Independent lighting designers and smaller design firms face a number of challenges that large firms do not often encounter. For example, cash flow and staffing are two major challenges. Larger firms can easily hire designers and staff, primarily because they have the cash flow to do it and a steady stream of new business to keep new employees busy. Small firms may need the help, but are often unable to afford a staff or sometimes even just an extra employee. In addition, small firms and independent designers face the challenge of making the most of their major business and design decisions on their own. Large firms, on the other hand, can bounce ideas around among their designers and staff members.
To address these disadvantages, smaller firms and individual designers often turn to partnerships and collaborative agreements. This is a way to maintain or grow their business or to solve a number of other challenges, such as financial concerns. While the old adage “strength in numbers” often holds true, lighting designers seeking to build strength through partnerships or business collaborations need to be aware of the benefits and risks associated with each.
In addition, regardless of how successful an alliance is, all good things must come to an end—either because a partner retires, a project ends, or creative differences develop. It is important that there is a strategy in place for transitioning out of any business or relationship.
For many designers, a business partnership can sound very appealing. Aligning with someone who has a complementary skill-set and a like-minded vision may be beneficial from a financial, intellectual, and creative standpoint. The benefits of a union include the ability to draw on a wider pool of administrative and business resources, design knowledge, individual overhead, and cost reduction. A collaboration also could enhance your reputation and credibility, increase efficiency, and boost the ability to pool connections in order to develop new leads.
Being a small business owner can be intimidating and stressful; it requires a significant amount of confidence, tenacity, and resilience. The idea of risk sharing can be very appealing. Finding the right business partner can be favorable for you and your company, so long as you take the right steps and avoid the following stumbling blocks.
Pitfall #1: Lack of Proper Formal Agreement
The most common mistake made by designers entering into a partnership is not having a formal and comprehensive written partnership agreement, and this oversight ends up leading to the majority of disputes. Often, even when there is an agreement, it fails to address potential points of contention between the parties involved.
Prior to forming an official partnership, it is critical that all of the designers involved sit down to discuss their expectations from each other, as well as their expectations concerning their specific goals. A key factor at this stage of the partnership is transparency. Each designer needs to have a good understanding of what each individual is bringing to the table. Transparency is essential to creating a good partnership and a strong business relationship.
Pitfall #2: Using a Partner as an Employee
Another common misuse of cooperative working relationships comes when the motivation stems from using the relationship as a way to increase staff without making any direct hires. This is a common theme seen in partnership litigation.
For example, let’s say that Designer 1 has a design vision and needs help but cannot afford an employee. So he partners with Designer 2. Designer 1 does not want to compromise on his initial vision but rather wants Designer 2 to help him realize it. Designer 2, meanwhile, believed that the process would be collaborative. When Designer 2 realizes that he was really brought on to act as an employee, he finds himself responsible for all of the business’s liabilities and obligations. A better solution for Designer 1 would have been for him to hire Designer 2 as an independent contractor.
Pitfall #3: Joint and Several Liability
One of the main concerns with any business affiliation is that each partner has unlimited personal liability for the debts and obligations of the partnership. As colleagues, each has the authority to bind the other, so one person may be liable for the debts of the other even if he was unaware that the other individual was incurring debt.
With a partnership, either person’s personal assets can be seized by creditors if the business defaults on its obligations. The legal term for this is joint and several liability. This means that each partner, as well as the partnership as a whole, is liable for 100 percent of any obligations incurred.
One option that associates can use to protect themselves against personal liability is to obtain business liability insurance and to structure agreements with third parties, including, but not limited to, creditors, which can absolve the issue. There are also a number of legal options that can help to protect individual partners. These involve using a corporate business entity as a general partner, but such a strategy is complex and should not be attempted without the assistance of a knowledgeable business attorney.
Or, if you’re contemplating a partnership arrangement but are uncertain whether the potential benefits would outweigh the potential risks, you should take a look at a limited partnership. This arrangement can carve out exceptions where the limited partner is not liable for the actions or obligations of the general partner, but the general partner can receive all of the benefits from the partnership. When attempting to form a limited partnership, it is generally advisable to have an attorney draft the agreement.
A third option would be to structure a business relationship whereas the partners agree to share expenses instead of capital. Sharing only expenses will make it much easier to part ways should the partnership end up not being what you expected.
Instead of pursuing a partnership, many designers decide to collaborate with their colleagues. Collaboration can involve a limited number of projects, or it can extend to individual clients and beyond. As with partnerships, when discussing collaborative efforts, there should be numerous meetings between yourself and your colleague before jumping in. During these initial meetings, you need to state your expectations and limitations. Ultimately, a written agreement should be prepared so that each party fully understands their rights, obligations, and limitations.
Regardless of the size or impact of your collaborative effort, having a written agreement is paramount to a successful relationship. While concerns over financial liabilities may not be an issue in a collaborative approach, damage to one’s reputation and image, as well as general liability, is always a concern. Therefore, it is critical to establish each party’s workload and the amount of credit that each should expect to take for the project.
This theme of credit comes up commonly in litigation surrounding collaborative business arrangements. For example, each party may have contributed a similar amount to a certain design, but one person happens to speak openly to industry partners about their work on the project, giving the impression that they were the principal designer. A number of suits related to situations like this have been filed, alleging tortious interference with business or even fraud. If a designer is concerned about the impact of working with another designer or firm, or with the potential loss of control or recognition, he should instead consider retaining the services of that colleague as an independent contractor.
If you choose to go this route, you will need an independent contractor agreement to protect yourself and limit your liability, all while alleviating your concerns over a lack of industry recognition. Hiring someone as an independent contractor can also provide a cost-effective alternative to obtain the benefit of a colleague’s knowledge and experience.
No matter how successful a partnership or collaboration, you must not overlook an exit strategy. Most designers enter into the venture expecting nothing but the best from their partner. There is nothing wrong with being optimistic, so long as both people realize that there is a possibility that it could go horribly wrong. If you think of this relationship as a marriage, then think of an exit strategy as the equivalent of a prenuptial agreement. Having a pre-determined exit strategy helps keep the business on track, maintains clients, and avoids implosion and ruination of the business.
Transitioning out of the partnership or collaboration can be relatively uncomplicated, so long as the contract between the parties addresses issues of company ownership, client management, financial issues, and related items. For example, let’s assume that two designers entered into a partnership and their agreement explicitly discussed what would happen if one partner wanted to disassociate himself from the partnership. In other words, the agreement addressed what monies would be paid out, how existing projects and clients would be handled, what information would be provided to those clients, and an explanation as to what the retreating partner would be liable for.
By addressing how to dissolve the partnership at the time that it is formed, when one partner does decide to leave, then the plan is already in place for his departure. It’s simply a matter of following the rules laid out in the agreement.
Of course, when money is involved, it’s never that simple. One partner will always believe that he is entitled to more money than the other. While having a pre-negotiated exit strategy can simplify the departure of one partner, there are bound to be snags, so have an attorney prepare the exit strategy or dissolution agreement. Even if you decide to create your own partnership agreement or collaboration contract, it is worth having an attorney draft the dissolution provisions. In the long run, it can save you a tremendous amount of money in attorney’s fees.
Transitions—Closing a Business
While a transition can refer to the dissolution of a partnership or collaboration, it traditionally refers to the sale of the business. Unfortunately, most owners or partners have no idea how to properly sell their business and its assets to an interested buyer, and how to do so while still turning a profit. That is why we see more design businesses closing, instead of being purchased or being acquired by another firm.
How to transition out of a business shares several themes and similarities with how to dissolve a partnership, just on a much larger scale. When selling a functional business, it is imperative that the owners employ financial advisers, attorneys, and certified public accountants to assist them. The financial hazards alone can lead to the ruin of the business’s owners. It is not uncommon for a successful design business with a significant amount of assets to end up in the red as the result of a failed transition.
Partnerships and collaborations can definitely benefit individuals and design firms. However, it is important to take into account all of the variables that can go wrong before you decide to form such a relationship. While you should hope for the best, always prepare for the worst. If your potential partner or collaborator is not interested in having a meaningful discussion about the potential pitfalls (or if he refuses to sign a partnership agreement or to discuss an exit strategy), you should think twice before entering into a relationship with them. Through proper preparation and planning, you can build meaningful and successful business relationships. The key to each’s success is to address how to deal with problems before they arise.
Peter J. Lamont is a business and commercial litigation attorney nationally recognized in a wide variety of highly specialized areas within the kitchen, bath, lighting, construction, and design industries. He routinely represents various national and international companies within the design sector, and has achieved the highest rating in both legal ability and ethical standards as awarded by AVVO (avvo.com).