Entering any business alone is daunting. It can actually force otherwise actionable people to freeze up and not start the business that they wanted to. The problem can be solved by entering this business, a CrossFit gym, as a partnership with someone you know and trust to help you run the business.
The bad side of that is what happens when it goes south, as it very easily can do. This is what you need to know about partnership agreements before you sign into one because there’s a lot of muck and mud that most people don’t talk about. It’s okay to get excited about opening a business together; it’s not okay (for you) to go in unprepared and starry-eyed.
Percentage of Ownership vs. In-Kind Contribution
Generally speaking, whoever puts up more money owns more of the business. This isn’t necessarily true for every single business type though; you set up the details as you and your partner see fit before you ever open your doors. If you’re okay being the workhorse and they’re okay being the silent partner, that’s great. You’ve got an angel investor.
But what if they put up most of the money for the opening? Are you okay receiving less than half of the profits moving forward? You’re the one building the business, they just provided the money in the beginning. Make sure your expectations are laid out, and never sell yourself short. Think about the position that you’ll be in one year from now. You don’t want to get caught in a partnership where you love the business, but hate that you can’t benefit from it as much as you’d like.
“Sweat equity” as some call it, is referred to as an in-kind contribution. That means you may have none of the money to start, but a wealthy friend of yours wants to be the silent partner because they know how much you can do for the business. Once again, make sure you gain enough from all of this so that it never feels like a sleight.
Last but not least, whatever arrangement you decide to go with, make sure that it’s all in writing. The specific, exact details, in as many words as possible, so that there’s absolutely zero confusion once the business is operating.
If one partner comes to the table six months into the business with a change in mind, tough beans because they already signed up knowing what their role was. You can have a clause to revisit partnership contracts annually, which would give one partner the option to sell their share of the business in the future if that’s what they wanted to do.
Allocation of Profits and Losses
Can partners just take draws off the money whenever they want? Where is the profit going, into what bank account, and who has access? Does the other partner’s spouse have access and can that count as a draw?
Scaling a business is tough, which is why in the early stages, a founder will usually take a personal pay cut (without making themselves struggle) so that they can constantly reinvest in the business. It’s a good habit to get into, but it’s not good if you don’t know how you’re using the profits.
At the same time, you have to think about the unfun part: where your losses are being taken from. How do you cover them, and what part of the profits go into it?
Losses aren’t what anyone wants to think about, but the reality is that any business is going to have its bad days. Even Amazon has its bad days. You have to find out how you’re going to deal with them now.
Who Can Bind the Partnership
This is where you get to clarify details in the partnership agreement. You can both bind the partnership with signed consent on a contract or form, however, you want to make sure the partnership is equal and fair. You wouldn’t want your partner to just go ahead and make an insanely expensive purchase with company money without your consent, would you?
Nobody would. Get it in writing. Make sure the binding of the partnership outlines the details. You can both bind it, but clarifying what that entails is important early on. For a gym, it could be something such as a complete purchase of new gym equipment totaling $30,000 or more.
That money has to come from somewhere, and during the early stages, it usually means your paycheck. If the other partner has more personal money to toss around and hasn't really thought of the consequences on your end, that’s not a good thing for the partnership. Outlining what is and isn’t acceptable early on is important.
You each control 50% of the decision-making process, so you both have to be all-in, or nothing gets done. This is a major aspect of a partnership that most people don’t think of, and if you aren’t careful, it can sink your ship.
You should outline how decision-making will be handled in your partnership agreement, and make sure you trust one another to carry out simple decisions without much issue. These are three models you can use for decision-making.
This process can seem a bit silly, but the point behind it is rooted in mediation. Mediation is when you typically have a mediator present, but if you use this model first, you may not have to.
If you don’t agree with your partner on a portion of the business, that’s okay. In fact, it’s natural. You’re two separate people, so different desires will pop up, especially as the business progresses.
The democratic process means that both parties have to vote, since there’s no majority in a 50/50 split. You use this model to open up discussion, talk about things that are bothering you, and essentially find a way to move past or tackle a problem.
The democratic process helps keep everything out in the open and clean and clear, so you won’t have to worry about agitation building behind closed doors. You should practice this regularly in conjunction with another method.
With delegation, decisions need to be swift and effective. You have different skills from your business partner, so the delegation process essentially means that the person with experience in that field should be the one making the decision. If your partner knows more about marketing, then marketing is delegated to them, and so on.
This process or partnership model is rooted in trust of one another and the other person’s abilities. If the other person isn’t succeeding in their endeavors, you should use the democratic process to open up a dialogue and consider a further delegation chain to another person who can help (i.e., outsourcing).
Be honest with your partner and don’t be inflammatory if you want this model to work. Understand and respect each other’s positions even if they don’t want to meet in the middle on absolutely everything.
This is last because it specifically applies to partnerships with more than one person. That’s an option for your business, by the way—it doesn’t just have to be a two-person business model.
A consensus, as you might imagine, means that all partners (three or more) must agree on the same outcome. Decisions are made with equal input, but if it doesn’t reach a consensus, you run into problems.
There are a lot of office politics that go into this method, so you have to be careful with how you approach it, but it can be a powerful way to get swift decisions and implementation. When you have a problem in a day-to-day establishment like a gym, you have to deal with problems the moment they crop up.
Death of Partner and Dissolution
Whether the other partner dies or wants to leave the partnership, a solution has to be met. Basically, you’re forced to buy or sell. You can both sell your positions and leave the business, selling it to someone in acquisitions, or you can buy them out.
That’s called dissolution, and it’s not as black-and-white as you might think. This is when an exit strategy comes into play. Your exit strategy, which we’ll go into detail about later on in this guide, is extremely important for these moments.
You never see these moments coming. Everyone who enters a new business has rose-colored glasses. That’s not something to be ashamed of; it’s just what happens.
If your business partner is in it to win it, just as you are, then they’ll be open to talking about an exit strategy when you two design your partnership contract. Don’t gloss over this and don’t just say that you’ll get to it later.
As a business progresses, it’s not uncommon for one partner to want to leave at the halfway point. It’s stressful, and maybe they’re under pressure from their family to spend more time at home, or it’s just too physically demanding. Empathize with your partner before you talk about buying their position. Live those core values that CrossFit teaches you.
Dissolutions and disputes can get ugly. Fast. You can either end up going to court and spending a ton of money, on both sides, and that can completely tank the business if you lose the ability to pay for it. Hopefully the dispute doesn’t get that bad, but you never know.
Instead, you should include a mediation clause in the contractual partnership before you actually go into business together. If you’re not sure what that is, let’s break it down.
You can find templates online to find out what’s in your average mediation clause. Essentially, it’s a part of your partnership contract where you both agree that if there are any major issues, you will both enter mediation. You will split the cost of mediation. You will both enter it willfully, and you both recognize the value of mediation to ensure the business doesn’t suffer and the individuals don’t suffer.
If a partnership goes sour, you want to be 100% sure it will end as quickly and painlessly as possible. Even if it ends in you buying out their half of the business. Whatever the case is, it should be smooth.
Tips for Preventing Broken Partnerships
There are three main components that play into a broken partnership. These aren’t all easy-to-swallow pills, so bear in mind that you’ll have to be the judge of whether or not these are going on. But more often than not if a partnership is on the chopping block, these reasons are why.
Both People Need to Contribute More
You’re both in this together. It’s a partnership. Even if you didn’t go 50/50 on the startup cost, that doesn’t give the person who contributed more of the initial pool the right to just not help (unless that’s the deal in the beginning like we talked about earlier). This is the most common reason that partnerships fail, and it’s a sad one especially when you realize that you both got into this together.
You Have to Stop Overwhelming Each Other
Hire help. Most of the time, two founders think that they can run the show, and it’s even worse if someone isn’t pulling their weight. New business owners often hear that labor is the most expensive part of the expense sheet, and while that’s true, it’s needed for a reason. You can’t keep letting the other person get overwhelmed; somewhere, you have to find qualified help and learn to let go of 100% total control of your business.
Your Goals Are Different; It’s Time to Realign
Somewhere in the beginning, when you both talked about this becoming a reality, you each had different visions of where it was going to go. Now, at the crossroads of your business, it just doesn’t seem like you both want the same thing. That’s a difficult thing to come to terms with when you’re both obviously entrepreneurs, but you have to call it and realize that you both want different things. Being honest can prevent the partnership from breaking, as you can both focus on different aspects of the business without harming one another.
Do’s and Don’ts of Partnerships
Go down this list and check them off. You should always have an equal partnership; not one that makes one party feel excluded or outside of the loop.
- Do Have an Exit Strategy: If things go sour, you don’t want your friendship to go down with it. Make an exit strategy just in case. It may not save the business, but you shouldn’t lose everything.
- Don’t Overlook Security Flaws: This means flaws in the security of your business model, your physical location, what-have-you. It’s easy to just think that the two of you will take on the world together, but it’s far from the truth.
- Do Communicate Regularly: One of you might run the day-to-day, while the other runs the marketing campaigns. As long as it’s equally split up, that’s fine, but you need to communicate your side of the work to the other person regularly so you can both be on the same page. Nothing makes someone feel unequal in a partnership like being out of the loop on some big decision.
- Don’t Start Without Help: A two-man crew is fine for a startup out of a garage, but not for a gym. It gets overwhelming, and you need help. Understand from the start that you will be hiring people to help you run the business.
- Do Keep Records: Just because you’re friendly with the co-owner doesn’t mean you shouldn’t keep detailed records of everything. It could help in the event of a split, but it could also help if you plan on selling the business at a later date.
- Don’t Rely on a Handshake: Get it in writing. Even if it’s your best friend of 20 years or more. Get everything in writing for both of your sakes. It could also help salvage the friendship if things go south in the future.
Be Sure How You Want to Run Your CrossFit Affiliate Gym
Partnerships don’t always work. You can’t tell when someone is going to buckle under pressure, lose interest in the business, or indirectly make it harder on you to fulfill your obligations. It’s a tricky thing to get into since you won’t know how people react until they inevitably do.
Go into it with good intentions and the understanding that you both have to work hard, and be clear, concise, and honest with your business partner right from the start (without being overbearing; everyone has their struggles and difficulties when launching a new business). Even if it ends up as a sole proprietorship, you have to be sure that you’ll be ready.