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4 Questions to ask Before Taking on a Business Partner.

Going into business with a partner is not a decision to be made lightly.

Friends often go into business together because they like the same idea for the business and assume that they will be able to work out any problems and stay friends forever. How well do you know your friend?  Will you be able to navigate the perils of business and still remain friends?

According to U.S. Small Business Administration statistics, companies with multiple owners are more likely to survive longer than sole proprietorships.  Even so 72% of small businesses are sole proprietor ships.  According to a Sept. 12, 2013 Bloomberg report, 8 out of 10 entrepreneurs who start a businesses fail within the first 18 months.  Would more of these businesses survived if they had a partner?

There are some good reasons for going into a partnership and there are multiple reasons to stay away from a partnership like the plaque.

You need to know which pertain to you!

So …

 

1. Why do you want/need a partner?

Do you want a partner so you won’t have to make all the decisions alone?  Do you want someone with a vested interest in the business to discuss options and decisions with?  Being in business can be very lonely.  Are you the type of person who can’t make a decision easily and you need someone who can?  Are you prepared to accept their decision if you’re not quite ready to make a decision?

Do you need someone to share the financial risk?  If so, are you prepared to give that person more say in decisions with financial implications?  Will this person be part of the day-to-day management of the business, or will they be a ‘silent partner’?  Will you be able to manage your business with confidence or will you always be looking over your shoulder, suspicious of someone checking your decisions for financial implications?  Could you accept a negative decision based on financial data, when you think the action is necessary for the success of your business?  Do you want a partner to share the financial obligations so there will be more flexibility should there be a downturn in business?  If so, will this be an equal partnership with risk and reward shared equally?  Is the partner capable of adding money additional finances?  If not, how will this issue be handled?

Is there a skill needed for your business that you don’t have?  Do you see a business opportunity for a niche bakery, but you are not a professional baker?  Are you more of a marketer and people manager?  Would you rather partner with a baker who then will have a vested interest in the business, or should you hire a baker and go it alone?  Or do you want a partner to share the workload and hours of the business?

 

2. Is the business capable of supporting 2 or more partners?

Be realistic in assessing the income potential of the business.  Very few people go into business just for the fun of it, and don’t want to make money.  My Rule of Thumb is – decrease the amount of income you expect to make and increase the expenses you are likely to have. Always know your break-even point. Remember that amounts for wages for a partner, i.e., baker, cashier, are considered part of the expenses of operating the business.

Each partner may have their own idea about how much money they need/want to make from the business profits. Come to an agreement on what this amount will be?  Calculate if the business can meet this goal.  How soon can it meet this goal?

Will all partners be able to wait until the business is profitable to take income?  What if it takes longer than anticipated to make a profit?  What happens if the business needs to borrow money continue until profitability occurs?

 

3. Management of a partnership.

As a general rule a partnership should be legally incorporated.  The exceptions could be when there is no sharing of income or expenses, where the amount of money involved is very small, or where this is a single occurrence or a short duration of the partnership.

Legal incorporation of the business requires that the position and relationship of the business partners is written out.  At this stage, if it is difficult to come to an agreement on the roles and obligations of the partners in the business then this should send up some ‘red flags’ about the long term viability of the business.  In business jargon you now each become ‘owners’.  After the business has been operating for some time, it is wise to go back and review these original roles and obligations.  Is this still the way the business is operating?  Perhaps updating or revision is required.  Always keep the roles and obligations up to date. A good Rule of Thumb is to review these roles and obligations at every Annual General Meeting. This prevents misunderstandings and recognizes ‘role creep’.

Once the business is incorporated it takes on a life of its own, quite separate from each of the partners.  My recommendation it that every business based on a partnership should have a written ‘Buy-Sell Agreement’ as part of the legal incorporation.  If there comes a point when the business partnership can’t continue, then it is better to have the rules concerning ending the partnership prepared in a calm, reasonable environment before going into business than it is to come try to come to a settlement in the heat of a disagreement.

 

4. How much do you trust your partner? How much does your partner trust you?

Trust is one of the most difficult issues to answer.  Sure we would all like to say, “Of course, I trust my partner. They’re my best friend!”  But, do you trust them enough when it comes to decisions about whether your business will survive, or whether you will be able to afford to send your child to University or whether the decision puts the business on a course to bankruptcy?

Granted, if you have written out the roles and responsibilities of each partner then you should also be having a say in decisions. However, because the business is legally incorporated then the decision of one partner is deemed to be the decision of all partners. The business operates as a single entity. You and each partner also represent the business to the public. What if a partner misrepresents the business, product or service offered. What if a lapse in judgement leads to an unethical decision? The credibility of the business is a stake.

Not only must you trust your partner 100%, your partner must also trust you 100%.

 

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Business partnership may seem like a marriage made in heaven, but what do you do when the honeymoon wears off?

These are not all of the questions that should be asked before entering into a business partnership.  However, if you can agree on the answer to these  4 essential questions you have a good basis to start building a partnership.

 

 

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