Forming a business partnership has many benefits: a lower cost of starting and maintaining a business, an exponential increase in the potential for developing innovative ideas and solutions, and increased access to capital and credit. But there are some things you need to do to make sure your partnership can survive the inevitable ups and downs of doing business. Let’s explore what you should consider.
At the root of every successful partnership is a base level of trust. But trust won’t flourish if your business partner doesn’t share your ethical values. You need to know if you and your potential partner share the same ideas about how to interact with employees (Do they believe in a top-down approach while you value getting input from workers about company changes?) You need to know if they’re the kind of person who takes financial shortcuts such as cheating contractors or “cooking the books” just to make an extra buck. No matter how obvious an ethical issue seems to be, you must have a candid conversation with potential partners about their attitudes towards business ethics.
In every business, there are skills that are critical to the success of the enterprise. When you’re considering someone as a business partner, you must make an honest assessment of your own skills and find a partner who is strong where you are weak. If you have trouble being honest with yourself about your weaknesses, consider giving an anonymous survey to trusted friends and business colleagues who are willing to give you feedback about your strongest characteristics.
Reputation and Track Record
Before bringing someone into your business as a partner, investigate their reputation and their track record of accomplishments. If you want a quality partnership, find someone who is at least your equal in terms of career achievements and who has a decent reputation in your industry.
Money is the number one reason for conflicts in a business partnership. Before you partner with someone in business, investigate their personal finances. Are they deeply in debt? Are they facing foreclosure or repossession? You don’t want to go into business with someone with shaky personal finances. No matter how ethical a person is, if they’re struggling financially they may eventually become tempted by a bribe or an embezzlement opportunity.
Responsibilities, Conflict and Compensation
Clearly define what role your partners will play in your business. Answer these questions:
- How much control will each partner have over business decisions?
- How much capital must each partner invest in the business? And what percentage of the business will they own?
- How will you calculate compensation and distribution? Are there circumstances where distributions can be halted or reduced?
- How will you resolve conflicts?
- How will you dissolve the partnership? Under what circumstances can a partner be forced out of the business? What will happen if some of the partners want to sell the business?
This list of suggested questions isn’t exhaustive. Consider speaking to someone who understands business partnerships about what issues your partnerships agreement should address.
Special Financial Situations To Consider
In any partnership, especially in a startup, there will be business partners who want to avoid exposing their personal assets to financial risks. They may want to invest money without giving a personal guarantee on debts. If you have potential partners in that position, are you and the remaining partners positioned to get credit access without the ‘shielded’ partner’s personal guarantee? You want to know that before you enter into the business arrangement.
In the case of a franchise business, most franchisors will probably require that all partners personally guarantee the franchise agreement. This may also be true when it’s time to sign a lease.
Limiting Personal Guarantee Exposure
For many people, offering a personal guarantee on business debt can feel scary, especially in a partnership. Fortunately, there are strategies you can use to mitigate your financial exposure.
- Narrowly define under what circumstances a personal guarantee is enforced. For example: Maybe a personal guarantee is activated when a business has failed to make a specific number of payments on a loan.
- Negotiate a phase-out of the personal guarantee over time. You might ask a lender to phase out the personal guarantee requirement after a business has been financially successful for a specific number of years.
- Peg personal guarantees to ownership percentage. For example: If you only own 5% of the business, maybe you only personally guarantee 5% of a loan.
Exclude essential assets from the personal guarantee. Negotiate an exclusion of your personal home, retirement account, and other essential assets from being included in a personal guarantee.
Select A Designated Operator
If you’re entering into a partnership for your franchise, you must choose one person as the designated operator. A designated operator will be the point of contact for the franchisor who will go to them for all decisions related to the franchise business. It’s important to note that the franchisor will hold all of the partners responsible for any decisions the designated operator makes. Make sure that you have a written agreement with your designated operator that outlines their limitations and responsibilities in their role. Your agreement should prevent the designated operator from making decisions without consensus from the other partners.