Pondering a Partnership?

Pondering a Partnership?

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This Month’s Challenge

A hard-working and dedicated sole proprietor with a successful PR, events and hospitality business that has been operating for almost four years plans to take on a full-time employee. The potential employee, who offers specialist skills in graphic design, has expressed an interest in investing in the business to become a significant minority partner.

Our advice

The entrepreneur has been approached to sell part of her business to a potential employee who would then become her partner. She has requested advice on whether she should agree to this approach or explore other partnership options, which would allow her to retain her ownership and achieve growth for both parties.

There are a number of key issues the entrepreneur should consider before reaching a decision. For instance, what are her reasons for looking for someone to join the business? She is clearly a successful and extremely hard-working business owner. The business is entirely dependent on her knowledge, skills and reputation right now. This means that she cannot expand because she has run out of time to do so. So I assume that she wants someone to take part of the workload and provide room for the business to expand.

If expanding the business is a part of the plan, then what type of growth is desirable? For instance:

  • More clients of the same type as she has now? And if so will they be local, national or international?
  • Adding new services to offer to existing clients, so that the per-client income increases?
  • Diversification into new market sectors with new services?
  • Some other expansion concept?

Once she has cleared all these issues in her mind, and preferably put them down in a plan, she can consider what resources she needs to achieve her goals. Incidentally, the plan should show how much, from which source, in what time frame and all the other measurable projections that a good plan would include.

For example, if one of the goals is to expand the business by adding new services, then the person she takes on board should have the skills to add new services for the clients. Equally, if her goal is to expand to more clients then the incoming person or people should be able to form relationships and deliver the services she offers today – and probably have a similar work ethic to the entrepreneur.

Design your business structure to fit the strategy

About 50 years ago Alfred Chandler proposed a construct that suggested that the road to business success was Environment → Strategy → Structure → Economic Efficiency. The emphasis was on strategy fitting the environment in which the business operated and structure designed to fit the strategy. While Chandler was thinking about large corporations, there is still merit today in entrepreneurial business following his construct. Once the strategy to grow has been planned the structure often becomes obvious.

Now, the entrepreneur needs to decide if the proposed partner has the right skills, knowledge and reputation to achieve the desired outcome or can grow quickly into that state? If not, he is the wrong person, whether a partner or an employee.

If he does fit, the second key question is: Is the interpersonal chemistry also right? In a pressurised environment like events management the entrepreneur will probably be spending more time with her business partner that with her spouse. Many great businesses have been founded on trusted partnerships, so it could be the start of a major expansion of the business. However, if the partnership fails because of interpersonal conflict, the results could be catastrophic. This is especially true in a service business where the core of the business is the skills and client relationships of the owners.

Back to the original question: Should she offer him a share of the business? I suggest she defers that decision until she has worked with him for some time. After a year of working together they should know if the business relationship is sound, if there is trust and if the partnership adds to the development of the company. Then she would have the choice of offering him shares in the main company or setting up an operating company in his field specialisation in which he is a shareholder. The latter option would allow her to retain full ownership of the core of the company she founded.

She should involve her accountant and remember that the structure must support the strategy. In the meantime she could offer the potential employee a profit share to motivate him.

Ed Hatton
Ed Hatton is the owner of The Marketing Director and has consulted to and mentored SMBs in strategy, marketing and sales for almost 20 years. He co-authored an entrepreneurship textbook and is passionate about helping entrepreneurs to succeed.