Business Partnership: 17 Factors to Consider Before Entering One
Are you considering going into a business partnership? It is imperative that you count the cost first.
In order for a startup to thrive, certain prerequisite skills and resources must be in the picture. Most times, it is difficult for just one individual to have all these skills and resources. This is why business partnership is important. So, having someone to start a business with you in partnership is a blessing because you get to pool resources (both tangible and intangible) to make the business start faster and grow faster.
However, what you want to avoid is to go into a partnership with a naïve mindset. The person(s) you are considering to be your business partner(s) is probably your best friend and you do not see any way you are going to have issues with them in future.
Experience has taught me that going into a business partnership like this will definitely lead to some trouble. I have had my own troubles. Granted, we cannot avoid a business partnership in some ventures. But never get into a partnership without a plan.
I suggest you consider a number of factors before entering a partnership with anybody.
Who is “Anybody”?
Anybody includes your brother, sister, father, uncle, aunt, mother, son, daughter, husband, wife, boyfriend, girlfriend, friend, former business partner, present business partner, pastor, imam, grand master, employer, employee, debtor, creditor, landlord, tenant, student, teacher, coach, accountant, lawyer, lover, boss, colleague, twin, etc.
Who the person is does NOT matter at all. Ensure you consider the questions I have asked below.
- What is each party bringing to the table? Is it just skills? What do the skills grant the person in the stakeholding of the business? If it is just skills, will the person get to work daily or weekly for the business? If it is money the person is bringing on board, what does that grant him? This must all be written down!
- How do you compute each party’s percentage ownership of the business? What factors will you use to determine that? If any of the partners reduce their commitment to the business partnership, will it affect their percentage ownership?
- When can each party borrow from the business? How much is the limit? What is the mode of paying back? What is the pay back tenure?
- How often will dividends of the business be shared? This should define how often you will share proceeds from the business.
- What about the infusion of funds? Businesses can thrive when more funds are introduced. But there has to be a procedure for that if it is a partnership. If one of the parties provides funds for the business at any point, would it be considered a loan or an investment? How will it be measured?
- How does #5 affect the ownership structure?
- What are the penalties if anyone falls short of their obligations to the business? These should also be documented.
- What is the tenure of partnership? There are no “forever partnerships.” So, from the very beginning, you should agree on how long the business partnership should last. That may be difficult if you are very close but still go ahead to determine that. I always suggest 3 years. If after 3 years, you wish to continue, create a new Memorandum of Understanding (MOU) and start another 3 years.
- If you decide to split after the first 3 years, what would be the sharing formula? This must be agreed upon by all the parties involved before you even start. I know of two doctors who started a clinic together some years ago. After a while, they went to another area to start another clinic. When the tenure of the partnership was over, each of them took a location.
- What is the exit strategy for anyone who needs to leave before the first tenure ends? It must be agreed upon. Maybe one person should give up some shares and retain part ownership of the company or whatever you agree upon from the onset. These things should be well thought out and documented.
- If any of the parties involved dies, what will happen? Can a person of their choosing continue from where they stopped or should the remaining parties just pay their benefactors (as stated on their will) off? What if there is no will at the time of death?
- If one of the parties is involved in an accident or venture that affects their participation in the business partnership, what happens?
- Would one party be involved in just supplying funds and another involved in also supplying funds while at the same time involved in the day to day running of the business?
- How much money can the one running the business approve for something without having to consult the others?
- When tough decisions need to be made quickly, who should be trusted to be responsible to make the call? That is the person who should be the captain. There can be no 2 captains in a boat.
- Do all parties have the right to hire or fire anybody they deem fit to?
- Do all parties have the right to speak with the media or members of the public on behalf of the company?
ALSO READ: Business Mistake: 7 Costly Ones You Must Shun Part 2
Why you should consider the factors above
- People change.
- Disagreements would naturally present themselves.
- You don’t want to destroy a formerly cordial relationship.
- People can hurt their best of friends because of money and fame.
- Money is involved and people can become irrational when it is in the equation.
There are many more factors that should be considered.
You can suggest some in the comment section below.
Kindly leave a comment or question below. I will reply quickly.