SelfInformed

February 2014


10 Questions To Ask Before Taking on a Business Partner

Thursday, February 20, 2014



By Sallie Hyman

  

Many solo entrepreneurs feel they need a partner to get their business started or to take it to the next level. But taking on a partner is a serious commitment and should be done for the right reasons and under the right circumstances. Before jumping in, consider the pros and cons to partnerships.

According to Scott Shane, professor of entrepreneurial studies at Case Western Reserve University, somewhere between 50 and 60 percent of start-ups are founded by just one person.

Most entrepreneurs prefer to work alone. However, Shane shows evidence that most entrepreneurs make the wrong decisions – decisions that make their businesses less likely to succeed. Shane says that in the case of business partners, evidence shows that businesses founded by teams of entrepreneurs are more likely to succeed than those founded by a single entrepreneur. Working with a business partner can give an entrepreneur a competitive advantage that many others don’t have.

But this doesn’t mean that every business owner should run out to find a partner. Before you place that “partner wanted” ad, ask yourself the following:

1. Do I really need a business partner?

Whether you are in the start-up planning process or an established business, before you even start looking for a partner, ask yourself why you are thinking of taking on a partner (or partners). NASE member Al Rickard of Association Vision in Chantilly, Virginia, says, “Having a partner makes the most sense if that person can bring in new clients and significantly grow the business.”

Bringing partners aboard should be done only if it is crucial to the success of the business, such as financial resources, connections, or vital skills that you do not possess. Rickard adds, “If they can’t offer that, you may be able to gain the extra help or expertise you need by contracting with someone or hiring an employee.” That way you can get what you need done without giving someone a stake in your company.

Reasons that do not justify taking on a partner include: Being lonely and wanting company, wanting to lighten your workload, and wanting to network. You can generally accomplish these without taking on a partner.

2. What do I need from a business partner?

NASE Consultant Gene Fairbrother of MBA Consulting, Inc., in Dallas, Texas, cautions, “Don’t partner with someone just like you!”

While people get into partnerships for many reasons, one of the biggest benefits of a partnership is to have people who balance out each person’s strengths and weaknesses. “If you hate dealing with numbers, a partner who is good at the financial end of business is an asset. Ditto when it comes to sales and marketing,” Fairbrother adds.

3. How do I know if I can work with a business partner?

Communication is important at every stage of a partnership, and especially so at the outset. A common mistake business partners make is jumping into business before really getting to know each other. You must be able to connect to feel comfortable expressing your opinions, ideas and expectations. It is also important that all you know about all aspects of a potential partner’s life, including health and personal issues. Nothing should be considered off limits.

If you haven’t worked together previously, test the partnership out by tackling a small project together that showcases each other’s skills and requires cooperation. This is also a way to learn about each other’s personality and core values. “Dating” a potential business partner first can prevent heartache later. Starting a business involves a lot of commitment, and making those commitments with someone who turns out not to be what you expected can be disastrous.

4. Is there anything in your potential partner’s personal or financial life that might affect your business?

Be sure to ask the hard questions about what is going on in your potential partner’s personal life such as a divorce, caring for elderly parents, or other personal health issues that might distract them from the business. If they are not honest about these issues now and they flare up and take them away from the business for an extended time, it can spell disaster for you.

What do you know about their credit and financial history? Again, these may be tough questions to ask, but it is really important to know what their current financial commitments are, as these can influence the decisions they make. How they have handled finances in the past will also be an indicator of what to expect in the future. When times were tough did they forego their own paycheck to pay others? Are they honest in paying payroll taxes? This all relates to financial soundness and how they view money.

5. Do you share the same commitment to the business?

If you don’t share the same commitment then don’t bother partnering. If a partner doesn’t share your enthusiasm for the business it will show to the world and project a negative image, which can be very damaging.

NASE member Sydni Craig-Hart of Smart Simple Marketing, Emeryville, CA, is partners with her husband Wil Hart. She says, “Before you get into business, you need to know what you and your partner’s personal goals and commitment to the business are. If they don’t align, then the partnership will not mesh.”

6. How much time should partners devote to the business?

Not all partners need to put in equal number of hours, but it is important to know what the level of involvement is up front and to set up the partnership agreement around these varying levels of time commitment. Your partner should also know what your time commitment will be. That way no one can accuse the other of not putting in their fair share of time.

7. What is the potential partner’s standing in the community?

It’s a small world these days, so find out what other people know or think about your potential partner. You wouldn’t hire an employee without checking references, but many people fail to check on a potential partner. Speak with former employees or business partners. Check with the Better Business Bureau or local Chamber of Commerce to see if there were any complaints or accolades regarding this person. Word of mouth is very powerful, so you want to make sure that a partner has a good reputation in the business world as well as in your local area.

 8. Should I partner with family or friends?

Many times entrepreneurs turn to close friends and family as potential partners. These people are known commodities and already know you better than anyone else. Some business owners want to keep the business in the family.

A partnership with family or close friends should be approached just as any other partnership. Craig-Hart says she and her husband Wil Hart started out doing it all wrong. “We didn’t establish our roles in the company at first,” she says. “It eventually led to Wil returning to corporate life.”

You still need to ask all of the hard questions and expect honest answers. More important in these situations is to carefully delineate the business relationship from the personal relationship and to make it clear that how you interact in each will be different.

Clear guidelines might also need to be set in the case of spouses working together, such as not discussing business at home after a certain time. Eventually Craig-Hart and her husband had the hard talk and figured out what they needed to do to make their partnership work. Says Craig-Hart, “We worked through the logistics and figured out how each one of us works. We chose roles based on our strengths and weaknesses and looked for ways to complement each other.”

9. What questions does a potential partner have for you?

Just as in an employment interview, you want this to be a give-and-take conversation. If they don’t have any questions about the business or you, they are demonstrating a serious lack of interest. They should want to know everything about you that you want to know about them. A lack of interest at the start may translate into loss of commitment or even wanting to get out of the partnership.

10. Are they willing to put everything in writing?

The days of handshake agreements are gone. Everything about the partnership should be very explicitly defined down to the last detail. “When NASE business consultants get calls from partners with problems, it is almost always a case of there not being a written partnership agreement in place, including a buy-sell agreement,” says Fairbrother. “Boilerplate agreements are easy to find online (sample agreement) and if you don’t have one and run into difficulties, attorneys will be happy to take all the money you have to throw at them.”

Fairbrother adds that the partnership should never be a 50-50 venture. “There needs to be a tie breaker in a partnership,” he explains. “If you are 50-50 partners and there is a disagreement as to the direction of the business, the business suffers.

“Usually one person is the strongest talent or brings the most to the table in a business. That person should own at least 51 percent of the business. If the 49 percent partner is afraid that the other person might take advantage of their position, you’re probably not getting into a good relationship to start with.”

As for the actual agreement, it should address three crucial areas: compensation, exit clauses, and roles and responsibilities. Include who owns what percentage of the business, who is investing what, where the money is coming from, and how and when partners will be paid.

The agreement should also cover how you plan to exit the business. Include clauses that spell out cases in which one partner is obliged to buy out the other’s interest, such as when one wants to quit the business. For example, an agreement can state that the other partner must buy him or her out for a pre-negotiated percentage of the value of the business.

If neither partner wants to continue the business, partners can liquidate and divide all assets. It’s also a good idea to settle on in advance how to assess the total value of the business upon dissolution. The agreement should specify who appraises the business and the methodology to use.

The Small Business Administration website has some good information on some of the business and tax elements that should be considered in the agreement.

Other useful terms to delineate are how communications will be handled, especially if partners are not located in the same town (or even the same country). Set times when daily communications can be made and also how often meetings should take place to reevaluate goals.

Partnerships are right for many businesses as long as you partner for the right reasons and with the right person. Finding a business partner should be approached with the same amount of time and effort that you put into developing your business. Don’t be afraid to ask the difficult questions and develop a comprehensive partnership agreement.

1 Comment

  1. 1 Jaxon 02 Apr
    It's awesome to find an association who can identify the issues so clearly.

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