,
Non-Competition Agreements at 100mph.
This article only gives a short roadmap of the issues involved with bringing
in a new partner. There is a lot more to bringing in a new partner than
introduced here. Before you bring in a new partner, get competent legal
counsel to help you.
me to schedule a legal consultation: