If you’re considering it, remember: Having a business partner is a lot like being married. To that end, there are many healthy, positive, long-lasting marriages. And conversely, there are toxic relationships that can crash and burn.
Before you add partners to your company, you may first want to have an accurate understanding of your value and the value of your business. The following are five points to consider before entering into a partnership for your company:
1. Ask yourself if your potential new partner shares your vision.
What is your new vision for your company and does the prospective partner share that same perspective? If your vision is to become the next Microsoft or Google, what is your strategic plan for that growth and most importantly, does this person agree that the vision is obtainable?
Not only is it important that you both share the vision for the overall goals and objectives for the company, it’s also important to come to an agreement on which actionable steps will be required to execute the vision.
2. Conduct a SWOT on them and yourself.
As previously mentioned, before you can add partners into a company, you may want to do a thoughtful and reflective analysis of you and the company. Using a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis can help.
“Whatever the reason you are considering a partner, it helps to clearly articulate what roles you each will have going forward.”
For instance, I have mentored dozens of businesses who are technically proficient in what their company does (i.e. IT, construction, security). However, they acknowledge that they have weaknesses in other areas, such as finance or human resource management. How do you know the difference between: a) training for yourself to strengthen your weak area, b) outsourcing to a third party or c) bringing in a partner to shore up the deficiency?
Before you make a decision, consider seeking out a financial business consultant, particularly one who can both review your financials as well as do a thorough analysis with you to determine whether a partnership is the correct avenue to take. The worse course to take may be to make a decision based on a temporary set of circumstances, like a cash-flow shortage. Giving up your company to someone who may solve a temporary problem may create a long-term result you don’t want.
3. Address what your exit strategy will be in the partnership agreement.
Unlike in marriage, the conversation about exit strategies is completely appropriate when you’re entering a business partnership—after all, it’s business, not personal.
However, all too often, in the honeymoon phase of partnership discussions, the partners do not want to discuss what will happen if the relationship doesn’t work. However, there should be clauses in your partnership agreement that address issues such as retirement, disability, death, the withdrawal of a partner and dissolution. I recommend also discussing insurance—particularly “key man’s insurance,” life insurance for the company’s point person—in the event that a partner dies or becomes permanently injured.
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4. Decide between offering equity versus non-equity distribution.
It’s clear that many people consider partners when it comes to capital contributions.
“Equity partners for bigger projects [are] the only partners I would entertain,” Shane Pomajambo, owner of Art Whino, a Washington, D.C.-based art gallery.
When you have a well-functioning company, you may not want to bring anyone in who could upset the proverbial apple cart. Say your goal may be to have a larger cart or seven carts, and you don’t have the resources to expand on your own. Offering a limited partnership may be an appropriate option for you in that case.
5. Determine what everyone’s roles and responsibilities are before you add partners to your company.
Whatever the reason you are considering a partner, it helps to clearly articulate what roles you each will have going forward.
A big mistake that people can make is assuming that the partner will know their roles and responsibilities. Consider writing everything down, especially what your current responsibilities are and what you envision they will be when the new partner comes aboard. Have as many discussions as needed until you are both clear about operations moving forward. Misunderstandings and assumptions can destroy an otherwise successful business.
Author: Nic Cober, Esquire
Contributor, Cober Johnson & Romney