If you have ever started a business, or are contemplating doing such, you will know that it is an exciting time. You have a great idea and the drive and willingness to make it happen. In many cases this is not a solo venture but a partnership between you and another person or group of people. Selecting business partners is very important to the future success of your business and the resulting personal relationships. I have seen the good, the bad and the ugly of business partnerships. Here are a few things to consider before you say “I do.”
- Who will contribute what to the partnership?
It is very often the case that people bring different skills or assets to the table. Perhaps one partner has a marketing background, whereas one is more technical. The other common formulation is one or more parties provide capital for the business whilst others put in the time, commonly known as “sweat equity”. Whatever the formulation, be clear about who will do what, look for partners with complementary skills but with an equal drive to make the business happen.
- Agree on a timeline.
If you or any one of your partners need to achieve certain milestones with the business by a set point in time, make sure this is known to all in the relationship. If you have a 5-year time horizon and someone else has 6 months, you need to be aware of this going into it.
- What past experience does each party have?
We have all heard of businesses that hit a home run out of the park with zero experience, but this is rare. Having a mixture of more seasoned business partners as part of your team, as well as less experienced creative types can be invaluable. Not everyone will be able or willing to commit the same amount of time but if you agree on what is a fair distribution of time, money, contacts and experience, the mixture can be very successful. This is one of the key factors in successful multi generational family businesses. You are not re-inventing the wheel every time there is a change. A balance of people who have seen it before coupled with a new generation can result in a huge competitive advantage.
- Do your due diligence – Personally and professionally.
- How well do you know your potential partner(s)? Have you checked references? Have you worked with them personally? How did you meet? It is easy to forget these things in the excitement but do a quick google search and you will be amazed what you will find. Call references and ask them what they think about a person; ask around and see what people say. I am often surprised by what people tell me.
- Meet their spouse / significant other and family. You may say business is business, but it is personal. It is all about people so understanding the personal situation of your potential partners is crucial. You may get on very well with the partner but have huge differences with their spouse or family situation, this is a red flag to me. Family dynamics affect people very deeply and they will affect your business partnership. Similar to dating, do your due diligence. Meet the family, understand your potential partner’s personal situation and make sure there are no red flags.
- Formulate a universal shareholder’s agreement (USA).
This is a must in my opinion, your lawyer can help you with a template to get you started. How a business starts and how it will eventually end rarely happen the way you might think. Individual’s personal situations will change, sometimes dramatically and quickly. Events such as divorce, health, spousal job changes, children and a host of other factors can change how your partners are able and willing to contribute to the business. If you don’t have a USA it can be messy, very messy. As we all know, assumption is the mother of all catastrophe and this is one of those points that often ends in tears and lawsuits. What you think you said, thought and agreed to means nothing if you never formally documented it. All parties must agree to a structure for how shareholders and partners will make decisions, vote, buy each other out, add new partners and terminate a relationship.
If your potential partner is your spouse, significant other or a family member it is still very important to document who will do what and what you agree on. If and when tensions run high, referring back to the base case can help everyone. It is also very important to have different roles in a business and be clear about them.
Thinking through and formulating a partnership arrangement before diving in is a crucial step in setting up your business. Existing businesses can also benefit from rethinking arrangements whilst contemplating or following periods of significant change.
Looking to brainstorm how to set up a partnership agreement or wondering how to structure one? Email us at email@example.com we would be happy to help.