Prioritize Before Partnering
The right partnership offers a range of benefits: it can help you reach new audiences, markets and industries, give you capabilities you don’t currently possess, expand your product or service lines and even offer access to new vendors and suppliers.
All small business owners face the dilemma of limited resources, both time and money, and bringing in a partner can help extend them. It also offers a level of accountability to both sides, which makes reaching goals more likely.
While partnerships have a number of potential positives, you need to make sure you’ve taken steps to ensure that one can work for you before you dive in. Listed below are a few points for “pre-partnership” consideration:
Know what you’re after — If, for example, you’re creating an entirely new company together, before you get into any deal, each partner should have a clear idea of what they want to create. Will it be a lifestyle company, where you want more freedom, or will your goal be to eventually sell the company and make a profit? Making that distinction leads to big differences in the way a company is created and operated. Each requires varying directions and strategic paths. It also effects how the company is invested in; funded by profits or building a business for sale that might require venture capital or angel investors. You need to be clear about the direction up front.”
Make sure the sum is greater than the parts —What does each party bring to the table? Do you have separate skills that collectively enhance the business? The point is to complement both your strengths and weaknesses. You might be good at managing a team and handling administrative issues, while your partner is a whiz at sales and marketing. You need to determine those skillsets at the outset and then decide who will be responsible for what.
What about the money? — Skills and experience matter, but you also need to clearly understand how much funding is being invested by each partner. In fact, before you decide you’ll simply go 50%/50%, you might want to think about making sure someone has a controlling interest. If one partner has a little more controlling interest, it can sometimes make clearing up log-jam decisions easier. The fact is, someone eventually has to decide, so it might make sense to go 51%/49%. You can also utilize an outside board when you reach stalemates.
Put it in writing — It goes without saying that you need to have some form of written agreement in place. You’ll want to outline such issues as the obligations of both parties; how profits are shared; how expenditures take place; specific performance and financial benchmarks; the rights of both parties; and an exit strategy. Have your attorney help you draft and review any partnership documents.
You should also understand the drawbacks a partnership presents. If expectations weren’t established clearly enough up front, resentment can build if one partner feels the other isn’t carrying his or her load. That’s why definition of responsibilities is so important. And bear in mind what John D. Rockefeller said: ‘A friendship founded on business is a good deal better than a business founded on a friendship.’” Many partnerships are formed among friends and the business can jeopardize that. Trust, honesty and open communication are critical to making a partnership work—meet frequently and separate the business from the friendship.
Finally, anyone forming a partnership should do due diligence. Look at background of any prospective partner, learn about his or her former business relationships. Learn as much as you can and trust your gut if you feel there’s any reason a partnership won’t work. It takes courage, but, if you get it right from the start, a partnership can help forward both businesses.