Business Partnerships and Taking on a Business Partner

By sbdceditor,

Business partnerships have their advantages and disadvantages. Taking on a business partner is like a marriage. In general, partnerships are easy to get into and difficult to get out of. Certain guidelines should be taken into consideration along with a path to follow – from dating to pre­nup to marriage – all of which can be applied to a business partner.

Taking on a business partner can be an excellent strategic decision in helping move the business forward.  It should be well thought out for all parties involved. The relationship needs to be synergistic financially, emotionally, and operationally.  All parties need to do due diligence to ensure no harm to the business and the potential partners.

Most of the important benefits for partnering include:

  1. Access to new markets
  2. Addition of new services or product lines
  3. Addition of essential expertise and knowledge to propel the business forward
  4. Open doors to new distribution channels
  5. Access to new technologies
  6. Access to capital

Certain steps should be taken before entering into a partnership.

A. Personal Assessment and Getting to Know One Another:

  1. Work together on 2-3 projects before an agreement is consummated
  2. Determine the commitment of the potential partners. Is the potential partner in for the long haul?
  3. Identify each of the partner’s unique contribution. Does the potential partner bring specialized knowledge, skills, leadership, or experience that compliments others?
  4. Understand each person’s personal goals. Are each set of goals consistent with the others including for example personal wealth, business success, autonomy?
  5. Determine trust and Values. Is there trust between the parties? Do they share a set of common values? Core values are none negotiable.  Be ready to walk away when others are willing to negotiate their own values or try to negotiate others.

B. Personal and Business Goals:

  1. Contribution:  What will the new partner contribute? Example: cash, assets, equipment, connections… Regardless of what it is, contribution needs to increase the value of the business.
  2. Compensation: What are compensation expectations? Example: salary, equity, joint venture, etc… Can the business afford it?
  3. Control:  What type of control is the new partner looking for? Example: percent of ownership, officer/operational, director/board member… What are the parties willing to give up in return for the prospect of business success?
  4. Brand and Success:  Is the new partner dedicated to ensuring brand continuity and contribute to the success or just to ride on what has been established?

C. Roles and Guidelines in the Potential Partnership:

  1. What role and responsibility will each of partners have including operations, financial, sales, marketing, etc..?
  2. How will decisions be made and by whom? Is it by committee?
  3. Will each have certain level decision making authority? Will the new process impair decision making?
  4. Will authority limits be defined and processes and procedures be put in place?
  5. What is the understanding if one of the partners wants out or wants more? What is the understanding if things go downhill/uphill?

D. Preliminary Due Diligence

  1. Review of 3 years financial statements
  2. Review of 3 years of tax returns
  3. Review business plan including marketing, sales strategies and financial needs
  4. Review long term company debt, goals and financial projections
  5. Research and talk to existing and past customers

E. Partnership Agreement Basics

  1. Define Key Performance Indicators (KPIs.) How will the success of the business be measured?
  2. Clarify decision making and dispute resolution processes
  3. Define each partners title and position
  4. Define management responsibilities and job descriptions
  5. Detail authority limits
  6. Clarify operation responsibilities and metrics used to measure performance
  7. Define vacations and time off policies such partners vacationing at same time
  8. Determine compensation
  9. Exit strategy including determining what happens when one partner leaves, closing the business, selling the business, buy/sell agreement, etc…
  10. Depending on the legal structure of the business, different types of agreements may be required
  11. Partnership agreement should never be 50/50 regardless of the perception of compatibility at the time of execution

Potential partners should follow and apply these guidelines independently followed by a joint meeting to determine commonalities, synergies, and conflicts. If necessary, bring in an impartial third party to facilitate any possible conflicts and resolutions.  It is highly recommended that legal document are created and/or reviewed by a business transaction attorney.  All agreements should be in writing and signed by all parties involved.  Regardless of what method is taken to reach an agreement among partners, avoid some of the common mistakes for best results including premature rejection of ideas, prematurely judging others, one-sided consideration, closed mindedness, and not sticking to core values.