The Common Cause
Structured more like a law firm than a typical remodeling company, the partnership of Construct Associates consists of four independent businesses sharing an office, a labor force, and equipment. “We’re all sole proprietors,” says Bob Reckman, who launched the Northampton, Mass., design/build company with Hobie Iselin and Bob Walker in 1985. “We each have our own set of books; we each sell and budget and manage our own jobs.”
The original thinking, Reckman explains, was that “we wanted to share our work experience, but we had seen many other partnerships founder on the shoals of financial messes.” He says that this structure makes it relatively easy for people to come and go over time, and insulates the corporation somewhat from the economic vagaries of the businesses of the individual owners.
Each original partner invested about $5,000 in the company. On an ongoing basis each pays the following to cover Construct’s overhead:
- A monthly “desk charge” of $1,000.
- 5% of his business’ gross annual revenues.
- Marked-up rates on the labor used for his jobs.
When Construct produces a profit for the year, the partners receive “rebates” based on their individual contributions.
Name recognition is a key advantage of the arrangement. “We have a much larger job base and can perform more projects under the Construct name than any of us can do individually,” Iselin notes. Collectively, they can offer outstanding benefits and delegate work if one of the partners takes an extended hiatus. And they can expand or contract their practice as desired; Iselin, for instance, does more large commercial projects.
Seven other people have been partners at various points since 1985. With Reckman planning to retire at the end of this year, new partner Stephen Ross, a longtime lead carpenter for Construct, will help bring in enough volume to maintain Construct at its current size. “They basically made it a turnkey operation for me,” he says.
50-50, Not Always Nifty?
Not all partnerships evenly divide owner compensation and profits. Jim Scovell owns 57.5% of Scovell Wolfe because an unsuccessful previous partnership convinced him “that I would never be a minority owner again,” he says. John Wolfe, his partner, says that he supports this “the buck stops here” attitude because Scovell doesn’t abuse it.
Mark Olson owns 51% of Legacy Custom Building & Remodeling, Brian Shaurette owns 21.5%, a third partner owns 15.5%, and two others own 6%. Some bought their ownership share; others were issued it in company stock.
Craig Durosko founded Sun Design Remodeling and owns 75% of the company. Bob Gallagher owns 25%.
Terry Streich and Gary Welton each own 50% of Silver Bullet Design & Build, but “we set it up to prevent conflicts over time spent participating in the business,” Streich explains. On a regular basis, each man receives an hourly wage for the time he actually worked in that pay period, plus a fixed payout for being a shareholder in the company. In profitable years, each partner also receives half the company’s profits.
The Partnership Agreement
Partnerships are the only business entities that can be formed by oral agreement, and many remodeling partnerships do, in fact, begin with a handshake ( see Reader Panel). But at some point, all should be formalized in a clearly written partnership agreement that leaves little room for ambiguity and can prevent minor disputes from erupting into full-blown battles.
Attorneys’ fees for drafting partnership agreements typically range from $500 to $2,000.
Some issues to address:
Initial contributions. How much cash, property, and services will (or did) each of you contribute to the partnership?
Management duties. How much time will each of you spend running the business? Who will do what?
Profits, losses, and draws. How will the money be divided and distributed? Will draws be issued on a regular basis or at the end of the year?
Decision-making authority. Establish voting rights for major decisions. Will they require a unanimous vote or a majority? If all partners have equal authority, consider giving a small ownership share to a neutral tie-breaker.
Disputes. If you become deadlocked in a dispute, will you go to court or bring in a mediator or arbitrator?
Buy-sell. How will you handle the departure or death of one partner, or the sale or dissolution of the business?