5 Steps to Pick the Right Business Partner
Taking on a business partner brings a large amount of benefits to entrepreneurs. Not only does the partnership give financial leverage to the business owners, but the workload and level of responsibilities become significantly lower than that of a sole proprietor. But choosing a business partner is much more complicated than just thinking about it.
In Making a Business Partnership Successful, we outline certain steps which should be taken before entering into one.
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 business partners. Is the potential business partner in for the long haul?
- Identify each of the business partner’s unique contribution. Does the potential business partner bring specialized knowledge, skills, leadership, or experience that compliments others?
- Understand each person’s personal goals. Is each set of goals consistent with the others including, for example, personal wealth, business success, and autonomy?
- Determine trust and values. Is there trust between the parties? Do they share a set of common values? Core values are none 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 business partner contribute? Example: cash, assets, equipment, connections… Regardless of what it is, contribution needs to increase the value of the business.
- Compensation: What are compensation expectations? Example: salary, equity, joint venture, etc… Can the business afford it?
- Control: What type of control is the new partner looking for? Example: 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 business partner dedicated to ensuring brand continuity and contribute to the success or just to ride on what has been established?
3. Create Roles and Guidelines in the Potential Business Partnership:
- What role and responsibility will each of business partners have including operations, financial, sales, marketing, etc…?
- How will decisions be made and by whom? Is it by committee?
- Will each have certain level decision-making authority? Will the new process impair decision making?
- Will authority limits be defined and processes and procedures be 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 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
- Define Key Performance Indicators (KPI’s.) How will the success of the business be measured?
- Clarify decision making and dispute resolution processes
- Define each business partners title and position
- Define management responsibilities and job descriptions
- Detail authority limits
- Clarify operation responsibilities and metrics used to measure performance
- Define vacations and time off policies such business partners vacationing at same time
- Determine compensation
- Exit strategy including determining what happens when one partner leaves, closing the business, selling the business, buy/sell agreement, etc.