Considerations When Expanding Your Business

December 22nd, 2016

Expanding businesses face choices about whether to add new partners, owners, or shareholders. Unlike simply hiring new staff, adding members to your company’s core may affect the business’ organizational structure. It also entails power- and profit-sharing dynamics that can be detrimental to some businesses.

Given the riskiness of surrendering partial control of your business, as well as the legal and financial headaches of getting rid of a co-owner or partner you don’t like, it is wise to consider alternatives. Here are some common reasons we hear for adding new core members, as well as some other options to meet your business’ needs.

1. I need to offer more services to generate more clients.

Problem: While broadening your service options may require adding new talent, it’s best to know for sure that the person you’re adding—and the services—are a good long-term fit. It can be painful to have a new partner leave within a year. It can be worse to realize that the new service area isn’t actually generating much business.

Alternative: Hire an independent contractor. Basically, this means contracting with someone to provide specific services—such as sales or consulting in a specific area—and ordinarily comes with a time limit. You can be very creative on the payment structure and you get a chance to observe whether you want them around long-term. The perks of this approach are that it’s easy to terminate a business relationship with someone you don’t like or don’t need long term.

Do keep in mind that there is a difference between an independent contractor and an employee, and compensation requirements are very different. Hiring “independent contractors” whose job duties make them look more like employees can cause trouble later if you haven’t been compensating them as employees.

2. I need the financial boost of having a partner buy in.

Problem: Adding partners or shareholders for purely financial reasons doesn’t allow you to prioritize their skill level or experience. Too often the new partner becomes a “silent owner” who exercises considerable control over your business but isn’t easing your workload.

Alternatives: Seek funding through a small business loan, not through a risky partnership deal, and test out potential partners through the independent-contractor framework described above. Or, if you have an investor you trust, set up a profit-sharing agreement. They get a percentage of profits; you get up-front cash while retaining control over your business. You can also set up different classes of shares/stock with and without voting rights. There are some issues on how this is done, but it is feasible.

3. I need someone to share my workload.

Problem: This doesn’t necessarily mean you need to add core members; it might just mean you need more employees. Especially if you’re still figuring out how to manage a high volume of business, you may not want to give up substantial control of the business just yet.

Alternatives: If your problem is sheer workload, try the independent-contractor arrangement described above—it allows you to temporarily offload tasks but gives you an option to terminate relationships at a definite time in the future. When the contract period expires, you can assess whether the work volume has subsided or is likely to persist.

If your problem is too many potential clients, try setting up referral fee agreements with businesses that aren’t your direct competitors. You’ll be compensated when people or businesses you’ve referred become clients of the outside company, and the collaborative relationship may also help direct business to you when business slows down.

Business owners can benefit from the advice of an experienced attorney to help with organizational decisions about dividing ownership or sharing profits. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.