Tips For Making A Business Partnership Work

What makes a successful partnership business ?

The prospect of starting a partnership business can be thrilling. Hopefully, you have found a partner who works well with you, has tons of great ideas, and shares your vision for the business. Together you think you have all the necessary ingredients to make a successful small business.

Perhaps your partner is an old friend, or maybe you only recently met. Whatever the situation, it is always a good feeling to find an individual with whom you can create a business venture. That said, before you invest tons of money and time with this person, you should be sure to take a step back and study the partnership from all sides, for the benefit of both partners.

A successful partnership business is not too different than a marriage. Both relationships demand long-term compatibility, rather than short-term interest. Both partners need to share the same vision and values, as well as goals and resources.

To be sure, you do not have to be the identical twin of your partner when starting a partnership business. Not everyone is exactly alike or agrees on everything, after all. The best small business teams involve compromise. However, with the stress of putting together a new business, what at first may seem to be quirks can quickly become the source of rifts.

Luckily, you have the ability right now to put your partnership on the right path by doing one simple thing: creating expectations. This writing is informed by representing hundreds of partnership business as a Los Angeles business attorney; additionally, the best data comes from my first-hand conversations with business owners and their leadership team.

How do you set expectations for a partnership?

It may not be easy setting expectations with your small business partner. However, this is a crucial conversation to have. The goal is to discuss every possible aspect of the business relationship, both verbally and in writing, before going into business. Without first going over an issue and reaching an agreement, you cannot assume you know your partner’s stance on anything.

To help you make sure you and your partner are on the same page, check out the following list of twenty-three questions. It may be helpful for you and your partner to review these prior to starting your relationship. Try answering the questions individually and then comparing notes to find common ground. This exercise can assist you with evaluating your individual opinions and finding potential conflicts before they come about.

Understand your motives

When starting a partnership business, it is essential to understand why you are going into business. What motivated you to come up with this idea? What do you want to get out of this partnership? Also, why have a partner rather than running the business solo? Understanding your motivations can help guide the partnership in the right direction.

Why do you want a small business partnership?

What made you decide to start a partnership business rather than running the business on your own? To come up with an effective answer, try to think about the general concept of a business partner rather than the individual person you are doing business with. Sure, Jerry’s great, but what value does a partner bring?

Why is a partnership relationship helpful to your enterprise? Are the pros of having a small business partner worth the negotiations and problems that are bound to occur? It is important to realize that the fear of running a business solo is not a valid reason for choosing a partnership. Ensure that you are picking this business structure because it aligns with your long-term plans.

What does this business partner offer that you cannot do alone?

A successful partnership business demands a certain amount of respect that derives from the understanding that both partners are offering resources and talents. How do your partner’s talents match with your own? Does a partnership improve your venture? Especially if you plan to run the business with a relative or friend, think about these issues as objectively as you can. You may love your cousin Fred, but Fred’s baking hobby is not going to be much use when it comes to running your software company.

What is your vision for the business?

Are you hoping to create an explosive startup or a local mom and pop shop that you will pass down to your kids? Are you creating a business that you hope to sell in a few years’ time? How big do you envision your company growing? How much money do you hope to make? It is wise to envision where you see your company in one year, five years, ten years down the line. Compare this vision to that of your partner.

Do you share the same values?

Obviously, you and your partner should agree to follow the law when it comes to your business. However, some decisions will cross into ethical grey areas. Your business decision making will be naturally influenced by your personal values. Therefore, it is essential to your partnership that your values align.

How do you know the roles within the partnership?

If you can clearly define the roles each partner has in the partnership business, then it will be easier to solve conflicts, manage daily operations, and make decisions related to the running of the business. It is important to define the roles of each partner early on, so that when challenges arise, you will both be better equipped to navigate stormy waters.

What role will you have in the partnership?

You should create a job description for yourself, even as owner. What are your specific responsibilities? The more detailed you can get with this description, the easier it will be to gauge success and to prevent duties from being forgotten or ignored.

What responsibilities will your partner have?

You should also write a job description for your partner, outlining what you expect from them. You should then come together and discuss your expectations for one another, noting any differences and clarifying individual responsibilities.

How much time are you willing to commit to the business?

Is the business a full-time commitment, or are you planning on keeping your current job? While living sustainably, how much time can you offer to the business? Remember to be realistic and specific with your answer. If you are running on coffee and no sleep for months on end, you will suffer burnout before your business becomes operational.

How much time should your partner invest in the business?

While both partners do not necessarily need to make an equal commitment to the company in terms of time, it is important to know from the beginning what each can expect from the other. Outline the expectations you have for your partner’s time so that you both can address any differences. Sharing responsibility is key when it comes to running a successful business.

How will you measure each partner’s contributions?

Building a new business is stressful. It can be easy to jump to the conclusion that your partner is not pulling their weight. To prevent resentment from building up, you should establish objective and clear performance indicators at the get-go. This is a surefire way to measure each partner’s contributions. Thus, if one partner fails to meet expectations, there can be a reasonable conversation based not on feelings, but facts.

How will you settle arguments?

The reality is that every partnership encounters disagreements. Before the first dispute comes about, you should establish some rules for resolving conflicts.

When tensions are high, how will you make decisions? Is it preferable to solve problems immediately, or is a cooling off period of a few days better? Are you two open to bringing in a business coach or a partnership counselor to help steady your relationship? You should discuss various conflict resolution scenarios to have a better idea of how things will go when conflicts inevitably arise.

How will you settle disputes with vendors, customers, and each other?

It is not pleasant to contemplate the possibility of a legal dispute or lawsuit, but the reality is that these things happen in the business world. Think about whether you will include an arbitration clause in vendor or customer contracts to reach a settlement privately. Also consider what will happen if you and your partner encounter a disagreement you cannot resolve on your own. While everyone is getting along, you should make as many decisions as you can so that you have a clear path designated for when problems do arise.

How do you identify your financial viewpoints and roles?

In the end, the purpose of a business venture is to make a profit. A partnership is also a financial relationship, so the topic of finances needs to come up at the very beginning.

Of course, we are all brought up not to talk about money in polite settings. However, in a business partnership, straightforward and honest conversations about finances need to take place. While decisions about finances can be very personal in nature, the next questions should be discussed from a business perspective.

How will both partners contribute monetarily to the business?

Ironically, making money is expensive. When you are in a partnership, the topic of investment naturally comes up. Who will contribute money? How much capital can each partner contribute? When do investments have to be made?

The details of who will offer monetary support are usually outlined in a partnership agreement. It is important to bear in mind that the need for financial resources is not a good reason to take on a partner. If a partner’s sole purpose is to provide capital, they are not a partner but an investor. It is important to understand the difference and establish your relationship thereafter.

What is your partner’s debt tolerance?

During the conversations about finances, you should remember that upfront cash is not the only contribution you can make as a partner. It is possible that you may look for outside investors or take out a business loan to fund the enterprise. This is the kind of decision that partners need to make together.

People have their own levels of debt tolerance, as well as the risk that goes with it. Before jumping into a business partnership, you and your potential partner should speak about going into debt for the enterprise, as well as individual tolerance for risk.

If a loan is acceptable, what size loan would you take on? Are you both okay with putting up collateral on a loan? What about signing a personal guarantee? Are both of you okay with financing short-term expenses on a credit card? You should come up with specific scenarios that may come up so that you understand how you both will manage debt in the partnership.

What financial liabilities does each partner have?

The likelihood is that both you and your potential partner have financial liabilities that may affect your income needs, cash flow, and ability to get a business loan. Though it depends in part on how your business is structured, you and your partner are financially connected. It is crucial that you are aware of any financial issues your partner has.

If your partner is hiding information about their financial situation, you should process carefully. If you are insistent about continuing with them, you should pick a business partnership structure that limits your own liability.

How is your partner’s personal credit?

If your partner agrees, you should think about checking each other’s credit reports through one of the major reporting agencies (Experian, TransUnion, Equifax) and sharing that data with each other. After all, credit score is the first information that lenders will look at when considering offering your business a loan. Therefore, it will be useful to have that information at the beginning.

By sharing credit histories, you both are committing yourselves to a high degree of transparency. For this reason, not every partner is prepared to do so. That said, you should recall that every successful partnership is founded on transparency and honesty. If you are willing to be vulnerable with your business partner, this is an act of good faith that can make both sides more comfortable with each other.

How will you handle business costs?

Are you naturally a frugal person, or do you have spendthrift tendencies? Overspending can cause a lot of disagreements between partners in a small business, but these can be avoided by creating a business budget and sticking to it.

Choose a budget that is reasonable and then think about how you will deal with additional costs. When will you purchase things on your own, and when will you be dutybound to discuss purchases with your partner first? The clearer your ground rules, the easier it will be to avoid conflicts over spending.

Will you or your partner take a salary before turning a profit?

Your or your partner in your small business may need to take a salary to cover the basic cost of living before the business turns a profit. You should decide on a salary figure that is reasonable for your situation. If only one of you decides to take a salary, you should assess how this difference will affect your profit-sharing structure.

How and when will the company’s profits be distributed?

There is no one correct way to design a company’s profit-sharing structure. The decision will rely on a few main factors. Who is responsible for most of the financing? How will time commitments or responsibilities be divided? Who will supply most of the expertise or personal connections? These factors affect how you decide to divide profits. You should talk with your partner about when and how you intend to divide profits. This plan should be put in writing so that everyone understands the terms.

What kind of partnership structure will you pick?

The legal structure of a business partnership affects many decisions related to how the business is operated. Selecting a structure will affect personal liability and responsibilities in addition to how the business is taxed at the state and federal levels. You should check with your state’s Secretary of State website to learn more about how to structure your partnership.

The following are the different types of partnership structures you can choose from:

The legal frameworks you choose for your business partnership will impact various aspects of how the company is operated. Your choice of structure will outline your roles, liabilities, and determine the taxation of your business at both federal and state levels. Visit your state’s Secretary of State office website for further guidance on structuring your small business partnership.

Below are different models for structuring your partnership:

1. General Partnership: This type of partnership is for when all partners actively participate in business activities and jointly shoulder the business’s debts. General partnerships are favored by many business owners due to their simplicity in initiation and flexibility in adopting various business formats. However, it is important to understand that a general partnership offers minimal protection to partners from legal liability. Consulting with an attorney before entering a general partnership is advisable to assess the associated risks.

2. Limited Partnership: This structure is typically chosen when business partners have varying levels of involvement in the day-to-day operations. For instance, if one partner primarily serves as an investor without direct participation in daily activities. Not all partner arrangements are eligible for limited partnerships, so it is recommended to consult with a business attorney to determine if this structure aligns with your specific situation.

3. Limited Liability Partnership (LLP): True to its name, a limited liability partnership limits the individual financial liability of each partner. It is akin to forming a limited liability company (LLC), with similar tax and legal implications. If you and your small business partner both contribute equally to the partnership and seek reduced personal financial exposure, a limited liability partnership may be the optimal structure for your business.

What are your strengths and weaknesses?

Recognizing and openly discussing your strengths and any areas for improvement with your potential business partner can pave the way for enhanced business expansion and a stronger partnership. Even if your business partner happens to be your closest friend, you may discover untapped business strengths in them, or vice versa.

Understanding the areas with potential for development and knowing how to leverage each other’s expertise can prove immensely valuable when you are deeply engaged in the day-to-day operations of your business.

Have an Exit Strategy

Even the most successful small business partnerships have a natural lifespan. Whether it is a matter of months, years, or even decades, the moment will inevitably arrive when you and your small business partner will part ways. Having prepared for this eventuality will make the transition much smoother to navigate.

Do you have a buy-out plan?

A buyout typically happens when one partner in a small business wants to exit the venture while the other intends to carry on. In such a situation, how will you establish an equitable buying price? What criteria and procedures will govern the buyout?

How are proceeds from a sale divided?

Typically, small business partners who opt to sell their venture divide the earnings based on their pre-established profit-sharing arrangement. However, others may choose to implement distinct terms for a sale. You and your partner should think about the situations in which you might contemplate a business sale, and draft a formal agreement specifying your terms.

What happens if a partner is disabled or dies?

While it is not a pleasant topic to dwell on, there is always a possibility that either you or your partner may not outlive your business. When you finalize the legal documentation for establishing your small business partnership, it is imperative to also have legal provisions in place outlining contingency plans in the event of a partner’s passing. Speak with your attorney regarding different avenues for transferring ownership, and together determine the most appropriate solution for your specific business framework.