Choosing a Business Partner and Making the Partnership Work

Choosing a Business Partner and Making the Partnership Work

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Business partnerships come in two varieties:

  1. General partnerships
  2. Limited partnerships.

In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.

Unless you expect to have many passive investors, limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities. If you have two or more partners who want to be actively involved, a general partnership would be much easier to form.

Keep in mind that business partnerships are also more expensive to establish than sole proprietorships because they require more legal and accounting services.

If you decide to organise your business as a partnership, be sure you draft a partnership agreement that details how business decisions are made, how disputes are resolved and how to handle a buyout. You’ll be glad you have this agreement if for some reason you run into difficulties with one of the partners or if someone wants out of the arrangement.

Do You Need a Partner in Business?

Business partners, like parents and spouses, are rarely perfect. The acid test of a good business partnership is whether each partner feels better off with the partnership than without it. That requires each partner to perceive the business as a success and to regard the contributions of his or her partners as critical to that success. Only embark on a business partnership that promises to pass the test.

Deciding on whether to take on a business partner or go it alone is a crucial question when first launching a business. Before you ask someone to join forces with you, there are some questions you should ask yourself:

1. Is this the type of person I could work with every day who complements my skill set?

Deciding whether or not to partner up isn’t unlike dating vs marriage – there’s a big difference between going out for an occasional dinner and waking up next to that person day in and day out. The bar is a lot higher when you’re signing someone up for the long haul. Think about the person you’ve got in mind and ask whether they’ll make the highs even better and the lows more tolerable. Will they bring out your strengths and compensate for your weaknesses? This is not a time to clone yourself. You already know what you know, so where are you weak?

2. What are my core values, and is there someone who shares the things that are most important to me who can help me grow my business?

Choose a  business partner who is completely in sync on issues like integrity, authenticity, passion and drive. If you have a strong work ethic you will feel slighted by a partner who didn’t work as hard, even if they were a good person. Be honest and realistic about your expectations you can’t compromise on things like core values.

3. Do all partners have to be equal?

This is a tough one. Should there be an odd number of partners so you can break ties? Does it make sense to be classified as a minority or a woman-owned business if you qualify? And how would that change the dynamics? Two equal partners have to have a lot of issues ironed out in advance to be successful. The corollary here is, will everyone feel like an owner if they have some equity stake in the business?

4. If I don’t have a partner, who will I turn to for advice or input?

Making an important decision in a vacuum can be dangerous. If you don’t take on a partner, then you’ll need to consider who knows more about certain issues than you do. And what’s in it for them to help you make the right call? Can they be an objective third opinion? Which decisions of yours should be vetted with an outside party as a reality check?

5. Will the business be stronger with more heads at the top?

You’d need to decide how to divide responsibilities. It can be split by inside person/outside person and also by function. And when it comes to titles, will you be co-CEOs or will one of you be the president and the other the CEO/chairman?

6. Do you want to have to consult someone every time you want to make a major decision?

Bachelor(ette)hood has its privileges. There are days when you really don’t want to consult with anyone else or invest the time it takes to sell others on your ideas. You just know in your gut or through prior experiences that your decision is the right one. And without a business partner around, you can solely decide to take on that new client, pursue a new market, or not go to the trade show this year without getting any attitude from a partner.

7. If I try it solo, could I bring in a partner later?

When times are good, everyone wants to be your partner. When things get tough, will they still be around? In the early years when a company is in investment mode, few people offer to write cheques to keep the train moving. Do you need outside capital to grow? As your customer base grows and revenues build, you’ll find plenty of people who are interested. When deciding whether to take on a partner, there are a lot of considerations, none of which should be taken lightly. These are important decisions because the health of your business is at stake.

Making Partnerships Work

In the spirit of improving what often becomes a flawed process, here are tips for the art of partnering.

1. Partner for spreadsheet reasons

The right reason to form a business partnership is to increase sales or decrease costs. Here’s a quick test: Will you recalculate the spreadsheet model of your financial projections if the partnership happens? If not, the partnership is doomed. You can wave your hands all you like about “visibility” and “credibility”, but if you can’t quantify the partnership, you don’t have one.

2. Define deliverables and objectives

If the primary goal of a partnership is to deliver “spreadsheet reasons,” then execution is dependent on setting deliverables and objectives, including additional revenue, lower costs, penetration of new markets, and new products and services. The only way to determine whether a partnership is working is to answer quantifiable questions, such as “How many more sales occurred because our websites are now linked?”

3. Ensure that the middles and bottoms like the deal

Some people believe the key to successful business partnerships is that top management thought of the idea. They’re wrong. The key is that the middles and bottoms of both organisations like the partnership. After all, they’re the ones who’ll be implementing it. The best partnerships occur when the middles and bottoms work together and wake up one day with a de facto partnership that didn’t involve top management until it was done.

4. Designate internal champions

One person inside each organisation must be the champion of the partnership. “A bunch of different people contributing to the partnership when they can” doesn’t cut it.

5. Cut win-win deals

A partnership seldom takes place between equals. The more powerful side will be tempted to squeeze the other party, while the weaker side will begrudgingly accept such deals and try to get whatever it can. Bad idea. Bad karma. Bad practicality. If the partnership is a win-lose deal, it will blow up because concrete walls and barbed wire can’t hold a partnership together. Only mutually beneficial results can.

6. Include an out clause

This might seem counter-intuitive, but if one company in the business partnership knows the other side can terminate the relationship easily, they’ll work harder to make it successful. Frankly, if all that’s holding the partnership together is a legal document, then it’s probably not going to work anyway.

7. Ask women

Men have a fundamental genetic flaw: the desire to partner with anything that moves. They don’t care about practicalities and long-term implications. Don’t bother asking men for their opinions about a partnership because they’ll almost always think it’s a good idea. Instead, ask women. You’ll gain real insight as to whether the partnership makes sense.

8. Wait to legislate

After you and your new partner have reached a conclusion on the deal terms, you will then draft an agreement. This happens at the end of the process because you want all parties to be psychologically committed to the partnership first. If you start the drafting process too early, you’re automatically asking for nitpicking, delays and blow-ups. Incidentally, if you ask for legal advice too early, you’ll kill the process. The best way to deal with the lawyers is to simply say, “This is what I want to do. Just keep us out of jail while we do it.”

The Partnership Agreement

When taking on a partner, it is critical to have a formal, written partnership agreement. While this is not a legal requirement, it does provide a framework for the partnership in terms of everyone’s obligations, settling conflicts, disagreements and other issues that could occur. The agreement is needed for the wellbeing of the business.

Create your written partnership agreement with the assumption that anything that can go wrong with your partnership will. Friction between partners over things such as money, power or ego frequently undoes business relationships. Your partnership agreement should prepare you for all possible “what-if” situations, and set methods for resolving them.

You can save money by drafting your own version of the key parts of your agreement, then taking it to your firm’s attorney to be reviewed, clarified, modified and finalised. It is important to have an attorney review the contract.

These are some of the key areas you should include in your written partnership agreement:

Partnership Basics

  • What is the name of the partnership?
  • What is the purpose of the partnership?
  • What is the duration of the partnership?

Responsibilities, performance and remuneration

  • What is each partner’s role?
  • What are each partner’s responsibilities within the company, and what level of performance is expected?
  • Are partners expected to make a full-time commitment to the venture, or are business activities permitted?
  • What will be the income of each partner, and how will profits or losses be distributed?

Contributions

  • What will each partner be contributing to the partnership in terms of cash, assets, loans, investments, and/or labor?
  • If a partner loans the company money, what will be the terms or repayment?
  • Will the partners be expected to make additional contributions to the partnership, and if so, how will that be handled?
  • Withdrawal of partners/admission of new partners
  • What guidelines should be followed if one partner wants to leave the partnership?
  • Will partners be allowed to sell their interests in the business to outsiders?
  • On what grounds can a partner be expelled from the partnership (misconduct, non-performance of duties)?
  • How will new partners be admitted to the partnership?

Buy-out procedures

  • What guidelines should be followed if one partner wants to retire or leave the partnership?
  • What happens if a partner is incapacitated or dies?
  • Will the partnership take out “key man” life insurance to ensure the surviving partner is able to buy the deceased partner’s shares from his/her heirs?
  • Will partners who leave have to sign a non-compete agreement?

Dispute resolution

  • What methods will be used to settle disputes that can’t be otherwise resolved?
  • What procedures should be used in the event of a tie vote between partners on crucial partnership decisions?
  • Will you use mediation or binding arbitration?
  • If disputes can’t be resolved, is there a mechanism in place for dissolving the partnership?

Financial arrangements

  • What banking arrangements will be made for the partnership?
  • Which partners will have check signing privileges?
  • Who will be authorized to draw on the partnership’s accounts?
  • How will the books be kept?

Method for dissolving the partnership

  • When can the partnership be dissolved?
  • What happens to the partnership if the partners decide they can’t work together?

Valuation

  • What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?

Useful resources

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