The horror stories of business partnerships gone awry, often sound like bad divorces. Most of these stories serve as cautionary tales as to why we should never take on a business partner. Of course, it’s possible to start and grow a business without partners, but there’s also nothing wrong with a good partnership. So should you take on partners and if you do, how do you create a good partnership?
The decision to take on partners is your choice alone. Look at the future of the business, your capacity to take on another executive, and carefully weigh the pros and cons. Once you decide to take on a business partner, follow the steps below to ensure the onboarding process is a smooth one.
Note: Partnership here refers to two or more people who are starting/heading a business not the legal form that could refer to several structures from a Corporation to LLC to traditional Partnership.
Change Your Vocabulary and Mindset About the Business
Notice I said “THE” business. If you take on a business partner and you continue to refer to it as “your” business, you set the stage for failure. When you take a partner, the company is no longer just “your” business; it becomes either “the” business or “our” business. The words “our business” conjure a different perception. It may seem like a minor adjustment, but this small change in vocabulary helps shift your mindset toward keeping decisions broader and less personal.
Engage Professional Help as You Take on a Business Partner
Unless you hold a law degree and ample experience in business law, taking on a business partner isn’t a do-it-yourself project. The professionals will help hammer out the details and a trained legal eye can identify key clauses needed in the partnership documents to serve as a starting point for negotiations. The final partnership agreement will encompass legal and tax requirements as well as buyout and other options for exiting the partnership. Protect the company and yourself by putting all partnership documents in front of an attorney.
Iron Out the Details Up Front
It’s often much easier to define all aspects of the partnership before there is real money involved. If the partnership is for an existing business, the steps are the same. At any point in the partnership process, you may decide the union isn’t working. Perfect!
The process outlined here does entail a great deal of work up front, but setting clear expectations will pay off. Most of us would agree that the costs of comprehensive analysis are much less than the legal battle of a failed partnership. Before you begin, you may also want to retain a facilitator for the process. Using a facilitator as you take on a business partner ensures the discussion is thorough and all decisions are documented.
Steps to Successfully Take on a Business Partner
1. Agree on the vision.
It’s crucial to define the business in legal documents but running the business day-to-day requires a shared vision. Partners should also be on the same page regarding the mission of the business as well as the balance of their personal lives. Consider the vision for both the long-term and short-term. If you are the type of person who lives to work, and your partner works to live, identify how that affects roles, responsibilities, equity, and so on, as you form the details of the partnership.
2. Define the exit strategy.
The discussion around an exit strategy is likely to expose differences in the expectations of partners for the business as well as identify differing long-term intentions of the partners. As you discuss the other aspects of the agreement, you may circle back to this conversation multiple times. Expect the perspective to change as you go through the process. Revelations that arise as you define the exit strategy may kill your deal.
3. Agree on the business plan.
Define the steps required to make the business a success. What is the business plan? Do you and your potential partner agree on market segments, distribution channels, forecasted revenues, expenses to support those revenues, funding sources, and cash flow projections? Other business decisions to include in the business plan are: first hires, the team needed, and the plan for ramp-up. These topics should generate vibrant discussions to identify differences of opinion that should be resolved. Exuberant support of varying positions will add helpful perspective, and the resolution of any conflicts is an important part of the partnership process.
4. Identify the roles of each partner.
Once you know (or think you know) what the business needs, define the roles required to make it happen without identifying who will take on the role. Common roles are sales, executive, administration, accounting, IT, engineering, manufacturing, and customer support. What roles did you define as needed in the business plan? If you are taking on an add-in partner for an existing business with a team in place, this discussion is the same – defining the roles of each partner.
What does the role of partner mean? What are the responsibilities under the partnerships and what is the level of authority? What is the reporting hierarchy?
For example, a simplified engineering role may include:
- Maintain knowledge of all relevant product safety rules.
- Meet regularly with manufacturing to improve product quality and ease of production.
- Provide drawings and bills of materials for all products.
- Propose changes to the product to meet safety rules or to enhance production.
- Report to Engineering Manager.
In a small business, a partner might take on the roles of both the engineer and engineering manager. The engineering manager has a role and reporting structure as well. When an existing company takes on a business partner, much of this legwork is already complete. The definition of roles should clearly designate the ultimate authority of each role.
Assigning the roles to partners involves matching skill sets. It’s important when you take on a business partner, you balance the workload (to the extent possible) and clearly define how the authority is distributed; budgeting, spending, hiring and firing, are just a few examples.
In defining roles and dealing with the perceptions of the work involved in a role, recognize the different requirements as well. For example, accounting may require more hours than sales, but both teams contribute to the success of the company.
5. Agree on the components of equity.
After all of the roles are defined, the partners have a clear understanding of what they are looking for, and the commitments they’re willing to make, it’s time to talk “equity.”
- Ownership Structure – Ownership structure should follow contribution to the business. In a 2-person partnership, often ownership is assumed as 50/50, and rightfully so. However, a 50/50 partnership may lead to a predicament even with an arbitration clause. Consider instead an equal partnership at 49/49 with an outside 2% holder as a swing vote in case of an impasse. Use caution and diligence to choose the 2% holder carefully.
- Work Equity – In theory, after all the legwork above and a periodic review, you and your partner will agree what equity looks like and avoid the argument of who is doing more work.
- Compensation – This is a corollary of work equity. Having defined roles and responsibilities, benchmarking compensation will help avoid future difficulties. Entrepreneurs should budget and pay compensation to all active partners (including themselves).
The Benefits of Taking on a Business Partner
Is it worth all the work to take on a business partner? Only you can decide what’s best for your business, of course, but in most cases, the right partner compliments you and brings additional value to the business by:
- Providing a sounding board for new ideas. Whether taking on a devil’s advocate role or simply by bringing a perspective from a different background, your partner has a stake in helping you make better decisions.
- Offering additional capital if you can only bring your idea to fruition with more money than you have, and loans aren’t an option.
- Bringing needed talents and skills. Entrepreneurs often wear too many hats and rounding out your expertise grows your business faster and better. If you are visionary and details bore you, a detail-oriented partner will increase the probability of success (possibly while driving you crazy, but remember it’s all about balance).
- Challenging and energizing the business. Entrepreneurship is difficult, facing obstacles with a shared vision and mission enables you to have challenging conversations while still remaining enthused about the business.
- Sharing responsibility. While employees also lighten the load, a partner makes developing the business a shared experience.
Taking on a partner is a huge step. Katie Felten of Strategy House expressed it this way: “Yes, having a partner has been transformative for me… (we) created a rock-solid operating agreement, and talked through the what-ifs of things not working out early on. We are aligned in our business growth goals and have very complementary skill sets. We each do what we love and what we are good at every day and appreciate that the other takes on aspects of the company we wouldn’t want to spend time focusing on.“
Of course, when considering if it’s the right step to take on a business partner, many of us focus on the risk of loss when we should objectively evaluate what we can gain. Would you rather own 100% of a $1 million business or 50% of a $3 million business?
Evaluate what you think a partner brings to the table and force your thinking toward focusing on the gain, not the loss. The process is designed to ensure you are on the same page and the partnership will last, creating a successful future for your company.