Dave’s note: Our guest insight this week is from JJ Richa. JJ is a successful entrepreneur and technologist giving back to the entrepreneurial community in many ways, including his weekly Internet TV program on entrepreneurism, and participation in several mentoring programs.
Business partnerships have their advantages and disadvantages. Taking on a business partner is like a entering into a marriage. In general, partnerships are easy to get into and difficult to get out of. Certain guidelines should be taken into consideration along with a path to follow—from dating to prenup to marriage—all of which can be applied to a business partnership.
Taking on a business partner can be an excellent strategic decision in helping move the business forward. It should be well thought out for all parties involved. The relationship needs to be synergistic financially, emotionally, and operationally. All parties need to perform due diligence to ensure that the assumptions are correct, that neither partner has financial issues which could affect the partnership, and that the opposite partner has the skills to contribute to the partnership.
Most of the important benefits for partnering include:
- Combining of complementary skill sets
- Access to new markets
- Addition of new services or product lines
- Addition of essential expertise and knowledge to propel the business forward
- Open doors to new distribution channels
- Access to new technologies
- Access to capital unavailable to either partner singly
Certain steps should be taken before entering into a partnership.
1. Personal assessment and getting to know one another
- Work together on 2-3 projects before an agreement is consummated.
- Determine the commitment of the potential partners. Is the potential partner in for the long haul?
- Identify each of the partner’s unique contribution. Does the potential partner bring specialized knowledge, skills, leadership, or experience that compliments others?
- Understand each person’s personal goals. Are each set of goals consistent with the other’s including for example personal wealth, business success, and autonomy?
- Determine trust and Values. Is there trust between the parties? Do the proposed partners share a set of common values? Core values are non-negotiable. Be ready to walk away when others are willing to negotiate their own values or try to negotiate others.
2. Determine personal and business goals
- Contribution: What will the new partner contribute? Examples: cash, assets, equipment, connections… Regardless of what it is, a partner’s contribution needs to increase the value of the business.
- Compensation: What are compensation expectations? Examples: salary, equity, joint venture, etc… Can the business afford it?
- Control: What type of control is the new partner looking for? Examples: percent of ownership, officer/operational, director/board member… What are the parties willing to give up in return for the prospect of business success?
- Brand and Success: Is the new partner dedicated to ensuring brand continuity and contribute to the success, or just to ride on what has been established by the other?
3. Create roles and guidelines in the potential partnership
- What role and responsibility will each of the partners have including operation, financial, sales, marketing, etc..?
- How will decisions be made and by whom? Is it by committee?
- Will each have certain level of decision making authority? Will the new process impair quick decision making?
- Will authority limits be defined, and processes and procedures put in place?
- What is the understanding if one of the partners wants out or wants more? What is the understanding if things go downhill/uphill?
4. Perform preliminary due diligence
- Review the business plan including marketing, sales strategies and financial needs
- Review long term company debt, goals, objectives and financial projections
- Review financial statements – up to 3 years if available
- Review tax returns – up to 3 years if available
- Research and talk to existing and past customers
5. Create partnership agreement basic terms
- Define Key Performance Indicators (KPIs.) How will the success of the business be measured?
- Clarify decision-making and dispute resolution processes
- Define each partner’s title and position
- Define management responsibilities and job descriptions
- Detail authority limits for each partner
- Clarify operation responsibilities and metrics used to measure performance
- Define vacations and time off policies such as with partners vacationing at the same time
- Determine compensation for each partner
- Exit strategy planning, including determining what happens when one partner leaves, if closing the business, if selling the business, creating a mutual buy/sell agreement, and more.
Depending on the legal structure of the business, different types of formal agreements may be required.
Partnership agreement should never be 50/50 regardless of the perception of compatibility at the time of execution. There must be some method of resolving a tie that is predetermined in the agreement.
Potential partners should follow and apply these guidelines independently. This should be followed by a joint meeting to determine commonalities, synergies, and conflicts. If necessary, this is the time to bring in an impartial third party to facilitate any possible conflicts and resolutions.
It is highly recommended that legal document are created and/or reviewed by a business transaction attorney. All agreements should be in writing and signed by all parties involved. Regardless of what method is taken to reach an agreement among partners, avoid some of the common mistakes. These include premature rejection of ideas by the other partner, prematurely judging others, one-sided financial consideration, and not sticking to core values.
This article was originally published by Berkonomics
Published: January 20, 2014