Sharpen Your Pencils

Fashion Designers Having A Discussion

We continue now with our reflections, posted earlier (here and here), on the legal and business issues that arise when a fashion business is formed and run by two or more venturers:

You and a colleague have decided to start a new fashion business. It is best to get in writing from the start what it is you intend to do together. A non-binding but useful method is the business plan, which is typically put together to help raise funding for the venture. There is an art to creating a business plan—it has to look earnest and solidly researched, the opportunity made clear and the plan to exploit it both correct and workable. In short, it has to read like an invitation to join in executing a winning strategy. And it should be a good read. (A business plan is, after all, narrowly directed advertising.)

To start, sit down together and write out thoughts about what it is you want to accomplish. You may be surprised with what comes out. We have seen otherwise promising working relationships break up over disputes about direction and vision that could have been detected early on. You may both have agreed that handbags will be your launch product only to find, as you compose your thoughts and turn them into a plan, that you have come to believe that destiny will take you quickly into women’s scarves but that your colleague favors branching out slowly and, even then, straight into small leather goods. You will both want to have all of this buttoned up before you drop the plan onto the desk of a potential investor—or anyone else.

Beyond the business plan comes the need to document organizational responsibilities. These are private matters at first, but because they become part of both legal documents of the company and even the “culture” of your organization, they are of greater long-term importance. For example: in the event of a dispute over that or any other issue, which of you will have final say or what mechanism would you both deem to be fair to resolve the problem and move on? (If your partner is your sister, you can perhaps conference in Mom, but in most new ventures, things are rarely that simple.)

If the form of organization you choose is the limited liability company, you have a clear opportunity to set that down formally all important terms in the grounding document for the company, the operating agreement. If you choose instead to form a corporation, keep in mind that it all starts a bit differently: in the absence of an express written agreement to the contrary, majority rule is the default option. That is, the principal of one share equals one vote applies, and all power goes in the end to whoever, alone or in combination with other shareholders, controls over fifty percent of the voting shares. If no one will have a majority holding, and because you likely will want to have clear rules on more topics than just voting rights, you will be well advised to enter into a shareholders agreement. The operating agreement or the shareholders agreement should deal with all that you mean to make effective about the operation of your business—because, as your lawyer will tell you, an unwritten promise is not worth the paper on which it was not written.

However you do it, the starting point is the same: sharpen your quills and start writing—and keep at it, with counsel and advisors brought in where required—until you have created documents worthy of your best college term papers. The grade of “A” you get as a result will be reflected in the operation of a well-run and profitable business.

Credit: Alan Behr