Starting a new business can be an exciting time, laden with opportunity and risk. For many small business owners, starting (or expanding) a business with a partner can offer significant advantages, from the ability to raise additional capital to new and complementary business skills. But business partnerships can pose their own challenges, so it’s important to understand the factors entrepreneurs should consider when evaluating a potential partner.
As the Covid-19 recession exposes more small business owners to the possibility of bankruptcy or other financial stresses, doing your due diligence when selecting a business partner is more important than ever.
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Ideally, a business partner brings a host of resources, skills and talents to your enterprise that enhance your venture’s chances of success. But it’s important to acknowledge that adding partners to your venture can add complexity that may be challenging. That’s why it’s essential to clarify expectations, roles, and contributions, ideally contractually.
The Small Business Administration offers a wealth of support for entrepreneurs in navigating business partnership.
While a “handshake” agreement can suffice in many instances, it can be prudent to formalize your partnership agreement in the event of any disputes or unforeseen events. It is also helpful for tax clarity, since each partner must report their share of business income or loss on their personal tax returns.
When evaluating a potential business partner, consider these professional attributes:
- Creditworthiness & financial integrity: A strong credit history and lack of financial blemishes can be indicative of the sort of responsibility and good financial management essential in a partnership. It’ll also be helpful for securing additional loans or funding at the best interest rates and terms.
- Experience in your industry: Positive experience in a similar or related business or industry is advantageous, not only because of the skills a potential partner has developed, but also because it makes your business more attractive to investors. A track record of success breeds confidence.
- Business acumen: Does your prospective partner have good financial or accounting skills? Are they strong salespeople or marketers? Having such business acumen will be instrumental to operating your business.
- Complementary strengths: Similarly, if your strengths are in quantitative areas, you may opt for a partner with strong marketing or networking skills. A good partner complements your existing strengths.
- Similarity of vision & values: Sharing a similar vision for the company’s success, as well as aligned values, can help ensure you work harmoniously toward joint goals.
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How you divide responsibility in a business partnership is a bit more complicated than it sounds, especially if you enter into a formal partnership agreement. Considerations include:
- Active vs. silent partnership: Will this partner have voting and decision-making rights, or will they merely be silent investors?
- Day-to-day responsibility: What roles will you play day-to-day. Clearly delineating responsibilities allows each partner to focus their talents and efforts where they will be most effective, and minimizes any potential disagreements.
- Capital contribution: How much capital will each partner contribute? What share of the profits will they enjoy?
- Dispute resolution: Have a clear plan for how you’ll address any disputes – including legal ones.
Of course, personal chemistry and friendship can and should play a role in partner selection, but they shouldn’t be the sole – or even principal factors – in your selection, according to the Harvard Business Review. That’s because your venture’s operations rely on much more than amicable relationships for success, and choosing a partner that adds value and essential skills to your business can boost your chances. Plus, the dynamics of a friendship can create emotional reactions that can impact decisions that should be guided by reason. Keeping the focus solely on your business can help you forge relationships that can strengthen your position in the marketplace.
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