There are many good reasons to partner with others in a business venture. Partners can bring skills, capital, knowledge and connections that complement your own. Partners can help do the work and share the risk. But there can be drawbacks as well. Having a partner means shared decisions, which can make a company less nimble in a competitive environment. It also means sharing profits. Much like choosing a spouse, selecting a business partner is not a decision to be taken lightly.
Whether a prospective business partner is a new acquaintance or an old friend, vet him thoroughly. Just because someone was a fun college roommate does not mean you should trust him with your financial future. Consider performing a background check, and offer to share the results of one performed on you. Exchange personal financial statements and credit reports. If your prospective partner has a bankruptcy in his past, you want to know that before it is time to qualify for a loan or other funding. Yes, these are sensitive topics. All the more reason to have the discussion on the front end.
When you are satisfied that there are no closet skeletons to fear, have a detailed discussion with your partner about objectives, expectations, money, operations and exit strategies. Too many partnerships begin without thinking through key issues. Discussing and negotiating the nuts and bolts of the relationship will offer a glimpse of what it will be like to be in business with your new partner.
Objectives and Expectations:
- Does your partner view the enterprise as an “all-in” 80 hour per week operation, or a lifestyle company that will allow more time for family and travel?
- Does he envision a long term commitment or does he want to sell out in three years?
- What sort of income does he reasonably expect to achieve?
- Will each partner make an initial contribution to start the company? If so, should any portion of that contribution be treated as a loan, or will it all be a capital contribution?
- If the company gets into a financial bind, what are the obligations of partners to put in additional capital?
- How will partners be compensated? Will each draw a salary? If times are tough, will that salary be deferred?
- Is a certain partner going to be in charge of day-to-day operations? What are the limits on the authority of the partner in charge of day-to-day operations?
- Will there be a division of responsibilities and labor between the partners?
- How much of a time commitment is expected of each partner?
- What are the partners’ “duty of loyalty” expectations. Can a partner work for or be involved with a competitive company?
- How will the partners resolve issues of deadlock?
- Are there restrictive covenants you want to impose on the partners?
- If the business is successful, at what point do you want to sell? If it is not profitable, at what point do you pull the plug?
- What are the partners’ respective exit strategies?
Once you find common ground on these issues, have your agreement written up by counsel. Sign it and make sure your partner does so too. Keep your copy! By working through these issues on the front end and memorializing that agreement, you maximize the opportunity for a successful business partnership.