In a world where competitors can come from around the corner or around the globe, it is increasingly difficult for firms to operate in isolation and establish and maintain a valuable competitive advantage. Typically, a firm can do a few things really well but to be exceptional at something valuable a single firm often needs to combine its skills and competencies with those of others to be truly competitive over time.
As we move toward a more interconnected society, competitive advantage depends not only on what you can do, but also who you work with. From the largest multinational corporations such as GE and Microsoft to the smallest owner managed entity, partnerships have become a critical element of business strategy.
Although partnering is important for all firms, it is generally not well understood and managers and entrepreneurs make many errors when seeking out partners and entering into business partnerships.
In this article I will seek to highlight a few of the most important aspects of business partnerships by discussing the what, who and how of partnering for business success:
- What is a business partnership?
- Who should one partner with?
- How should one manage a business partnership?
1. What is a business partnership?
While business partnerships are defined in many different ways (eg. strategic alliance, joint venture, associative relationship etc) ultimately all these names and definitions boil down to the same thing: A partnership is two or more entities working together in a structured way to achieve a desired outcome.
Within this definition, a number of things may vary: (1) the nature of the entities working together may differ; (2) the structuring of the relationship may not be the same; and (3) the desired outcome may vary. Each of these variations within the definition of partnership is discussed below.
1. Nature of the entities working together. It is very common for two or more businesses to work together in a partnership called a ‘Business2Business’ or ‘B2B’ partnership. Well-known business partnerships in South Africa include partnerships between Standard Bank and MTN to provide cell phone banking services or Discovery partnering with Virgin Active to bundle gym membership as part of their vitality package.
But partnering is not limited to business level arrangements. It is also common and relevant for businesses to form partnerships with individuals called ‘Business2Person’ or ‘B2P’ partnerships. For example, I have personally partnered with Entrepreneur Magazine over the past five years to produce insightful content and to deliver educational seminars to entrepreneurs in South Africa.
Partnerships don‘t necessarily need to involve businesses; they can be two or more individuals coming together to form a business (Person2Person or P2P partnerships). For example, Rob Stokes and Justin Spratt combined their creative and business skills to grow Quirk Marketing while Yossi Hasson and David Jacobson joined their personal business and technical skills in the creation of IT company, Synaq.
2. Structuring of partnerships. For many years it was believed that partnerships could be placed somewhere on a single continuum ranging from highly contractual (ie. everything defined upfront in writing) to highly relational (ie. a partnership based almost entirely on personal trust).
Recent research suggests that these two dimensions actually exist independently of each other. Therefore, it is possible to have partnerships that are either low on both the contractual and relational elements, high on one or low on the other, or high on both the contractual and relational elements (see Figure 1 on page 58).
The best performing partnerships are the ones that are high on both the contractual and relational dimensions. In other words, the most productive partnerships tend to be those where the parties engaging with one another implicitly trust each other but still take the time to contractually define the relationship upfront.
Pure relational mechanisms tend to be more important than pure contractual mechanisms in governing long-term partnerships; therefore partnerships that are founded on a basis of relational trust with little contracting tend to outperform those that are founded on the basis of contractual mechanisms with limited relational mechanisms.
If neither relational nor contractual mechanisms are in place when creating a partnership, then the partnership is likely to be doomed.
3. Desired outcomes. Business partnerships are established for many different reasons. I find it useful to describe the desired outcomes of a partnership in terms of one of four categories: new products, new markets, an integrated offering or financial returns. New product partnerships (also called R&D partnerships) focus on innovation.
They mostly entail the coming together of people and organisations with different knowledge and skills sets to create something new and different — the creation of a new product or the advancement of a technology.
New market partnerships are orientated around one or both of the entities in the partnership entering a new market. Many times such partnerships are formed because one partner has a foothold in a market and the other partner wishes to get their product or service into that market.
They therefore link up so that one partner can leverage the other partner’s customer base and local knowledge.
The third type of partnership is orientated around an integrated offering. Two or more entities come together to deliver a joint product or service offering. The final type of partnership is focused primarily on financial returns. This is usually when one partner provides another partner with capital in the hope that their investment will generate good financial returns over time.
2. Who should you partner with?
One of the most critical and important decisions in forming a business partnership is the selection of partners. Many partnership headaches can be avoided if one selects wisely when getting into a partnership. Research suggests that many firms pay relatively little attention to partner selection and then try to control partners with a myriad of different contractual arrangements in the course of the partnership.
Those firms that focus more intensely on selecting the right partner are not obliged to enforce contractual arrangements and end up with much better partnership outcomes. So one key element to good partnering is partnership selection.
There are a number of elements that underly effective partner selection, the most important of which are discussed below.
Values. One of the most critical things to look for when selecting a person or organisation to work with is values alignment. Values are things that you and your organisation hold most dear, the things that you would be unwilling to change even when under pressure.
People and firms can value many different things. Some values have a moral underpinning eg. honesty, integrity. Other values focus on how people are treated eg. respect, customer service, while other values may focus on how things get done eg. innovation, punctuality, or creativity. When looking for other entities with which to partner, it is useful to assess the extent to which your values are aligned.
If your values are way out of line with a potential partner, then it is probably not worth moving forward. If your values are marginally out of alignment, it is important to recognise that, to discuss it in detail upfront and to make provision for it in the written partnership contract. If your values are strongly in alignment, then it becomes easier to make decisions and move forward as the partnership develops.
Trust. No matter how many clauses you write into a partnership agreement and how many lawyers you involve in establishing a partnership, it still largely hinges on trust. If you cannot trust your partners everything else about the partnership becomes very difficult.
No matter how attractive all other elements of the deal are, ask yourself: “do I trust these people?” If you cannot answer with an emphatic yes then spend some more time getting to know them before you enter into a business partnership and only move forward when you feel confident that you can trust them.
Complementarities. One of the key aspects of finding appropriate partners is to look for people and businesses with complementary skills and assets. It is not always useful to seek other entities that are good at the same things as you. It is much more valuable to first understand why you wish to enter into a business partnership — is it for new products, new markets, an integrated offering or financial reasons?
Then determine what you lack in terms of achieving your objectives. At an individual level, if you are a strong business person, you may be looking for a partner who is strong technically. The famous examples include Steve Jobs, the business mind, teaming up with Steve Wozniak, the engineering expert, to create Apple Computers.
If you are a creative genius you may realise that you need to partner with someone who is strong on organisation and operations.
That was the case when Howard Schultz created Starbucks. He had the vision and charisma, but he needed someone to channel and organise his energy appropriately so he teamed up with Orin Smith in the coffee retailer’s early days.
At a business level it is just as important to look for complementarities in other businesses. It is important to know what you’re good at, what you are not good at, and what you need to be really competitive in your industry.
Map the industry ecosystem. A useful exercise in seeking partners is to map out the ecosystem of the industry in which you operate and to find partners that help you become more powerful and more productive within that ecosystem (see the sidebar on mapping your industry ecosystem).
As a small firm, you may have an innovative new product but need a partner to help you get that product to customers. If you have been in business for a while you may have developed a strong sales force and could partner with an overseas organisation looking to bring a complementary product into your existing market.
Whether you are an individual partnering with another individual to start or grow a business or a business partnering with another business to increase your competitive advantage, the key is to find other parties that do things that you cannot do so that when you combine your competencies you get something unique and valuable.
Dual benefit. If a partnership is to work over the long term, it is critical to ensure that all the parties participating in the partnership are benefitting.
This may seem obvious but I am surprised at how many people and organisations enter into a partnership without being clear on the benefits for themselves or their partners. It is important to make this explicit early on in the partnership’s negotiations because it aids the transparency, communication and goal setting.
If the parties entering a partnership can be open and honest about why they are pursuing the partnership and what they stand to gain, the partnership can be developed on the right foundation. If you or your prospective partners are cagey and obscure about why you are going into partnership, you should rethink your strategy and motives.
3. How should you manage a business partnership?
As you enter into a business partnership with another organisation or individual, there are a few things that you can do to significantly enhance the likelihood that the partnership will bear fruit. The advice for succeeding in a business partnership is not very different from the advice for succeeding in marriage.
The two types of relationships are actually very similar; therefore, if you consider some of the elements of a successful marriage, they will serve as a guide for successfully managing a successful business partnership.
Establish ground rules. Unless you are explicit about how you expect things to be done in a partnership, both parties will end up making a lot of assumptions. Assumptions are dangerous and destructive in a partnership, especially when things are not going as hoped.
An open and honest conversation, early in the partnering process, about each party’s expectation of the partnership can save a great deal of frustration, tension and confusion down the line. (See page 57 on items that should be covered in setting up the ground rules of a business partnership.)
Communicate. Always keep the lines of communication open in a partnership. This means asking questions and clarifying with your business partner when you don’t understand, and always making sure that both partners are on the same page.
A number of surveys and research studies suggest that lack of communication is the single biggest downfall of partnerships. To overcome the risk of communication breakdown try the following three things: (1) find a means of communication that is comfortable and easy for both parties — this may include phone, email, face-to-face meetings, Skype; (2) set up a regular time to communicate, even if you have nothing specific to talk about. Regularly connecting with business partners will radically increase the chance of partnership success; (3) follow up all communications with an email or document that clarifies and records the essence of what was discussed and lays out action points and deadline dates.
Give more than you take. The final important philosophical point in effectively managing business partnerships is to always seek a way to give more than you receive in your dealings and interactions with business partners.
If all partners approach a partnership with this philosophy then things just seem to work. If you constantly feel like you are contributing to the partnership, then you will remain interested and committed, which will make your partners more inclined to contribute.
A very successful CEO told one of my MBA classes the other day, “Giving is not an afterthought to success, it is the foundation.” This could not be truer for business partnerships. Unless all parties perceive that they are contributing to the partnership it is unlikely to succeed, and the giving begins with you.
Any person wishing to be successful in business, whether they are leading a large corporation or operating as an independent consultant, needs to confront the challenge, the joy, the frustration and the positive synergy that can come from entering into business partnerships. The essence and value of partnering goes back many years but it is more relevant in business today than it has ever been.
How To Partner Successfully With A Younger Boss
Age sometimes seems a lot more than just a number
Just a few years ago, millennials surpassed Generation Xers to become the largest cohort in the United States workforce, according to PEW research. As a result, more and more young people are assuming positions of management.
Being managed by someone younger can feel uncomfortable.
I have to admit, I get into the habit of comparing myself to other people. Those who are younger than us who have advanced further professionally can make us feel inadequate or resentful.
At one of the start-ups where I worked, one co-founder was a decade younger than me. At first I felt awkward with the heavy slate of marketing, sales and social media duties she assigned me. It wasn’t too long, though, before we settled into a groove and formed a strong working relationship.
Creating a bond with a younger manager can have significant positive effects on your own career. Here’s how you should manage it:
Identify skills that helped your boss advance and develop them in yourself
Even innovative businesses will adhere to rules of thumb. One rule of thumb many business leaders believe, rightly or wrongly, is that experience is valuable in and of itself. If your manager is younger than you, it means she probably had to overcome stereotypes and false assessments to get there.
Rather than assume your manager is a young punk who had a managerial role handed to her, work on identifying the skills that helped your boss to succeed. By developing the same skills within yourself, you’ll be more likely to enter a managerial role as well.
To get started, consider asking your manager point blank to identify the skills that she thinks were most useful in propelling her career forward. Once identified, make it clear that it’s a goal to develop those same skills within yourself. A good manager will take this conversation as a sign that you are a driven professional.
Alternatively, you could have a conversation with the person who decided to promote your manager in the first place. As long as you position your question to ensure that it sounds like it’s coming from a good place, the senior manager should have no problem sharing this information with you.
Think of your relationship as a partnership
Your manager is not your parent or your babysitter. If it feels as though your manager is overbearing, have a conversation with her about it. Otherwise, you should treat the relationship you have with your manager as a partnership.
Chances are you are both being evaluated on the same or similar metrics. If you fail, your manager fails, and if your manager fails, you fail. By changing your perspective on this important professional relationship, you may find working with a manager who is younger than you to be more comfortable.
Related: Build Better Business Relationships
Most managers simply want to ensure that whatever they’re working on is completed in the best way possible. They’ll be happy to work with employees who are collaborative, open to new ideas and motivated to get the job done.
In return, a manager who is satisfied with your work can make it more likely that you will also find yourself in a management role someday. If nothing else, you can consider leaving your current company and listing your current manager as a reference if you are able to develop a strong relationship.
Trade experience for new ideas
Both you and your manager have important knowledge that can be made more valuable when put together. You probably have accumulated wisdom from on the job experience, and your manager might have a fresh perspective or innovative new ideas.
Together wisdom and innovation can form a valuable pair that propels both you and your manager to success.
Make sure you make it clear that you are open to new perspectives and new ideas, and offer your experience when appropriate to guide your manager to making smarter choices.
Encourage open feedback in both directions
Feedback is a critical component of professional growth. So much so that companies like Goldman Sachs are overhauling their feedback processes to boost employee performance. As a younger manager, she may feel anxious or conflicted about providing you with honest feedback. Instead, “manage up” and invite your manager to provide you with honest feedback.
In doing so, you will also set expectations that your manager should invite candidate feedback from you as well. By creating open dialogue between you and your manager, you’ll accelerate your professional learning curve and avoid passive aggressive moments.
Though your manager may be younger than you, she earned the privilege of managing a team for a reason. As an ambitious professional, it’s your job to understand why your manager earned that role and to begin cultivating the same skills within yourself.
Instead of feeling resentful, partner with your manager to share feedback and wisdom as you both work to achieve success.
By committing yourself to professional self-improvement, you may soon find yourself managing your own team of people who are older than you.
This article was originally posted here on Entrepreneur.com.
The Case For A Business Partner Who Makes You Uncomfortable
Should you even have a comfort zone?
As humans, we love living within our comfort zone. Science tells us that our comfort zones are a place where activities and experiences fit a pattern and a routine that we’re used to. It’s a place of minimum risk for us, which is why it feels so good to stay in that bubble. The idea of adding experiences and actions that could be stressful, lead to failure or worse is not appealing to our minds. So, we get into comfortable routines and rationalise why we are not doing all the things we’ve dreamt and talked about doing in our businesses. This is a familiar pattern that we’ve repeated most of our adult life.
As you grow a business, there comes a point where it makes sense to bring in others who could help the business grow.
This could be a business partner, it could be a board of advisors, or it can be contractors that do tasks we’re not qualified to do. There is a safe route where you can bring in only what makes you comfortable and only entrepreneurs that are YES people – they agree with what you do and say even though they know it’s not right. Or, you can take a different path. You can explore the zone right outside of your comfort zone.
Charlie Munger is the vice chairman of Berkshire Hathaway. Warren Buffet describes him as “his partner.” They have been in business together for 56 years.
Munger has been quoted saying, “we don’t agree totally on everything, and yet we’re quite respectful of one another.”
Over the years, the advice Munger has given Buffet has not been as a yes man to Buffet, and for that reason, both have flourished. They’ve built an amazing company that keeps growing every year.
In April of 1975, Bill Gates and Paul Allen formed a partnership that led to a little company called Microsoft. You are probably using some of their products as you read this article. Their company has become one of the largest in the world. These days, it seems their partnership is not what it once was but it was those early days of partnering with someone who made Bill Gates step outside of his comfort zone that helped the company grow. They complimented each other in different ways. They weren’t yes partners. They pushed and challenged each other and that’s what led to growth.
A wise man once said that if you’re not uncomfortable, you’re not growing. We have run from discomfort when the reality is that there are situations in which the discomfort comes from growing. When you can learn to embrace the opportunity to get uncomfortably from growth, you can take your business to whatever the next level is for you.
There are things you excel in. There are things you’re not so good at. The right business partner – and business partnerships – can help complete the areas you lack. We know that we’re the average of the people we associate with. Traditional logic tells you to associate and partner with people that make you comfortable.
While we want to associate with people whose personalities match, we want to seek out entrepreneurs that will push, inspire, motivate, and challenge us in the ways we can’t do for ourselves.
You want a business partner that will call you out when you’re clearly making excuses. They will challenge traditional ways of thinking about growth strategies. They will inspire you through the actions they’re already taking in their life and business. They walk their talk and let their success doing all the talking for them publicly. They are sincerely invested in seeing you succeed without expecting anything in return. They have love for you. They will stay with you through the good times and especially the hard times.
Don’t pick YES entrepreneurs or add them to your circle. Pick entrepreneurs that make you uncomfortable in a way that leads to growth in life and business. You only get one life to live. You have a goal and dream for your business. The right partners or partners can help you get there in a way that helps you scale.
This article was originally posted here on Entrepreneur.com.
Selling Your Business To Your Business Partner
Follow these tips for creating a deal to sell your business that both you and your business partner will be satisfied with.
The following excerpt is from Mark J. Kohler and Randall A. Luebke’s book The Business Owner’s Guide to Financial Freedom.
Selling your business to a partner is probably the most common ownership transfer among small businesses. The reason is, your partners have a clear picture as to the value of the business, its potential, and what they need to do in order to replace you in the operations.
Selling to a partner is often one of the easier transfers to handle legally – not that partners don’t have their battles and disagreements – but most buying partners want to make the transition smooth and get the selling partner out quickly and painlessly. Many times, I feel that partners are amenable and anxious to define the transaction and process so that they themselves can utilise the same method with a good conscience in the future.
The document that typically lays the groundwork for a partnership sale like this is called the “Buy-Sell Agreement.” These types of agreements are drafted daily by law firms around the country and are actually implemented for more reasons than a partner wanting to sell.
In a more elaborate Buy-Sell Agreement for a more mature or established partnership, the document will cover issues of divorce, death, disability and a requested departure or exit. I call these the “Four Ds,” and each is important to address with predefined terms.
The primary purpose of the Buy-Sell Agreement is to define the procedure for the transfer of ownership, price, terms and transition well in advance of any event causing a transfer. This is a powerful tool because it prevents a partner from holding another partner hostage at a price or process in the heat of emotions when the transfer is needed.
For example, if all partners understand the process to determine the value well in advance, then they can work more clearly toward increasing the value of the business. Each party also knows that they’re all held to the same equation and process no matter what side they’re on. This way, it will be fair when the time comes for each partner to leave the partnership (at least, that’s the goal of the document and can certainly minimise the chance of a lawsuit). Following are some details you need to know about the Buy-Sell Agreement.
Determining the value
Most Buy-Sell Agreements require the partners to agree to the value of the company on an annual basis and record it in the annual partnership meeting. This may seem arbitrary, but if everybody agrees (typically requiring a unanimous vote) and everyone knows the value applies to everyone, then who cares what anyone from the outside thinks? If the partners can’t agree, then a third-party appraiser is brought in to do a formal valuation if a buyout is triggered during the upcoming year.
Oftentimes, the terms are based on a note, with interest, paid out over five to 10 years. This can obviously create the retirement income a partner is looking for, and over the period of payments, it will spread out the tax bill as well. Some Buy-Sell Agreements require the remaining partners to obtain a loan for a good portion of the purchase price and then finish off the rest with a Note. This allows the departing partner to invest the initial money received wisely to create additional cash flow and prepare for when the payments under the Note end.
First right of refusal
Typically, there’s a first right of refusal that must be given to the remaining partner(s) when a partner wants to leave or sell. This means that before a partner can run out into the open market and look for another buyer, they first have to offer their ownership interest to the other partners. This obviously can create some hurdles for the partner wanting to sell because they first have to find a third party willing to buy into a partnership where they may not be welcomed with open arms, probably be in a minority position, and then have to wait around for the other partners to exercise their first right of refusal. But, again, it’s a protection mechanism that “cuts both ways” and protects all the partners.
To protect both parties, there can be a provision requiring the departing partner to sign a noncompete, and also the remaining partner or partners to “pledge” the partnership interest they purchased as security or collateral for the Note they’re paying off. Thus, if the buying partner(s) defaults, the selling partner can come back into the company as an equity partner to try to recover the remaining sales price or value sold in the original agreement.
It’s OK for a partnership not to have a Buy-Sell Agreement in place, but it can increase the tension in the case of a partner selling when the remaining partners didn’t foresee the situation and don’t have the wherewithal to buy out their partner. In these situations, I tell the partners to turn immediately to their partnership agreement (typically an LLC Operating Agreement) to understand what the governing document allows for when it comes to a partner who wants to get out or sell.
If you’re in a partnership and you have the slightest thought that you might want to sell in the next 10 years, and your partner might just be the buyer, then implement a Buy-Sell Agreement immediately. Don’t mess around with the disaster that can be created in a partnership when it becomes volatile or a partner up and decides they want out.
This article was originally posted here on Entrepreneur.com.
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