You’re ready to make the entrepreneurship leap and start a business together. Whether it’s with your closest confidante or a more casual business acquaintance, it’s important not to tell yourself a common lie: That it isn’t personal.
“Some people call [their business] their baby,” says Ryan Kauth, executive director of the Wisconsin Center for Employee Ownership. “People say that business isn’t personal; that’s bull crap. Business is very personal. It’s just that you have to make business decisions that don’t involve emotion sometimes, [and] that’s just really hard.”
And in a country where, according to the U.S. Small Business Administration, 18% of small business startups fail within the first year and 65% close down within a decade, a business relationship can sometimes mean a devastating breakup — and feelings that are intensely personal.
From day one, your business is an asset. If you bought a stock, you’re going to think about the value of that stock and the growth of that stock from day one, so it’s the same with your business.
— Matthew Brehmer, attorney
Making the match
Kauth, a Manitowoc-based former banker who currently teaches at Marquette University and volunteers as a small business mentor for SCORE Northeast Wisconsin in addition to his role with WICEO, says that despite the inherent relationship risks, the benefits of going into business with at least one partner generally outweigh the benefits of sole proprietorship. And like a marriage with a prenuptial agreement, planning and clear communication are key to protecting the business relationship.
“I know people who have said, ‘Don’t ever start a business with somebody else, because there’s disadvantages,’” Kauth says. “But the benefits are, there’s two people. Maybe that means you both have more capital to put into the business. [Maybe you] have complementary skill sets. Maybe that means you can operate the business with just the two of you, and you don’t have to hire somebody right away. But it’s really two heads are better than one, and it’s not just a 2x thing — it’s more exponential … and you have somebody you can be accountable to.”
Lynn Davis, an agricultural scientist who has started four multiowner businesses in Wisconsin and one in Colorado, says he never considered sole proprietorship in his decades-long entrepreneurship journey. Multiple business owners meant he could pursue diverse interests, and the complementary skills and networks of each enterprise’s co-owners proved both liberating and enriching.
“We all know of so many sole proprietors that are tied to businesses and can never get large enough to bring in the expertise they need. I did not want to have a business like that,” Davis says. “I wanted the businesses to be large enough … to hire talent that was needed in different areas that maybe wasn’t possessed by ownership.”
Davis launched Nutrition Professionals, Wisconsin’s first independent dairy consulting business, in 1983 with a graduate school classmate and the farm enterprise Breeze Dairy Group in 2002 with four other owners, both in Appleton. In 1991, he founded the soybean processing business Quality Roasting in Valders with three other owners. All are still thriving in the New North region, with Davis citing the dynamic among the owners of Breeze Dairy Group as one of his favorite success stories.
“We’ve met monthly for the last 23 years, and no one has ever raised their voice in 23 years of monthly meetings; I like to tell people that,” Davis says. “Knowing the people well — the integrity, the sensibility of them — is so important in getting into business.”
One of his favorite pieces of advice, Davis says, came from the attorney who helped him and his business partner create Nutrition Professionals:
“You need to plan for the worst while everyone is smiling,” Davis recites. “That was absolutely spectacular advice.”
Dotting the Is, crossing the Ts
Attorney Matthew Brehmer, managing partner of Brehmer Law LLC in Neenah and Green Bay, has experienced both entrepreneurs’ smiling and frowning moments during his 11-plus years helping small business owners. He says it’s always better to plan and communicate early, because the “four Ds” — death, divorce, disability and disagreement — can come for business owners at any time.
“You want to be on the same page from the beginning, because when circumstances change you might have a completely different perspective on how you want things to happen,” Brehmer says.
Brehmer recommends that business partners should work with a qualified attorney to draft an operating agreement and a buy-sell agreement before launching a business, both to protect the business from liabilities and lawsuits but also to “protect your life without the business.”
“My advice always is that you should think about the succession of your business, whether it’s something happening to you or you selling it,” Brehmer says. “From day one, your business is an asset. If you bought a stock, you’re going to think about the value of that stock and the growth of that stock from day one, so it’s the same with your business.”
Brehmer estimates the cost of working with an attorney to set up an operating agreement at $1,000 to $3,000, and that investment pales in comparison to the potential price of not having one.
“If you have a game plan, [that’s] exactly how things are going to work out,” he says. “If you don’t have your operating game plan together, it’s going to be potential litigation, which is going to cost a lot of money. Operating agreements are pretty straightforward to start with; they can get complex as your business grows and becomes successful, but to start with they are pretty standard.”
Not only should business partners create business plans, operating agreements and buy-sell agreements, Kauth and Brehmer advise, they should also be reviewed regularly, similar to the bylaws of a nonprofit organization. Life insurance is also an important and sometimes overlooked consideration, Kauth adds.
Joe Simon, principal at Green Bay-based DaVinci Insurance Advisors, agrees.
“They have a banker, they have an accountant, they have an attorney and oftentimes what’s forgotten is insurance,” he says. “You’ve got people who are bringing their personal livelihoods to the table, possibly putting some personal liability on the table in return for ownership, so it really puts not only the partners who are sitting around the table in jeopardy [in case of] death or disability, but it also leaves the families in a very precarious situation.”
Simon says there’s one particular update proprietors need to make to their buy-sell agreements that could save them millions of dollars, and many seasoned business owners are still to date unaware. The June 2024 Supreme Court ruling in Connelly vs. United States shattered a 35-year precedent for business valuation that changes how life insurance proceeds are treated in the event of an owner’s death. The ruling, Simon says, means business owners should change their life insurance beneficiaries from the corporation to the business partners themselves.
“My concern is, you may have CPAs or attorneys who have brought this up to their clients, but you know how busy business owners are,” Simon says. “It’s easily forgotten, but it can be a very expensive tax bill if it’s done the wrong way. It’s just a piece of paper to the attorney and a piece of paper to the insurance company to change this, and then we’re not paying millions of dollars.”
Knowing the people well — the integrity, the sensibility of them — is so important in getting into business.
— Lynn Davis, entrepreneur
Getting it right
Planning for what might go wrong is critical when launching a multiowner business, but just as important is leveraging resources and taking steps to get it right.
Kauth says complementary skill sets are a key consideration when choosing business partners. A restaurant is a prime example, he says: “Typically speaking, you’ve got two owners: one front of house, one back of house, right? You don’t want two chefs.”
In a multiowner business arrangement, it is unlikely that owners’ skill sets and interests are perfectly lined up with each other and the needs of the business. Kauth recommends creating job descriptions for each owner. If neither owner, for example, has bookkeeping experience, responsibility for bookkeeping should still be assigned to one of the owners, who can choose to outsource and delegate as needed.
Davis recommends going into business with partners who are “financial peers,” agreeing to share financial statements and understanding that an owner with deeper pockets may potentially find themselves in the position of bailing out the business.
“You don’t want to go into business with somebody who already has a lot of financial obligations elsewhere,” he says. “New businesses, in the first couple of years, typically operate in the red, so ownership is going to have to be there to allow it to operate.”
Kauth says he has seen arrangements where one business partner has deeper pockets and the other is an “idea person,” but he agrees that understanding your financial position and liability before going into business is critical.
But lack of personal resources shouldn’t necessarily stop an entrepreneur from getting started. For owners who don’t necessarily have deep pockets, Kauth says there are free or low-cost resources available, including SCORE mentoring and the Law and Entrepreneurship Clinics at Marquette and the University of Wisconsin-Madison, of which business owners should take advantage.
“I also think if you’re going to be in business together and neither of you have been in business before, taking a class together at Fox Valley Technical College, the SBDC, or even some economic development organizations like Progress Lakeshore [that] offer them, is a great thing,” Kauth says. “Spend a couple of weeks being together, talking about things, and if by the end of that class you decide you shouldn’t go into business together, that might be the best business decision you ever made.”
