You may have mixed feelings about business partnerships: you’ve heard success stories and you’ve heard horror stories. But how important are partnerships when buying a franchise? There’s a lot to consider, especially if you lack critical business skills or investment capital.
Forget about all the stories or warnings you’ve heard. Some may be true, some not but most of them are exaggerated. A partnership should be seen as a positive step towards advancing your franchise towards success but setting one up an be time-consuming – there are lawyers and accountants to deal with and a contract to draw up. You can always draft up the contract yourself but make sure to have a lawyer look at it to avoid any errors or omissions you may have made.
Read these two scenarios closely:
Scenario A: John & Sally
John and his wife Sally have decided to buy a fast-food franchise. On their application, which has been approved by the Franchisor, they stated that there would only be two people operating the business: John and Sally. But, after further consideration, the couple realize that this venture – as lucrative as it may be – might be too overwhelming for both of them to handle alone. They have more than enough money saved to buy the business and have a list of friends’ teenage children who are excited about possibly working for John and Sally. They are considering bringing on a partner who has years of experience in corporate marketing and public relations.
Scenario B: Maggie
Maggie has worked as a freelance lab technician for the last fifteen years. She recently discovered an interesting franchise concept where her science skills could be useful and was approved for a franchise loan but the funds are not going to cover the entire investment amount. The Franchisor is young with only eleven franchised outlets, but just won an award for up-and-coming new franchise operation. Maggie’s current occupation doesn’t really require her to be a self-starter or problem-solver. She’s worked independently for so long that she feels she can run the franchise on her own.
In which of these scenarios would a partnership best serve the individuals? Do either of these scenarios describe you and/or your lifestyle situation?
Before we analyze them and arrive at a recommendation for John and Sally, Maggie – and perhaps yourself – you will need to know the definition of a partnership, how it works, and the two different partnerships you can choose from.
What is a Partnership and How Does it Work?
A business partnership is essentially a number of individuals (two or more) sharing the roles and responsibilities of the business. Typically, all decisions made and actions taken should be agreed upon by all the partners. Profits are normally shared equally among the partners, as well as any liabilities incurred and regardless of who may have been responsible for the debt. Of course, there are some variations depending on the type of Partnership Agreement: the General Partnership or the Limited Partnership.
The General Partnership is the easier of the two to form and involves two or more people jointly running the business and having a share in the profits as they are outlined in the agreement. The same applies to debts and liabilities. Every partner has an equal vote. The partnership itself is not subject to any income tax. One of the advantages to the GP is that no state filing, registration, or ongoing reporting is required.
The Limited Partnership is modeled around the General Partnership except it can have one or more “limited partners” (also known as “silent partners”) who are not liable for partnership debts. All liabilities rest with one or more designated. general partners. Limited partners own a share of the business but do not have any say in how the business is being run. In most states, limited partners are prohibited by law from getting involved in managerial decisions. Finally, a LP must register itself with the respective government office in your state. Your lawyer or accountant should be able to tell you the name of the government office where to register.
