THINGS TO CONSIDER BEFORE ENTERING A BUSINESS PARTNERSHIP
Going into business with a partner has significant advantages. It may help you make the most out of shared resources and complementary talents. However, there are important considerations you should take into account before jumping into a partnership.
Start by thinking about whether you really need partners. Being afraid to go into business alone, or lacking financing, skills or connections may be the wrong reasons for a partnership. You may be able to get someone to do something without giving away a share of your business. You could hire someone or find a mentor to bring capital, skills, or a network to the table.
If after careful analysis you have resolved that you must have partners, consider partners who compliment your personality and skills, but that also bring something different to the table and are passionate about growing the business and succeeding. Consider the pros and cons of a partner relative to your business, industry and finances.
Get to know your partner first. It is important to look into the potential partner’s values, personal goals and financial situation. Working with a partner who does not share your business values and ethical standards may discredit your reputation with clients and other partners.
An examination into the potential partner’s personal goals and vision of the business will not always guarantee a complete alignment, but it will at least avoid fundamental discrepancies and unpleasant surprises. You may ask for references, look at their presence online, and even run a background check. Do this before entering an agreement.
Communicate with the potential partner before you make a decision. Your conversations with potential partners should be aimed at establishing two-way lines of communication and allow the parties to set forth their expectations. You could also benefit from working with the potential partner on a discrete project or for a couple of weeks before you make a final decision.
So you have made a decision about whether you would like a partner. You have also ensured that the potential partner is a good match for the partnership. Stop. There are legal implications that you must consider before jumping into a partnership agreement. You must understand the different forms of legal partnerships, contemplate forms of taxation, decide how you will split profits, and think about how you would handle the situation in the event of a break-up. Thus, it is crucial to find the advice of an accountant and an attorney.
Give a significant amount of unemotional thought to the following:
1. A written partnership agreement.
Partners should be willing to put an agreement to writing. A written agreement may not be a legal requirement in your state, but a well crafted partnership agreement may not only insulate you from personal liability issues, it will force you to think about how you and your partner, or partners, will achieve the implementation of your entrepreneurial vision. Partners should be able to resolve any issues that arise by referring to the agreement. In the absence of an agreement, discrepancies will be resolved by your state’s generic
partnership law, which will undoubtedly not cover the intricacies of your business partnership.
2. Determine the roles and responsibilities of each partner.
This is about managing duties and expectations. Although partners don’t need to commit the exact same amount of time on the business, it is crucial that there is consensus as to expected time obligations. You will avoid resentment that may emerge when partners begin distributing profits and comparing them to individual efforts and results. This decision must avoid the emotion connected to a power structure. Every partner needs to be clear on her role, duties and responsibilities. Responsibility for day-to-day company direction must be based on what is best for the business enterprise.
3. Align the partnership towards profit.
Profit will generally result when you create value for your customers. However, commitment from potential partners to the business must be as strong as yours. It is fundamental to consider how you and your partner will be accountable for results. Think about how you will measure performance and outcomes.
4. Develop an exit strategy for each partner.
Ironically, you should enter the partnership knowing that it will likely end someday. Thus, you should outline flexible steps for partners to exit the partnership when a need or circumstance arises.
5. Decide how you will handle partnership dissolution.
Business partners will likely go on their separate ways at some point. You must prepare for that scenario by determining how partners will be compensated, resources divided, and clients served when the time comes. Emotions will undoubtedly run high if the partnership does not work out, so the best time to decide how to handle a break-up is before a partnership or operating agreement is signed.
There may certainly be a number of specific considerations that you should take into account according to your industry, business, and personal situation.
However, figuring out from the outset whether you need a partner and how the partnership will operate with regards to compensation, exit clauses, and roles and responsibilities, will give you a solid general framework for a successful partnership, and allow you to focus on your business.
Salim E. Awad, Attorney and Board Chairman, Veterans Business Resource Center
McQUEEN AWAD, LLC
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