The Advantages of Partnerships

It may be in your first management rights business or future purchases but at some point there is a good chance you will be involved in a partnership.

There are many advantages to entering into partnerships:
  • It enables the purchaser to purchase a share of a much larger business than they could on their own
  • By having an experienced partner it may be possible to purchase an ‘off the plan’ business which would normally not be available to a first time purchaser
  • You benefit from the accumulated knowledge of your partner who has previous experience. There are no surprises, they understand the time frames and what is required to settle a management rights deal
  • The funding of the business would be easier as you would be dealing with your partner’s friendly banker. You would also use their established experts being the lawyer and accountant

Over the past 10 years, 90% of all management rights businesses purchased by the Lancaster Group have been through a partnership. All of which have been successful and the first time partners have gone on to purchase buildings themselves or have also entered into other partnerships. Some now own shares in three or more buildings.

There are two types of partnership; silent or working partners.


Silent partners

Silent partners are generally in the industry or have been previously and are happy with the financial rewards the industry brings. They may prefer to remain in their present building and use their improving equity to purchase another property but require a working partner for it to work. There are some silent partners who have never operated a management rights but are happy with the returns they produce. While these partnerships can work the Lancaster Group recommends first time buyers enter into a partnership with an experienced operator.


Working partners

This type of partner has been or has just sold a business and is looking for a large property that requires two couples to operate it. A net profit of over $400,000 would be required and the partners may operate on a month on and a month off basis. Generally they would own two units for their individual accommodation. The big advantage for the new working partner joining with the experienced operator is they have skipped the smaller entry level property and will be rewarded with a higher stable income, more chance of growth and therefore higher capital gain. The bigger the property the easier it is to afford to employ staff for the reception desk and gardening duties while the partners put their effort into marketing and improving the turn over.

A business partnership is somewhat like a marriage and a lot of thought has to be put into it before anything is signed.

You must see your accountant early to get advice on the best structure for tax purposes. Generally a partnership between the two parties or a partnership of their companies or the company trusts is the best vehicle, but there may be individual situations that require one of many other structures to be set up. You also must have an agreement to cover most eventualities such as; the ideal time frame you will own the building, if one wishes to leave the partnership the terms and conditions of the buyout must be agreed upon, the salary for the working partner must be agreed and what duties on the schedule of duties attached to the caretaking agreement they will be responsible for.

Like marriages, some partnerships do not work which is why it is important to have all terms and conditions of the relationship clearly written down.

Gandview Ballina


Grandview Ballina Bedroom


Grandview Ballina Gardens


The Sands Apartments


The Sands Reception
Some reasons why partnerships fail are:

Incompetence


It is hard for the experienced partner to assess the ability of the new partner to operate the business. If the new partner turns out to lack the basic public relation skills, has bad work ethics and is not open to suggestions from the more experienced partner, then the relationship will likely fail. That means due to the large investment at stake, a decision to sell the property or buy out the incompetent partner has to be made. I have seen recently an example of a three way partnership being destroyed by one partner who through lack of experience almost destroyed a $5,000,000 business. The only way out was to sell the property.

Decision making

Another reason that partnerships can fail is when the new partner seemingly becomes an expert in the industry within a short time and makes decisions (sometimes the wrong ones) without consulting the more experienced partner. You will never stop learning in this industry. The Lancaster Group has been in the service accommodation industry for 25 years and we are still seeing new situations. The new manager must communicate with the experienced partner when the result has a bearing on the turn over or the value of the business.

No documentation

As stated earlier if the terms of the partnership arrangement have not been agreed and documented before signing purchase contracts, there will generally be a dispute as people will have differing views on what they have agreed.
The body corporate itself is a legal entity made up of the individual owners of
the units in the complex.

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