There are a variety of reasons why you may want to bring a partner onboard in your business. For some companies, it’s to raise capital, while for others it’s a necessary component of expanding their business.
Whatever your reason for taking on a partner, it’s a decision that will change the future of your company. Partnering with the right people and engaging under terms you both find agreeable is one of the most significant challenges any entrepreneur will face in the business life-cycle.
If you’re considering taking on a partner, read through these 4-steps to establishing your business partnership before you enter negotiations.
Partnerships Explained
As partners in business, you are both exposed to the risks and the rewards. Ensure that you take a long-term view of the impact on your company before you form your partnership. Think about why you need a partner and how it will affect the dynamic of your company moving forward into the future.
Questions to consider in your due diligence should include; what kind of partner do you need? How will they add value to the company? What if they don’t work out? How will it affect your tax situation? These are all critical questions that require serious thought before introducing a potential partner to your business.
- Select the Right Partner for Your Business
Ask yourself what your partner can bring to your company, where is their value? If you’re taking on a partner purely for financial incentives, like boosting your capital account, you may want to limit their involvement in the business.
A silent partner, or angel investor, is the best option in such a scenario. They add value to your company while still letting you maintain control of operations. In circumstances where you are partnering with someone that will be working with you in your business, consider if they are a good fit.
Partnering with someone that takes an active role in your company can result in a volatile situation. If the partner doesn’t understand or want to deal with your company culture, it can sow the seeds of discord among your team and derail your business.
For example, if your retail company requires your employees to wear custom lapel pins, and your partner refuses to wear one, it will disrupt the culture balance and your employees will begin to complain.
- Identify Partner Contributions
Always ask yourself how the partner will add value to your business. This question will provide you with clear directions on how to structure your partnership agreement.
Every partner in the business needs to make a financial contribution that’s directly related to their involvement in the company and the number of shares awarded in the partnership agreement.
Make sure that you value your company correctly. Speak to your accountant to work out your valuation, then attribute a cost to the percentage of the company you are willing to sell to your partner.
- Select the Type of Partnership
What role will your partner play in your business? Here are the three types of partnership options available to you. Check with your states business division to see what options are available to you.
Equity and salaried partners – Will the partner be offering a financial contribution in return for equity in the firm? Alternatively, will they be drawing a salary?
General partnership – Partners that work in the day-to-day operations of your business.
Limited partnership – Includes both limited and general partners.
Limited liability partnership – This structure offers liability protection for both partners, reducing risk.
- The Final Step – Create a Partnership Agreement
Don’t make the mistake of forming a partnership based on a verbal agreement. This strategy will come back to haunt you if something goes wrong in the future.
Always ensure that you have the terms of your partnership clearly defined in a partnership agreement. Visit your attorney and have them draw up the contract. Your attorney will handle all of the legal details, such as registering the partnership with the correct authorities, as well as ensuring that you’re receiving a fair deal.
