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Published in Ha’aretz in June 2014

By Moshe Kahn

 

You met each other during reserve duty or at university, you have good chemistry, a wealth of ideas and also talent, and you have decided to start a business together. What is the secret to a successful partnership? Moshe Kahn, a commercial lawyer from Tel Aviv, Israel, sets out the rules for starting a business partnership with a friend.

 

A business partnership is very popular for many reasons. Often, two friends enter into a business partnership together. They know each other from high school, the army or the university, they trust each other, they have a common business idea - and they jump in at the deep end of a business partnership. Moshe Kahn, an Israeli lawyer, explains the rules you should know prior to entering into a business partnership with a friend.

 

Moshe Kahn explains: “The prevailing misconception is that chemistry between parties is enough in order to ensure a successful business partnership. In my opinion, this is a prerequisite, but certainly not the only requirement. Obviously, each party also needs to bring with him skills that are required for the joint business and they should jointly raise the initial investment required for its operation. In addition, when entering into a business partnership, you need to consider what will happen if the successful friendship will not stand the test of a business partnership. This is not always clear. The beginning of the road is often accompanied by a feeling of euphoria. You envision only the success and prosperity of the joint business, however, then the hard work begins and the honeymoon period ends. You begin to face financial challenges and everyday business problems. You may see sides in your business partner that you had not seen before. This is very similar to what happens in a relationship after the initial phase of falling in love. Therefore, it is extremely important that in a partnership of this kind, which is based on friendship, you reach understandings beforehand and divide the powers between you. Otherwise, you may step on each other’s toes and face a control struggle. This happens also among people who were convinced that they do not have an ego problem. Of course it is best to agree in advance that each party will be responsible for the field in which he excels. The winning combination of partners is when each of them brings skills, connections and resources into the business. Since it is not often that one person has all of the aforementioned, we find ourselves with partners”.

 

So what are the rules for proper conduct?

 

According to the legal situation in Israel, a business partnership between two people, where each holds 50% of the business, is very risky. You can easily reach situations of inability to make decisions and paralysis of the business. Therefore, future partners should decide in advance how to resolve future disputes between them and how they will act in situations of indecision and even how they will part ways in the event of a material conflict between the partners. Although this may sound like a couple signing a prenuptial agreement before marriage, nevertheless, when it comes to a business, it is desirable to agree in advance on the rules and laws which will be followed. If all goes well, there will be no problem. However, in the event of a crisis and conflicts, the parties will turn to the agreement and articles of association made prior to the establishment of the joint business and will act according to what was agreed upon”.

 

How can you think in advance of all the possibilities of a crisis?

 

“It is not possible to think in advance of all the possibilities, but we can learn from the experiences of other businesses, some of which have closed down due to the conflicts. Experienced Israeli lawyers know how to draft agreements between partners that will formulate agreed solutions for potential disputes and even include a provision in the agreement whereby if a dispute arises, it will be resolved outside of the Israeli courts by means of mediation or arbitration, thereby avoiding negative publicity for the company and the parties involved”.

 

Adv. Moshe Kahn specializes in commercial law, corporate law and litigation. He is licensed to practice law both in Israel and the U.S. and is the founder of a law firm in Tel Aviv.

Moshe Kahn, Advocates,
Beit Amot Hashkaot, 7th Fl. 2 Weizmann St. Tel Aviv, 6423902.
Phone: +972-3-6914775

Israeli Business Law משפט עסקי