Why enter into a Business Partnership?
If you have ever been involved in a Business Partnership you will appreciate that the process going into it is much smoother than once you’re in or need to get out.
Taking on a Business Partner can be a great boost to the long term business strategy and selecting a Partner that will compliment your skills and/or bring with them an existing business to reduce expenses or increase revenue, hopefully both.
Many businesses are formed because of friendship and the subsequent trust that comes from Knowing, Liking and Trusting your ‘friend’.
For a business partnership to function effectively the owners not only need to trust each other, but they also need to be aligned in many areas otherwise friction is created and unless addressed can turn toxic. Trust is a good platform but it’s not a sustainable framework alone to support the inevitable disagreements that present over time.
Coming into a Partnership there needs to be an alignment of Intention. This is guided by purpose, legacy, values, beliefs and acceptable outcomes.
The decisions to make as you enter into the Partnership are:
- Why does it make sense to start the partnership?
- Is there a complement of skills?
- Is there a purpose that is common?
- Do the values relating to work, effort, money, objectives and time to achieve these align?
- Does it feel right?
- Are there more things you agree upon than disagree upon? Trick question.
Discuss your Exit Strategy
Before you make a final decision and enter into the Partnership discuss how you will exit. This may sound counter intuitive but it’s the perfect time to test if you’re aligned.
Every Partnership dissolves at some point. Retirement or sale and at the time of exiting emotions run high. The decision to leave may be voluntary or forced, amicable or adversarial. Having negotiated the exit strategy at the beginning means that you can reduce the emotional impact of the separation.
Going into a partnership everyone is in love, coming out is like a divorce. It could be equitable or the Lawyers make another deposit on an investment. 🙂
At the core of this is the ability to have difficult conversations and to put forward your viewpoint and be heard, and then have the confidence that your partner has an intention to resolve the differences amicably. This invariably will need a shift to the middle.
It is fanciful to think that every partnership will be plain sailing, so stress test it as much as you can and over multiple topics and over a reasonable amount of time.
You don’t have to agree, in fact it’s better if you don’t, because that will demonstrate the Intent.
The goal at the start is to negotiate the terms of the exit.
Here are some of the considerations to take into account.
- Are the partners equal in the decision-making process regardless of their equity?
- How will the Partners make the existing business better? What’s the Intention of each partner and are they aligned?
- Agree on the valuation model coming in. Is it fair and equitable ? If not say so, it helps no-one if you feel you are being taken advantage of. Engage a specialist Business Valuer.
- Agree on the valuation model to be used on exit. Will the increase in the value of the business be proportional to the equity or based on effort ?
- What if one party wants to increase/decrease their equity.
- Include the exit or acquisition valuation model in the Buy-Sell or Partnership Agreement
- Revisit the Partnership every year to check in to see if it’s meeting both partner’s objectives.
Must haves before you enter a Business Partnership
Partnership (Buy-Sell) Agreement (choose a Solicitor who specialises in this)
Job Descriptions and functional responsibility of Partners
Partnership insurance (key person, equity life and disability)
Personal Insurance (Income Protection)
Inspiring Business helps business owners who are in partnerships or intending to enter into a partnership maximise the business potential