Entering a business partnership can be exciting and a strategically wise growth move that can have many advantages; however, it isn’t a decision to be taken lightly. Small business partnerships can be harmonious, mutually beneficial relationships that help propel your business forward, but they can also quickly go sour and pose a risk should things not work out in the long term.
To avoid a bad dynamic, it’s crucial to do your homework. If you’re thinking of forming a small business partnership, but are unsure how to approach it, there are a few important things to look at first. Here are six key matters to consider prior to signing a contract and entering a business partnership:
Set clear expectations from the start
Before jumping into business together, get to know your potential partner and familiarize yourself with who they are, how they communicate, and how they do business. It's vital to be transparent from the outset, and ask questions to ensure you set forth and agree on clear expectations and goals before signing contracts. For example, you might ask how your partner handles pressure or what they expect to achieve with the business, including personal goals.
Clear, open communication is the key to a healthy, long-lasting business partnership. Before you go into business, make sure you thoroughly discuss your communication style and preferences. That includes talking about how you make decisions, how you approach conflict, and when and how often you’d like to check in with one another. From developing a clear company mission, to hiring, to securing business funding, there are plenty of big decisions you will need to make. Therefore, establishing clarity on these expectations prior to entering any partnership can help you steer clear of future conflicts and issues down the road.
Differentiate skills from your partner
One of the first things you should do when you're considering taking on a new partner is to evaluate your own strengths and weaknesses. In doing so, you’ll have a better idea of what traits to look for in a partner and how to choose someone with different skills than your own. An ideal business partner is someone who can complement your strengths and compensate for your shortcomings.
Having different talents and areas of expertise doesn’t just improve your company’s growth potential, it can also prevent conflict or competition between you and your partner. After all, when you’re working on different areas of the business, you won’t be stepping on one another’s toes.
Share similar values
To create a beneficial small business partnership, there needs to be common ground. For this reason, it’s important to ensure your prospective partner shares business goals and values that are aligned with yours. This goes beyond the desire to simply make a profit — it means establishing whether or not you share the same vision for the future and similar core values that represent who you are as a business and guide how you conduct business.
For example, if you value good quality and environmental sustainability over fast profits and your potential business partner values fast profits over quality, you’ll likely struggle to see eye-to-eye on key decisions, and that can hinder your achievements. In fact, a growing body of research shows that there is a strong link between financial performance and values-driven organizations.
Clearly define each partner’s roles and responsibilities
Once you’ve made the decision to bring on a new partner, it’s imperative that you clearly define each of your roles and responsibilities within the business, including time and money contributions. Determining the best ways for each of you to contribute can help you optimize your capabilities, management skills, and investment potential.
In fact, understanding core competencies and creating a document that is similar to a job description for each partner may be a helpful resource to refer back to should questions arise in the future. While getting things on paper can protect each partner legally, it can also help you to establish more accountability and avoid miscommunication.
Put contracts in writing
Although there's no requirement for a written contract and profit-sharing plan, iit's a good idea to have such documents in place to help mitigate internal conflicts and give the partnership structure. Having a written contract is an important way to protect legal interests and navigate any potential difficulties should they arise.
A partnership agreement is a contract that sets out the terms and conditions of the relationship, including:
- Percentages of ownership and distribution of profits and losses
- Description of management powers and duties of each partner
- Term (length) of the partnership
- How the partnership can be terminated
- Equity strategy
- How one business partner may buy out the other
- Provisions for death of a partner
Trust is a core aspect of finding the right fit in a business partner, and evaluating trustworthiness often comes down to conversations, track record, and intuition. This is why it’s crucial to take the time to have those pivotal discussions around vision, values, professional and personal background, situational factors, and more. Each of us has our own ways of handling successes, challenges, and failures, but if you can build a strong foundation of mutual respect and trust with your business partner you will increase your chances of success.
It’s a good idea to gather as much information as possible when preparing for a business partnership, however, ultimately your best source of intel is your own intuition. Of course, the hope is to avoid friction or hard times in any partner relationship, but it’s often inevitable in just about any long-term partnership. What’s most important is choosing a partner willing to work with you through the challenging times, with the goal of emerging on top on the other side.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.