Home builder Ira Norris has raised millions of dollars from hundreds of limited partners he has never met. By combining his expertise and their cash, Norris has built more than 9,000 homes and is proud of his ability to please a business partner.
"It is important to really get to know each other's expectations and talk about the downside of the deal," said Norris, founder and president of Inco Homes Co. in Upland, Calif., which employs about 70 people. "Then, when something bad is happening, let your partners know right away."
By following his own advice and building affordable, high-quality homes in Southern California, Norris was chosen local builder of the year by his construction industry peers in 1988. He has built a loyal following of investors who keep reinvesting their money because they are pleased with the results.
Every day, in coffee shops and conference rooms nationwide, business owners and potential investors are scribbling deals on scratch pads and napkins. But turning those scribbles into viable, legal and satisfying partnerships takes careful planning and expertise.
Entering a partnership is very much like entering into marriage. And unless you know the person well, communicate openly and develop trust, you may end up in court.
"Regardless of all the handshakes, no deal is a deal until the partners fully understand all the consequences of the arrangement," said Scott Farb, a partnership in the public accounting firm of Kenneth Leventhal & Co. in Los Angeles.
Farb, who reviews Norris's construction partnerships, said a partnership agreement must be clearly written so each partner understands exactly what he or she is getting into. "You should clearly define what each partner will contribute and the percentage of ownership," Farb said. "It's also important to make arrangements up front as to how the partnership will obtain additional cash if there are operating deficits."
Every partnership agreement must also include a provision for buying out a partner or terminating a partnership in the event of disability, death, bankruptcy, criminal activity or irreconcilable differences. Farb said the agreement must be fair and "track properly" when it comes to profit-and-loss allocations among the partners. And every partnership needs a detailed business plan, forecast and hypothetical financial problems.
Whether the agreement is 10 pages or 100, a lawyer should be involved in its drafting. After the attorney drafts the legal language, it should be reviewed by an accountant who is familiar with the tax laws affecting partnerships. By seeking advice from both advisers in the beginning, the partnership has a much better chance of success.
"You should be as specific as you can be about the purpose of the partnership and very clear about who will run the business or enterprise," said Warren Kessler, a Beverly Hills lawyer who specializes in drafting partnership agreements.
Kessler, who has drafted hundreds of partnership contracts, said the most traditional partnership involves one person who provides the product or management skills, while the other contributes the cash.
"One person should be responsible for creating a budget and a timetable," Kessler said. "That person also needs to produce regular financial statements for the partners."
Unlike a corporation, which operates under a standard set of bylaws, Kessler said, a partnership agreement can be tailored to spell out exactly how a particular business venture should operate.
Although most entrepreneurs need cash to pursue their dreams, many are wary of entering into partnerships because they balk at having to give up control in exchange for capital, according to David King, a partner at the law firm of Morgan, Lewis & Bockius in Philadelphia.
King, who specializes in venture capital issues, said a key element of his job is to "educate entrepreneurs as to what an investor wants from the deal."
Entrepreneurs need to know exactly how and when they will receive their share of the profits from a partnership, King said. He also stresses the importance of open and honest communication with the people who are putting up the money.
"If the business is successful," King said, "you are going to have to go back to the same investors for money to grow."
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