How to Bring in a New Partner
By Matt Dickstein, Business Attorney
In this article, I will give you a quick overview of 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 compensation structure.
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.
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.
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.