That’s great with love, but not so great with money.
Financial partnerships are at least as challenging as marriages. And business deals don’t have love to smooth the rough spots in the relationship.
Something will likely asunder the business venture.
Yet people pool their money in business, real estate, and investments without a thought to how the partnership will end.
Chances are, it will end, and that end can be very messy and miserably expensive.
My charge to those pairing up for an investment is this:
At the start of any venture involving pooling money, lay out some rules for how you part in the end.
Think of your business wind-up rules as a prenuptial agreement for your business.
Your business future
Maybe, you’ll be content to be partners forever.
- Your financial venture will be wildly successful.
- Nothing in either life will change.
- You’ll die simultaneously.
- Your heirs will be in perfect agreement about what to do with the joint venture.
But I wouldn’t bet on it.
Things change, in predictable and unpredictable ways. What seemed so amicable and straightforward at the start is less so as life happens.
You buy a house together
Suppose you invest in a house with a friend. Together, you can get what neither of you could afford alone.
But then, change happens: one of you has to move for job reasons; you can’t make joint decisions about the property; one of you pairs up with another.
Whatever the reason, it is no longer advantageous to be joint owners.
Let’s start a business
Two of you hatch an idea for a business. That’s what we do here in Silicon Valley.
Each of you is married to another. You pool your money and your credit and launch your enterprise.
The business prospers until one of you becomes ill or disabled and can’t work in the business. If the business has to hire an outside replacement for the ailing partner, it doesn’t have enough money to pay the disabled partner.
Or one partner is sued for divorce and the business must be divided.
Or one party dies, and the survivor doesn’t want to be in business with the widow.
The variations are endless, but the problem of getting your money out of a joint venture is the same.
Fail to plan and…
Absent an agreement that provides a plan for the dissolution, a lawsuit follows. An absolutely avoidable lawsuit, when you could have agreed, at the beginning, how the joint purchase is unwound.
Why make the separation plan at the beginning?
No one going into a joint venture wants to consider that it will be anything less than a roaring success, forever and ever, amen. But the beginning of the venture is when you can most objectively discuss the options for unwinding.
You are full of enthusiasm and good feeling. It’s easy and emotion-free to discuss parting some long time in the future.
If you wait to hold that discussion til the venture needs to end or one party needs to get their money out, the mood will not be nearly so free and easy.
One needs his money back; the other is pressed to buyout the departing partner or give up the venture.
And that’s if the relationship between the parties is harmonious. If the parties no longer see eye to eye, things are worse.
The ways you can separate your pooled money are as endless as your imagination.
- Sell the property to a stranger
- One party buys the other out with the price set by appraisal
- A buyout price is set by an agreed formula
- The departing party gets a short term note from the remaining party
- Insurance funds a windup triggered by death or disability
The more money you pool, the more attention you should pay to the exit strategy.
If you each contribute $100 toward shared season tickets, the stakes when things change aren’t great. However, if you each mortgage your homes to start a business, the consequences of a rupture are huge.
If I wrote the rules, joint money ventures, just like marriage,would require a license in the form of a written separation plan, from the start.
An earlier version of this article appeared on Consumer Ledger.
Image courtesy of Daniel Clark and Openclipart.