5 Critical Questions to Ask When Going into Business with Others

O*NO! You’re thinking of going into business with someone and want to set yourself up for success from the start but aren’t sure what questions to ask!

Whether you are going to be partners, shareholders, unit holders or joint venturers, the big strategic questions to be asked are very similar.

Whose call is it?

When making decisions, do you both get a say? What happens when you don’t agree on things? You don’t want small issues getting between you, so it is best to set this out clearly from the start, when everyone gets along.

The level of say you get to have in the running of the agency may depend on the percentage of ownership you take. Often, big strategic decisions would require all shareholders to agree on the direction of the agency, however smaller day to day tasks may be in the hands of one of the Principals/Directors.

Ownership

There are various ways you can structure your real estate agency, such as using a company, trust, partnership or other vehicle. Regardless of the type of structure, you will need to determine what percentage ownership all business partners are to receive.

The ownership level will depend on what each partner is contributing. If a cash buy in is required, then it will depend on the valuation and how much each person can afford to buy in at. If in start-up mode, you could have one person contributing the capital (cash), but another could tip in intellectual property, client database or services to make up their equity share.

Profits

Again, whether you receive profits as dividends or as distributions will depend on the type of structure. Honestly, the distinction doesn’t really matter – what matters is that you agree how and when this will happen.

The ‘how and when’ will relate to whether certain KPIs need to be met before taking profits out, or whether debt needs to be paid down first. Does one partner want to pump the profits back into the agency to drive growth, while the other wants extra cash in their pocket via dividends to pay off their mortgage or go on a nice holiday? (When we are allowed to again, of course!) All things are possible, but you need to sort out the how and when from the start as money and lack of strategic alignment can ruin relationships.

Client Database

We all know our CRM and client database is the lifeblood of any agency. What we don’t think about when going into business with someone else is to specifically talk about who owns the database.

If you are merging with another agency this can get especially tricky, and is often overlooked. Does each party retain ownership of their part of the database? What about the client data that is collected over the time you work together? What if you are an employee and are buying into the agency where you work - if your boss leaves, will the database stay with you?

The main issue arises when someone wants to leave the business. Generally, whoever is staying and has bought the agency off the other person will own the client database. However it doesn’t have to be this way and you can be as creative as you like when it comes to this (subject to privacy laws) - but spell it out from the start.

Exit

When going into business with someone, it is hard to think about how it might end. At some point though, everyone’s ownership in a business will end – be it by choice or not.

When it’s your choice, life can be a little easier as you can agree what will happen at that point in time. We recommend that you still have a plan for that scenario, such as whether the remaining partners get first option to buy you out, or whether you are free to sell to a third party.

The involuntary exists are much harder and must be agreed from the start. An involuntary exit can be on the death or disability of a business partner, or ‘bad leaver’  mechanisms where they can be kicked out - such as if they lose their real estate licence, steal from the business, or other terrible behaviour.

Takeaways

Go and talk to your current or future business partner about:

• who makes what decisions?

• what level of ownership will you receive?

• how and when profits will be paid?

• who owns the client database under different scenarios?

• how will you exit when the time comes?

Remember, relationships are everything in real estate and you must future proof them from the start if you want to succeed.

What’s next?

If you are thinking of going into business with someone, or have done so recently but aren’t sure if you have set yourself up for success, book a FREE 10 min call with us to chat about future proofing your relationship.

Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.