The Pros and Cons of Having Business Partners in Clinical Research
Lately, I’ve been getting a lot of questions about business and clinical research, specifically from people who want to start a research business of their own. Most of them have been wanting to start clinical research sites or SMOs, a few were looking to open up patient recruitments firms, and finally, there were the ever present wanna-be consultants out there. I thought it would be a good idea to write a short blog post about the pros and cons of having business partners. We can spend a lot of time on what kind of partners you may want to target and then also the pros and cons of having partners in general.
You may or may not have heard the analogy that relates getting into business with a partner as the equivalent of marriage, but it is absolutely correct. You’re pretty much stuck with your business partners for life unless the business goes bankrupt or dissolves which is not necessarily what you want to have happen in the first place. My firm DSCS Sweat Equity & Investments, besides consulting with research clinics on getting studies, recruiting patients, recruiting doctors, creating SOPs and source documents, negotiating budgets, and all of that other stuff that we do as consultants, we also partner with sites (that’s were the equity in our name comes into play). We partner with the research clinics out there who are either in the start up phase or they want to expand their business and the value they are getting by aligning themselves with us is that they can accomplish their goals quicker.
In an absolutely perfect utopia, I probably would not partner with anyone at all just because it is a lot simpler to not have anyone else to answer to but myself. However, this is not a perfect world and partnership makes a lot of sense for many different reasons: number one, you can leverage different individuals’ strengths and talents; number two, if financing becomes an issue you can leverage or use one of the partners as the one that’s going to be providing the capital; number three, if you are going to be partnering with a doctor you can obviously leverage the fact that they are going to be referring patients and that you can have them as the principal investigators for your studies, so you don’t have to worry about paying a PI cash. As you can see, there are a lot of benefits in partnering with people, but, there also are a lot of cons, this is why it is very important to be very careful and very selective about who you partner with.
When you are the sole owner of a business, you can pretty much do anything you want with the money you generate especially if it’s an LLC or an S Corp. I’m no attorney, I’m not even a CPA, I’m not any of that stuff, I’m just someone who has being operating businesses for the last decade, so please do not take any of the following as legal advice. LLC’s and S-Corp’s (not a C Corp), are known as flow through entities. What that means is that all the revenues and the profits flow through the company to you, so basically the company acts like a shield, they call it corporate veil, to protect you from liability from outsiders. They can’t personally sue you they have to sue your company. Now, from an IRS perspective, any money that flows through the company, if you are the sole business owner of the LLC or the S Corp, the revenues flow to you and you have no business partners to really be accountable to, so you can do whatever you want with the revenues (within reason). For example, you can get a company car and lease it or buy it under the company name, even though you’ll be the only one using it. You can go out and purchase meals for yourself under the company name, pay for travel expenses, etc (of course run all this by your CPA). If you were to have even one business partner, all of these expenses will have to be agreed upon by your partners because now it is not just your money at stake here, as the revenue is flowing through to them as well. I just wanted to illustrate to you that one of the pros of being a solo business owner is that you don’t have anyone else to answer to, except the IRS, and your own accountant.
Another issue that occurs with partnering is the fact that people start getting into disagreements about work load. You may end up partnering with one individual whom at the time, seems very interested and willing to contribute towards their fair share of the workload, only to later find out that this person has completely lost interest in the business for any number of reasons, yet they’re still entitled to their percentage of the profits for the business. I’ve had good and bad experiences in business, particularly in the clinical research industry with business partners, and I continue to choose to partner with people constantly. Often times we have an exit plan in advance, such as selling the company or we will agree to buy the other partner out or a number of other alternatives. I guess the important thing is to be in agreement going into a partnership on exactly who’s to do what and when and what the exit strategy should be for any of the partners.
I don’t know what’s right for you, only you know that, but just be very careful when partnering with someone, they could definitely help you out at the beginning. It can be especially tempting when you bring someone in as a partner, because they are going to finance the operations. After that first 18 months (usually 18 months are a business’ break even point), they become less valuable because they’ve already contributed all their value up front when they financed the business, but you’ve still got to figure out so what you do in year two, year three and year four and year five, when you are doing all the work and this person is basically collecting all the profits, because they invested early on. So you have got to have those things in place and have some kind of a written agreement describing this. The same issue can arise when you partner with the PI. You may partner with a PI because you don’t want to pay a PI a certain salary, so you’d rather partner with them and share the profits with them. What do you do if that PI loses their license? What do you do if that PI decides they don’t want to have a private practice anymore? What do you do if the PI retires? What do you do if that PI decides they don’t want to do research anymore? A number of these things are not only possible, they occur all the time. There are so many different possibilities here and you can just keep doing this exercise with any partner you pick whatever their role is, you’ve got to look at the worst case scenario. This is where you will have to ask yourself the tough questions: what can happen if they do x? Or what can happen if they don’t do y? What would happen to the business? These are things better answered and agreed upon in writing before you end up partnering with others versus after the fact.
