Are you going into business with a partner? If you’re considering it, remember: Having a business partner can be a lot like being married. To that end, there are many healthy, positive, long-lasting marriages. On the other hand, some relationships face consistent challenges and may not endure.
Before going into business with someone or adding partners to your existing company, you may first want to understand the common benefits and risks of doing so. Potential benefits could include bringing in more capital, filling gaps in knowledge or expertise, splitting costs, sharing risks, improving access to credit, and tapping into your potential partner’s network of business relationships. The risks can include losing management control, falling into disagreement, and sharing liability for any money-losing decisions your partner may make.
Knowing the pros and cons, consider asking yourself the following five questions before starting a partnership:
1. Are you going into business with someone who shares your vision?
What is your vision for your company and does the prospective partner share that point of view? If your vision is to become the next big tech company, what is your strategic plan for that growth and, most important, does this person agree that the vision is achievable?
Not only is it important that you both share the vision for the overall goals and objectives for the company, but the two of you may also want to agree on the steps required to execute the vision.
2. Are you starting a partnership business from a position of strength?
Before you add partners into a company, you may want to do a thoughtful and reflective analysis of the value of your business as well as your potential partner’s value. Using a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis can help.
For instance, your business may be technically proficient in what it does, whether that’s construction, communications, or cooking. Despite this strength, you may recognize its weaknesses in other areas, such as finance or human resource management. That’s when the decision may come down to training in the area where you’re weak, outsourcing to a third party, or bringing in a partner to shore up the deficiency.
As you decide, consider asking a consultant to review your financials and analyze whether a partnership is the right strategic move for your business. The worst course may be to add a partner based on a temporary set of circumstances, like a cash-flow shortage. Giving part of the company to someone just to solve a temporary problem could create longer-term issues.
Giving part of the company to someone just to solve a temporary problem could create longer-term issues.
3. Before going into business with someone, have you considered an exit strategy?
Unlike in marriage, a conversation about exit strategies can be completely appropriate when you’re entering a business partnership – after all, it’s business, not personal.
All too often, though, in the honeymoon phase of partnership discussions, the partners may not want to discuss what will happen if the relationship doesn’t work. Nevertheless, consider adding clauses in your partnership agreement that address issues such as retirement, disability, death, the withdrawal of a partner, and dissolution of the business. Another discussion can address insurance – particularly “key person insurance,” which is a type of life insurance that can protect a business in the event that one partner dies or becomes permanently injured.
4. Are you starting a partnership business by offering equity?
Many people may consider partners as sources of capital. “Equity partners for bigger projects are the only partners I would entertain,” says 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. But say your goal is 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 in that case.
5. Are you going into business knowing everyone’s roles and responsibilities?
Whatever the reason you are considering a partner, it helps to clearly articulate what roles you each will have.
A big mistake people 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. Consider having as many discussions as needed until you are both clear about operations moving forward. Misunderstandings and assumptions can destroy an otherwise successful business.
The Bottom Line
As in a marriage, starting a business partnership can require both parties to study themselves and their intended closely to know whether they are a good fit. Unlike in a marriage, stark terms of agreement on matters such as control and an exit strategy may need to be documented in advance, as the basis for averting misunderstandings and conflict. Asking the five questions posed above can provide a good starting point toward a successful business partnership.
A version of this article was originally published on March 29, 2017.
Photo: Getty Images
