Partnerships can seem like the perfect path to business ownership – shared investment, shared effort, and someone to alleviate the risk of “going it alone”. But business partnerships aren’t always what they are cracked up to be. Partners can quickly clash over goals, money, time commitments, and more.
So it’s a good idea to make sure you have a very clear idea of who you’re binding yourself to (even if they’re a friend) before you commit. Here are eight questions to ask yourself and your potential partner, before you walk down the proverbial “aisle” to business partnership.
Why Are You Doing This?
I’ve seen best buddies go into business for all the wrong reasons. One had the ambition, the other saw it as a fun way to make money. Their motives were questionable and their approach reflected that. They failed to dot the “i’s” and cross the “t’s” with a steadfast plan and agreement. One made financial decisions without the other and things quickly got nasty leaving a broken partnership and thousands of dollars in unexpected liability on both sides.
The point is, unless you are both sure why you are doing this and are equally committed, things can quickly go awry. Conflicting and ill-defined goals are a death nail in any business’ coffin. As you weigh up your motives for a partnership, consider some of the following points too.
Does Your Partner Bring Skills to the Table that You Don’t?
Each partner should bring a key skill or experience to the table that the other lacks. It could something like leadership or executive experience or a technical skill that can steer your product strategy. A well-rounded team is more likely to attract investors and give the partnership the holistic basis it needs to succeed.
How is Your Partner Situated Financially and Personally?
Is your potential partner experiencing marital problems? Have they experienced financial distress in the past (that you know of)? Personal and financial issues can creep into business and potentially impact their ability to perform their work and the business itself. It’s worth being forthright about things like the credit rating of both partners – this will give you an indication as to their fiscal health, but also alert you to any red flags that might impact your ability to get funding.
What Time Investment Can Your Partner Give?
You don’t have to commit to an equal amount of hours, but it’s important to understand both your expectations. If you’re not in alignment now, there could be problems later.
How Does Your Partner React Under Pressure?
This is an age-old interview question, but forget the canned responses and do your research. Has your partner been in business before? How did they handle common problems such as not being able to pay bills on time or handling a customer complaint? If their reaction and approach wasn’t quite by the book, you can probably gauge that they won’t do well when backed against a wall. You could also talk to former employees to get a sense of how they perform under pressure.
What Kind of Brand Do They Project?
Think of this from both a business and personal standpoint. How is your potential partner viewed by the community at large? Check out references, talk to former colleagues and employers. What’s their appearance like? What about their values? Your brand isn’t just your logo and signage it’s about the people behind it.
How Will You Divide Profits?
What’s the best basis for splitting profits? It’s a tricky question, especially if one partner contributes more man hours or injects more money into the business. Read How to Split Profits in a Small Business Partnership for some tips on a workable profit sharing strategy.
Are You Willing to Put It in Writing?
So you’re ready to walk down the partnership aisle? Then both parties will need to put it in writing and agree to the partnership equivalent of a prenup agreement. A business partnership agreement should be completed before you start operations and any profits are made (the division of profits is a critical part of this process). Although an agreement is not legally required, it can protect your interests as one-half of the partnership for the duration of your partnership and through its dissolution. This to include are how you’ll split profits, any contributions or assets each partner makes to the partnership, how decisions will be made and how disputes will be resolved, as well as who does what.
Work with a lawyer to get one drawn up and formalized.