1) Understand Individual Motivations
As we mentioned, an individual must be able to clearly state—and understand—why he or she is starting a new business. Is it solely to create capital? Do you have an excellent idea that you think the world needs to see? Do you have a product or service that is so unique you cannot wait to share it? Or, are you filling a necessary niche that market research has informed you of, so the expectations for revenue are high?
Whatever the reason for starting a small business, it is also important to reframe these questions for the purposes of understanding your new partnership. Why have you chosen this business structure, and what do you hope to get out of it? What are your reasonable expectations for the business in one, five, or even ten years? Where do you see room for growth? More importantly: what do you expect from your partner, and what does he/ she expect from you?
Being one with these individual motivations will help you to be able to present them to your partner and also understand his/her motivations. It will help to give some thought to the nature of the person you are going into business with so that you will be able to more clearly understand who they are, why you chose them, and why they selected you. Do they have the same interests in your business, or are they different? Will a business partnership strengthen the business, or is it possible that this business would work better as a sole proprietorship? For every capable partnership out there, business partnerships are formed for the wrong reasons, so be honest with yourself about your true colors and motivations.
If you are partnering up just for more cash flow, or you are worried about investing time and capital into a new business by yourself, a partnership may not be right for you at this time. Ideally, you think that this new partnership will enable both of you to reach new heights, learn about each other, and succeed more rapidly than if you were doing it alone. Be sure to consider your long-term goals and those of your partner at this point.
2) Find a Business Partner Who Compliments Your Talents
We’ve covered some aspects of the importance of motivation, but did you know that forming a profitable small business partnership is similar, in some ways, to finishing a jigsaw puzzle? In a puzzle, the challenge lies in finding the pieces that fit and lining up the jagged edges, so they complement each other. This process is rewarding, and so is finding a business partner whose talents line up with your own.
Now, this does not mean that both partners need to be exactly the same or even similar. We each have individual talents and resources that we draw from. We also all have unique approaches to problems and overall outlooks, which are in part inspired by our experiences and backgrounds. The key here is in how individual strengths offset individual weaknesses. For example, how do your business partner’s critical talents work together with your own talents?
Partnering together, if done correctly, creates a whole that is greater than its separate components. An entrepreneur should be able to clearly identify the ways in which his or her business advantage is improved by the addition of their partner—and the reverse should also be true. Let’s simplify this. If Pete is great with numbers and inventory and is starting a restaurant, he has a pretty good shot. But if Pete adds Mary to the equation, who is a whiz at being the front of the house and the “face” of the business, he gains enough technique and skill that the sum of the partnership is greater than the individual numbers. Now, if Mary is also great with numbers, then this does not hold up quite as well; but Mary can’t do everything!
The point here is not only about recognizing strengths and using them to one’s advantage; it is also about respect. If your partner respects your contributions to the business and you understand the value of his/her different contributions, then your business will be set to prosper. Lastly: often, we partner up with friends or family, which can make objective evaluations like this difficult. Do your best, and if needed, contact an outside party for a more reasoned and detached look at each of your distinct talents.
3) Compare Visions, and Create Collective Goals
Sometimes, we grow excited at the idea of starting a small business partnership and lose some of our focus on the most concrete goals and visions we have. For example, when you envision the business, do you picture a smaller-sized local entity that will grow slowly over time? Or do you envision a snappy startup that will triple its growth and revenue in a year?
The point here is to recognize and identify the vision you have for the business and be honest about it with your partner. Your visions and goals do not have to be identical, but they do need to be shared and approved by each other. Likewise, you may have a different five or ten-year plan than your partner, but each of you should be aware of what that is and how the business fits into it. Do not wait until later in the process to find out that your new partner only wanted to work hard for a year and then retire for good. While he was banking on selling the small business and cashing out, you were hoping for a strong ten years of due diligence and growth. This is just an example of how divergent visions should be compared early in the process.
So ask yourself: where do you see yourself and the small business in three years, six years, and nine years? And then, turn around and ask your new partner.
4) Find Out Where Your Personal Values Overlap
Our personal attitudes are a funny thing. They are inspired by our friends and families, the world around us, our past experiences, and even our own singular concept of ourselves. It is the same thing with personal values, and an entrepreneur’s values and way of life may figure into the business in a greater capacity than people believe—especially in terms of a partnership.
The fact that your small business is dedicated to following the law, licensing the business, and making sure all legal requirements are taken care of should go without saying. Making sure that your business dealings are lawful should also be automatic. However, many entrepreneurs find that in their careers, they face important decisions that do not have black and white answers, and this is where personal ethics and morals come into play. The business world can become distorted by jealousy and greed, and for every ten outstanding businesses that are in it for the right reasons, there are a few that find it acceptable to cut corners or ignore the ethical demands of our society. Good business is about the pursuit of revenue, of course, but it should also be anchored in morality.
Making sure that your partner shares your overall sense of values, and cares about the well-being of others, is crucial. Why not talk openly about this or even fill out a values exercise (these can be found online)? Doing so will enable you to talk about issues outside of the business and figure out if working together will create any volatile situations. Let’s be clear here: we are not suggesting that partners need to share political affiliations or even the exact same belief system. However, they should fundamentally share a moral code that goes far deeper than simple business ethics. They should be committed to equality, fairness, and respect for fellow men and women unequivocally.
5) Set Relationship Goals
No, we do not mean that kind of relationship goal. However, we have already established the fact that a small business partnership is a working relationship, so let’s continue in that vein. When business relationships are clearly defined and well-thought-out, solving conflicts, making tough decisions, and generally overseeing day-to-day business becomes easier. Discussing the way each of you sees the partnership working, now and in the future, is the best way to establish mutual goals. It is smart to be specific about all of your expectations and share this with your partner. If not every single idea meshes together, that is alright, as long as both partners still see eye to eye about the significant roles and responsibilities involved in the business. The next few items on the list will delve a little deeper into how to set these all-important relationship goals.
6) Designate Roles in Your Partnership
One of the most important aspects of the work that you will do before setting the business in motion is designating proper and precise roles. We suggest a hands-on approach: after discussing this with your partner, have both individuals write down informal job descriptions for themselves. While these are really only for your own use, they should outline the main areas of responsibility that each individual will focus on. Make them as specific as possible so that later, you do not realize that some of the vital business responsibilities have been forgotten.
Once both partners have written out their job outline, it is time for the most important part: sit down and have a conversation. Share the job outlines with each other, and engage in a productive dialogue. Does anything surprise you? Are there areas of overlap that should be taken care of so you do not waste time doing the same thing? Once you feel good about each other’s main company roles, revise the job descriptions as you see fit, and print or save copies of these. Now, you have a record of designated responsibilities to guide the small business partnership.
7) Discuss and Establish Schedules and Overall Time
Here is an essential distinction between going over with your new business partner, ideally before you open up shop. How much overall time is both of you planning on giving to the business?
First, individuals must make sure to establish whether this is a full-time endeavor or a part-time gig. Sometimes, business owners develop a new company as a part-time business, and then when it creates enough revenue, pursue it full-time. All of these decisions are up to both partners, so make sure that your visions and goals coalesce. Second, go over how much time you can spend on the new business in practical terms. Getting enough sleep while trying to start a new small business partnership can be difficult, and many Americans struggle to get enough rest these days. It is smart to be aware that while you may want to give everything you have to support this new venture, one cannot make important decisions while low on valuable rest. Also, are there other concerns that might make a full-time commitment to the business impossible, such as family time or caring for others? Go over all of this with your partner, so each of you has reasonable expectations for how much time and effort will be required.
Lastly, many businesses find that a nice equilibrium can be established without an equal time commitment. Sometimes, one partner simply has more time to give or wants the business to be their full-time gig. This can work out perfectly fine as long as these roles are defined ahead of time. However, if expectations for time commitment are not discussed early in the life of the business, the difference in working hours can lead to disagreements. Shared responsibility is a significant aspect of any partnership, but it is up to you how you share it.
8) Use Performance Indicators and Have a System for Conflict Resolution
Critics may suggest that measuring contributions can create a disparity between partners, but we feel that defining concise ways through which to measure contributions leads to better performance. Starting a small business partnership is difficult and stressful enough, and it can be tempting to assume that your partner is heaping all the work on you since you noticed they left early one night. This kind of suspicion and resentment can damage the partnership and the entire business, but the solution is reasonably simple: performance indicators. These can come in many forms, and we will leave it up to you regarding how you would like to measure things such as completion of daily tasks, sales, recruitment of new customers, and marketing and advertising, but the key is to have a clear chart or system. This will help maintain harmony and also provide subtle motivation for each partner. Some businesses even make this into a sort of competitive game, if you can handle that!
Also in this category is the concept of conflict resolution. There will be times when one partner, for one reason or another, is performing below expectations. While that does not automatically doom the business, a level-headed solution is needed, and quickly. So, how will you resolve the disagreements that are bound to occur within even the most successful partnerships? One thing that will help is the establishment of some ground rules through which to resolve conflicts, so you know where to turn when things get a little rocky. Now, everyone deals with conflict differently, which may be true of yourself and your partner. Some prefer to jump in right away in an effort to nip things in the bud; others prefer to wait, think things over, and let everyone cool off. Still, others think that speaking with a business coach or mediator provides an appropriate sounding board.
Our suggestion is to talk your way through a few different scenarios and possible fixes before any problems occur—and ideally before the company is set in motion. This way, when a conflict arises, there will be a formula to follow for a rapid resolution, so you can get back to what is important: running a successful business.
One last thing: as much as people do not want to think about it, issues such as lawsuits will arise with vendors, customers, and building owners; you name it. Before you begin selling your services or goods, discuss plans to deal with these complex situations. Some things to think about: what happens if a dispute with a customer or vendor cannot be settled? Will you use an arbitration clause? Obviously, everyone hopes their business career will be smooth sailing, but it is always better to be prepared for the worst than unprepared.
9) Get on the Same Financial Page
The main reason you formed this exciting new business partnership is clear: to create revenue and run a profitable entity at the end of the day. The relationship with your new partner is financial in nature, so finances must be discussed extensively before the partnership and business begin running. Now, many of us shy away from talking about our finances. However, that simply cannot be the case in this type of relationship and within the company. Even though financial decisions and debates can quickly get personal, the key is to see them through the lens of the business and remain clear-headed. While your relationship with your company partner obviously will have personal moments, it is best to keep financial calculations clear and objective.
First off, have you clarified among partners how financial contributions will work? Many business partners avoid speaking about this directly, assuming it will “work itself out,” but we are here to tell you that can create future problems. Important questions for a small business range from:
- How much capital should each partner contribute, and how much are they financially able to give?
- Who will contribute more, or is the plan to keep things on an even playing field?
- When do investments need to be made, and who is in charge of keeping track of the money that is spent?
A specific financial agreement that is signed by both parties—no matter how friendly the partners are—will allow for clear rules and no “wiggle room,” which can create problems in this sphere. Some partnership agreements include a financial section, but if yours does not, we recommend drafting up one, and a licensed attorney can help you with this.
One last note here: if your business partner is only part of the business because of his or her financial contributions, then we advise that you rethink the partnership, as this is usually not a sound starting point. If you are counting on this financial capital, then you have found an investor, not a partner, and this person should be treated as such. This sort of specific clarification goes along with one of the most important themes in this article: establish roles and clearly understand the partnership before you begin. This anticipatory action will help reduce the chance of problems later on.
10) Have a Clear Understanding of Contributions, Debts, and Financial Baggage.
When we think about financial contributions to the business, we instantly think of cash. However, partners have a lot of freedom in how they search out funding for a new business. While cash is common, and some would call it “king,” there are other means such as outside investors or business loans. These options should be weighed by both partners and then decided upon.
Next, the issue of debt should be discussed in all of its forms. While some of these conversations may be uncomfortable, we cannot emphasize enough the need for honesty and transparency when starting a business partnership. An individual’s partner, for example, may have a tolerance for a different level of debt than they do. All assumed debt comes with financial risk, so this is another important issue to cover in early conversations and debates. Other questions to ask are as follows:
- Are both partners comfortable with using the business credit card for short-term expenses?
- Is one or both partners willing to sign a personal guarantee for a new loan or put up collateral?
- What loan sizes are preferred?
The answers to these questions will likely lead to discussions about partners’ outside liabilities and financial baggage. Generally, everyone has some form of debt or another, whether it is school loans for themselves or their children, the house, or even linked to cars or credit cards. However, honesty is essential here because partners need to understand any limitations that might be placed on their cash flow, including the ability to get a loan for the business.
Be careful when a new partner is hesitant to reveal their economic history. This could mean that the individual has some financial skeletons in the closet. When entering into a business partnership with someone, it is important to note that the partner’s finances become tied together. So, just as a partner who is honest about their positive financial history can be a boon to business, an individual who is dishonest about their past can hurt the company.
11) Go Over Credit Reports and Business Expenses
If an individual’s partner is amenable to it, running a credit check using either Experian or another industry leader is great. Partners should be comfortable sharing their credit history with each other—after all, you will be running a business together! Also, when applying for a business loan, the first information that lenders will see are these credit checks, so being transparent about this information creates trust and stability.
It is true that some business partners balk at sharing this much information so readily with their partners. However, being willing to share personal financial information can provide comfort to one’s partner, who is placing a lot of trust in the business union. If it is achieved early on in the business, transparency is one of those things that will continue to be rewarding as the business prospers and grows.
Business expenses can quickly add up, and it is human nature that different people have different spending habits. Some people tally up every cent they spend, and others are more casual in their spending habits. Since overspending—or refusing to pay for something that one partner deems crucial to the business—can provide fuel for arguments, it is wise to establish a budget for the business and do your best to stick to it.
Designing a reasonable budget should help stabilize spending. Business partnerships should also keep track of daily, monthly, and weekly spending so they are able to track trends. An important question for any partnership is: how will they decide on and handle extra expenses? When business purchases need to be made—for example, a new laptop is necessary because the old desktop has stopped working—have you deemed it necessary to discuss it with your partner first? How do you designate minor and major purchases? There are more questions like this, and they will depend on the nature of the company, but the point here is that financial ground rules, when established early in the process, will help eliminate mistakes, alleviate stress, and avoid business partner conflict. Sounds good, doesn’t it?
12) Discuss Salaries and Business Profits
Many business partners decide that they need to allot themselves each a salary of some type, even before the business has created any genuine revenue. This is usually done simply in order to pay for rudimentary living expenses. If it becomes clear that this is the case for one or both partners, it is time to discuss a practical number that fits the unique situation. If there will be only one salary needed, make sure to address how that could impact profit-sharing for the business.
When business partners attempt to address profit-sharing and come up with a comprehensive plan that works for everyone, it can prove a challenge, but these questions may help you to identify the key factors for your unique partnership’s needs. Of course, every business partnership is different.
- Which partner is expected to provide most of the expertise or the personal connections?
- Which partner will be providing most of the financing, or will this be shared?
- What are the plan for time commitments and other vital responsibilities; will they be split, or will there be a clear system in place?
Discuss the answers to these questions and more with your business partner, and record the results so that you will be able to refer to them when things are moving forward.
13) Choose a Structure for the Partnership
You cannot afford to gloss over this step since, in many ways, the way your business is managed and run depends on the legal structure of your partnership. From a general partnership to an LLC, the choice is yours. Why is this step necessary? Your business structure will dictate personal liability, tax structure at the state and federal level, and even individual and collective responsibilities. Since business partners might have contrasting ideas regarding what structure might be best, make this decision a priority, and talk it out. Here are some popular choices for small businesses that are just starting out. Keep in mind that later in the life of the business, you can change your business structure to allow for company growth.
- Limited liability partnership: A partnership with limited liability includes the word “limited” for a reason. This structure works to limit the partners’ personal financial responsibilities for the business. The business equivalent of an LLC, or limited liability company, this structure comes with many of the legal and tax implications that make LLCs so popular. So why might you desire to choose this structure? If you are planning on a company with equal participation by both partners, this approach might make the most sense.
- General partnership: General partnerships are created when both partners are active in business operations and take on responsibility for any business debts. Generally, business owners find this structure amenable because general partnerships are easy to start; familiar here is that a general partnership does not protect partners from liability. We always recommend speaking with a business lawyer before leaping into a general partnership. This is especially helpful because an attorney can help evaluate any of the risks inherent in the agreement from a rational standpoint.
- Limited Partnership: When business partners know that their roles will be uneven within the business, limited partnerships are usually the top choice. For example, if one partner has decided to be an investor only, and the other partner will be responsible for day-to-day operations, then a limited partnership is the answer. However, while businesses appreciate the perks of this structure, be aware that not all partnerships are eligible for it. A business lawyer can help partners figure out if and how this structure can work for their business.
The goal here is, to be honest about which structure makes the most sense as the business gets off the ground. If a business partnership is already built on honesty, transparency, and clear goals, choosing the right structure should be a snap.
14) Identify Strengths and Weaknesses and Pin Down an Exit Strategy
We’ve spent a lot of time here on being honest with your partner about everything from finances to responsibility, and that theme continues. Being comfortable with your strengths and willing to teach others is an excellent quality in a person. Being aware of your shortcoming and willing and excited to learn and improve is arguable an even better quality. Within something as crucial as a business partnership, being able to share both your strengths and weaknesses is vital to the health of the business. Utilizing individual strengths and improving upon weaknesses can truly help a business thrive, so whether a partner is a best friend or a business acquaintance, it is crucial to understand their unique skill set.
Being aware of what you can learn from your partner and what they can learn from you is essential. Another important concept is the idea of an exit strategy. We are not saying that your new business is destined to fail; it is far from it. If you follow these steps and work hard, we predict great success for your partnership. However, sometimes even the most lucrative companies are not intended to last for decades or more. Every business has a different lifespan, be it months, years, or centuries. At some point, the time comes for even the most compatible and successful business partners to part ways. Even if the terms are not set in stone, planning for this eventual separation can help make this a manageable and even bittersweet occasion.
15) Have A Plan for a Buy-Out and Business Sale
We firmly believe that all small business partnerships should be prepared for everything, so be sure to have a buy-out plan in place before you open the doors. A buy-out takes place when one partner wants to leave the company, and the other is set on staying. The factors to think about here are a fair purchase price for the company, the process of the buy-out, the terms, the appropriate division of proceeds, and other issues. For example, what about stock options? There is much to think about here, so some planning is usually necessary. Consulting with a qualified business attorney is also smart when debating the best terms to include.
Sometimes, partners sell the business and split the profits according to their initial agreement. However, sometimes business partners choose to use separate terms. As always, a discussion and a written contract are paramount here to prevent misunderstandings, regardless of the amount of money being discussed.
16) Plan for Unfortunate Events in the Future
No one wants to imagine the death of their partner, nor do we want to think about an accident that could create a disability. However, since life is entirely unpredictable, filling out the necessary legal paperwork corresponding to these events makes sense. When most partners form the business, they include these types of legal documents in the operating agreement. Making sure that there is a plan in place in case of death or disability is not overly careful; it is realistic and wise. Just in case, speak with a lawyer about issues such as transfer of ownership. Different plans will be discussed depending on your business structure, so make sure to include both partners in the discussion, agreement, and signing of legally binding documents regarding the business. Who knows, sometimes a debate like this can make partners feel more of a sense of gratitude for each other and inspire more patience and understanding.
Forming a Small Business Partnership: In Review
Starting a small business partnership can be invigorating, as the Future suddenly is full of promise. Instead of setting out on your own, partnerships work because of the strength of both partners working in unison with each other. Small business partners will also undoubtedly face their share of challenges and adversity, so being prepared for this is essential. The more hard work and thought that partners put into preparing for their business careers, the better. This includes being open with each other, forging trust in one another, and understanding each other’s strengths and weaknesses. We wish you success in your business journey alongside your partner and hope this article has helped you along in the process.
If questions remain, or if you would like the counsel of a skilled legal professional as you navigate these critical steps, contact Nakase Wade today. We have helped guide many business partnerships through the startup phase and their entire careers, and we look forward to speaking with you.
