Considering a Partnership?
Whether you have been in business for a while and considering a growth strategy, or you are just starting out, you may be considering entering into a business partnership. A business partnership is a lot like a marriage. It can seem like a great idea at the time and your partnership will likely start with high expectations and lots of enthusiasm. Sometimes personalities, expectations and finances just don’t work out and divorce is inevitable. Divorce in a partnership can have devastating results to both the business and the lives of the partners.
What are the benefits of a partnership?
Depth and Breadth of Skills. You have heard the cliché “Two heads are better than one”. Bringing in a partner can bring new skills and knowledge to your business. Consider a partner who brings attributes to the business that you do not have. Compliment your skills, behavioural style and personality. Look to someone who will bring balance to your business.
Economies of scale. Sharing the responsibilities and risks can be a benefit of a partnership. Consider a professional firm such as an accountant practice. Having two or more partners in the practice can mean the fixed overhead costs can be shared amongst the partners. The cost of rent, utilities, equipment leases, administrative and support staff can be all be shared between the partners.
Financial Contribution. A partner can bring new capital into the business which can in turn be reinvested into the business to provide growth.
More Perspective, Mutual Support and Motivation. It is nice to know someone has your back. We all have our bad days, and a partner can be there to provide motivation, support and encouragement when you’re just not on the top of your game. In addition, a partner can provide another perspective on everything from hiring decisions to marketing to strategic planning.
Increased Client List. A partner that comes with an established client list can bring an instant boost to the business. This may be particularly true where the merging of client lists can bring on an increase in sales as a result of those clients buying new products and services offered by the partnership. For example, if a hair salon expands to have an esthetician the clientele may purchase services from both partners.
What are the detractors of a partnership?
Not unlike a marriage, a statistical percentage of partnerships will fail. Reasons for failure will include:
- Control and/or egos.
- Lack of a shared mission, vision and values.
- Financial stress or disagreement.
- Perceived or real lack of work ethic by one partner.
Liability. Partners may be jointly and individually liable for the business activities of the other.
Shared Profits. For some people, sharing in the profits can bring resentment if one partner feels the other partner is not performing to expectations.
Who is the right partner?
Time Commitment. It is important that the partners have an upfront understanding of the expectations of the time commitment to the business.
Shared Mission, Vision and Values. It is important that the partners have a shared purpose. To be successful there must be a collective understanding of the goals and objectives of the business, why the partnership is being formed, and the scope of the work that is to be performed. Moreover, a shared mission, vision and values allow employees and customers alike understand what the business is about and what it wants to achieve.
Business Commitment. Is the partner you are considering willing to put everything in writing?
“Who” are they. Take a look at factors of your prospective partner’s personal life that may have an impact on their ability to be a dedicated partner:
- Financial situation.
- Community standing.
- Family life.
Behavioural Style and Motivating Factors. There are currently exceptional tools on the market to provide an in-depth behavioural or motivational assessment. These tools are a very inexpensive considering the depth of the insights provided. Knowing the behavioural style and motivators of a prospective partner can allow you to make an informed decision about signing the partner and then give you the tools to communicate with each other effectively.
How should you set up a partnership?
Consideration of Equity. There are several factors to consider when determining the split of equity in the partnership which may include:
- Who is funding the capital?
- How important is the partner’s role?
- Is there a value to goodwill for the pre-partnership business?
- How much are the partners going to be drawing as a salary?
- Who is critical to generating revenue?
- Who is the founder and creator of the business? Consider the value-in-kind of the long hours to set up the pre-partnership business.
- What are the experience factors that should be considered?
Insurance. There are a lot of different insurances that should be considered for purposes of tax planning and the inevitable dissolution of the partnership. Thoughtful planning at the inception of the partnership can save a lot of taxes and headaches later down the road. For example, you should consider discussing the following insurances to protect your assets and your earnings with a credible insurance advisor:
- Life, disability and critical illness
- Partnership insurance – allows you to purchase the shares and continue running the business (rather than have your partner’s spouse as your new, and potentially unwanted, new partner).
Consider also whether insurance should be owned at a corporate or personal level to maximize your tax planning.
Exit Strategy. You must plan for the inevitable dissolution of the partnership. Whether it be by death, retirement, or just a desire to move on, the partnership will not last forever. It is important to have in contractual terms an exit strategy that will allow one partner to leave in a manner that will not result in the end of the business for the remaining partner. Consider whether the partnership agreement should require a partner to exchange his partnership interest for a liquidating distribution. Consider clauses that prevent a partner from selling his interest publicly – which could result in a new partner undesirable for your business. Do your due diligence and consult a lawyer.
Clarification of Responsibilities. Ensure the duties and responsibilities of each partner are agreed upon and put into a written legal document. Consider who is responsible for the division of labour, managing operations, hiring decisions, purchase decisions, how much and when capital is contributed, how disputes will be resolved, how profits will be shared, and who owns what in the partnership.
Sharing Capital or Sharing Expenses. Consider an arrangement where expenses are shared in according to an associative arrangement.
Liability Planning. Discuss with your legal council the options for a partnership agreement where one partner is not liable for the actions and/or obligations of another partner.
Deciding on entering into a partnership is a decision for your business not unlike marriage is a decision in your personal life. The difference, of course, is a partnership decision should be much less of an emotions based decision. Do your due diligence. Get a behavioural and motivational profile (something that a FocalPoint Business Coach such as myself can provide), seek advice and council from your accountant, insurance advisor and lawyer.