The beginnings of a small business partnership can resemble a teenage summer romance. This person just “gets” you. You’ve got a great idea, you agree on everything … you’re going to take over the world together!
Whether your newfound business interest is with a long-time friend or someone you’ve only recently met, there’s no denying the adrenaline rush of those early days.
Even so, you probably wouldn’t run off to Vegas and marry that summer fling just yet, would you? (Or maybe you would, in which case—tell Elvis we said hello!)
In all seriousness, we know that hot summer romances don’t necessarily translate to lasting marriages, and the same is true for business partnerships. So before you go too far down the path of turning your big ideas into a real-life joint business venture, let’s all slow down for a minute and let cooler heads prevail.
What Makes a Strong Small Business Partnership?
The marriage comparison to business partnerships may be cliché, but that’s with good reason. Like a successful marriage, small business partnerships require not just short-term mutual interest but long-term compatibility. You need compatible values and vision, compatible financial resources and expectations, and compatible goals.
Of course, compatibility doesn’t necessarily mean being exactly alike or even agreeing on everything. The best business partnerships involve some give and take. But under the stress of building a new business, differences that at first seem quirky or even complementary can turn into major rifts.
Fortunately, you have the power to set your business partnership on the path to long-term success with just one simple step: set expectations.
Set Expectations for a Successful Small Business Partnership
We admit, calling this a simple step might be a bit misleading. Because while setting expectations should be a straightforward process, it’s by no means easy to do! Your goal in this exercise is to clarify every conceivable aspect of your partnership relationship—both out loud and in writing—before any dotted lines are signed. Don’t presume to know your business partner’s position on anything without first discussing the matter and agreeing to a written definition!
To guide you in this process, we’ve designed 21 questions you should be able to answer before starting a small business partnership. It may be helpful for you and your potential business partner to each review the questions below on your own and answer them individually before coming together to compare notes and find common ground. This can help you really evaluate your individual perspective and identify areas of potential conflict before they arise.
So, grab your notebook and get ready for some tough questions. You won’t want to skip these 21 must-knows before starting your small business partnership!
Know Your Motivations
When you’re starting a business with another person, understanding why you’re going into business becomes all the more important. What is your motivation for the business venture? What do you hope to get out of the relationship? Why do you want to work with a partner instead of going it alone? Know your motivations so you can steer your partnership in the same direction.
Why are you considering a small business partnership?
What is your motivation for pursuing a partnership business instead of going it alone? To answer this question effectively, think less about the particular person you’re going into business with and more about the idea of a business partner in general.
Why is a partnership structure beneficial to your venture? Will the benefits of having a business partner be worth the complications and negotiations that come with it? Remember that the fear of going it alone isn’t a good enough reason to form a small business partnership. Make sure that choosing this business structure fits with your long-term interest.
What will this potential business partner bring to the table that you couldn’t achieve on your own?
A healthy business partnership requires a level of respect that comes only from the understanding that you’re both bringing critical talents and resources to the table. How do your prospective business partner’s talents complement your own? How does partnering together make your business venture more successful than if you were to go it alone? Particularly if you are considering going into business with a good friend or family member, evaluate these matters as objectively as possible.
What is your vision for the business venture?
Are you seeking to build a fast-growing startup or a small local business that you’ll hold onto for years? Are you building your business with a future sale in mind? What are your expectations for your business’s size and annual revenue? Paint a picture of where you see your business in 2, 5, and 10 years, and compare that to your partner’s vision.
Do you and your partner share the same personal values?
It should be obvious that you and your business partner both intend to follow the law in your business dealings, but not every decision you face will be ethically black and white. Your personal values will naturally drive your business decision making, so values alignment is critical to your relationship with your business partner. Consider completing a values exercise together to identify what’s most important to you and determine whether your standards and priorities are well matched.
Know Your Relationship
The more clearly you can define your relationship with your business partner, the more easily you can make decisions, solve conflicts, and manage the day-to-day operations of your business over the long term. Answer and discuss these key questions about your business relationship before the going gets tough, and you’ll be better prepared to weather the storms of business ownership together.
What role will you hold in the small business partnership?
Outline a job description for yourself within the company. What will be your areas of responsibility? The more specific you are with this definition, the easier it is to measure success and avoid letting key responsibilities slip through the cracks.
What responsibilities do you expect your partner to fulfill?
Using the same “job description” format, define what you’re expecting from your partner before you come together to discuss your roles. Notice and discuss your differences in expectations, and you can both overcome assumptions as you clarify your individual areas of responsibility.
How much time do you plan to commit to building the business?
Are you pursuing your business full-time, or still keeping your day job? How much time can your reasonably commit while maintaining a sustainable lifestyle? Be specific and realistic as you answer this question—sacrificing sleep and sanity could lead to burnout before your business even gets off the ground!
What kind of time investment do you expect from your partner?
You and your business partner don’t necessarily need to make an equal time commitment to the business venture, but you do need to know from the outset what to expect from each other. As with the roles definition above, outline your expectations from your partner’s time so that you can identify any disparity between expectations and reality.
How will you measure each partner’s contributions?
When you’re feeling the stress of building a new business, it’s easy to assume that your partner isn’t pulling his or her weight. To avoid mounting resentment, define clear and objective performance indicators from the beginning to measure each of your contributions. This way, if one or the other of you fails to follow through on expectations, you can hold a level-headed conversation based on facts instead of feelings.
How will you resolve disagreements?
Within a long-term small business partnership, it’s not a matter of if but when you and your partner will have a major disagreement. Before that first dispute arises, it will be helpful to set some ground rules for conflict resolution.
How will you make decisions when tensions are high? Do you prefer to resolve disputes right away, or do you need a few days to mull over your position? Are you open to working with a business coach or partnership counselor to navigate your business relationship? Talk through a few different conflict resolution scenarios to get a sense of how things will play out when conflicts come up.
How will you settle legal disputes with customers, vendors, and one another?
No one likes to think about the possibility of a lawsuit or legal dispute, but they are a reality of doing business. Will you include an arbitration clause in customer or vendor contracts to settle disputes privately? What happens if you and your partner reach a disagreement that you can’t solve on your own? Make as many decisions as possible while everyone is getting along so that if a legal dispute does arise, you have a clear path forward.
Know Your Financial Roles and Viewpoints
At the end of the day, the purpose of any business venture should be to generate revenue and turn a profit. A business partnership is a financial relationship, so discussing finances from the outset is critical.
Outside of a business context, finances aren’t necessarily a topic for polite conversation. But in a business relationship, honest and forthright financial conversations need to happen. Although financial decisions can be deeply personal, remember to talk through these next questions from a “strictly business” perspective.
How will each partner contribute financially to the business?
You’ve heard a million times that “it takes money to make money.” When you’re in a business partnership, that truth presents additional questions: Who will be contributing financially? How much capital will be expected from each partner? When does that investment have to be made?
Keep in mind that while the specifics of who will contribute what financially are important to your partnership agreement, financial resources alone are not a worthwhile reason to bring in a business partner. If financial capital is all your partner is bringing to the table, that’s not a business partner—that’s an investor. Make sure you understand the difference, and structure your business relationship accordingly.
What is your potential business partner’s tolerance for debt?
When considering potential financial contributions, remember that cash up front is not the only—or even the most common—form of financial contribution that a partner can make. You might seek an outside investor, or you could take out a business loan to fund your venture. As business partners, this is yet another decision you’ll need to make together.
Different individuals have different levels of tolerance for debt and the risk that comes along with it. Before agreeing to a business partnership, have a conversation about the possibility of going into debt for your business and your individual tolerance for risk in that scenario.
What size business loan would you consider? Are you willing to put up collateral on a business loan, or to sign a personal guarantee? Are you comfortable financing short-term expenses on a business credit card? Get specific about various scenarios to decide how you’ll handle debt within your small business partnership.
What financial liabilities does each of you currently hold?
Realistically, it’s likely that both you and your business partner have some outside financial liabilities that might impact your cash flow, your income needs, and even your ability to obtain a business loan. Depending on the structure of your business partnership, you are to some degree tied to your partner financially. It’s critical that you’re aware of any financial baggage they might be carrying.
If your potential business partner is less than forthcoming about their financial situation, proceed with caution—and at the very least, make sure you choose a partnership structure that limits your personal liability.
How’s your potential business partner’s personal credit?
If your partner agrees, consider pulling each of your personal credit reports from one or more of the major reporting agencies—Experian, Equifax, and TransUnion—and sharing that information with one another. This is the first information that potential lenders see when considering a loan for your business, so it will be valuable for both of you to have that information up front.
Sharing credit histories requires a high commitment to transparency, and not every business partner is willing to take such a step. But if you’re open to being a bit vulnerable with your business partner, this act of good faith can give all sides much more comfort at the prospect of tying your finances together.
How will you manage business expenses?
Are you a natural spendthrift, counting every penny spent? Or are you more relaxed in the way you spend money for your business? Overspending can be a major source of disagreements between business partners, but it’s one that can be avoided by setting and sticking to a budget together.
Decide on a reasonable budget for your business, then decide how you will go about decision making for additional expenses. When will you make purchases on your own, and in what cases will you discuss the decision before making a purchase? The more clearly you can define ground rules for business spending, the easier it will be to avoid spending related conflicts.
Will you or your partner take a salary from the business before you turn a profit?
You or your partner might need to take a salary for basic living expenses even before the business has technically turned a profit. Decide on a reasonable salary figure for your particular circumstances, and if only one of you is taking a salary, decide how this disparity will impact your profit-sharing structure.
How and when will business profits be distributed?
There’s no right or wrong way to lay out your business’s profit sharing structure, and the decision could depend on several key factors. Who will be putting up the majority of financing? How will responsibilities or time commitments be split? Who will provide the majority of personal connections or expertise? All of these may factor into how you decide to split profits.
Discuss with your partner how and on what schedule you plan to distribute profits, and put the details of your plan in writing so that all parties are clear on the terms.
What partnership structure will you choose?
The legal structure of your partnership will dictate many decisions as to how the business is run. Choosing a structure will define your responsibilities and personal liability as well as how your business will be taxed at the federal and state levels. Check with your state’s Office of the Secretary of State for more information about how to structure your business partnership.
- General partnership: A general partnership is formed when all partners participate in business operations and take mutual responsibility for the business’s debt. General partnerships are attractive to many business owners because they are easy to start and can take any form of business structure. However, it’s important to realize that a general partnership offers very little protection for the partners from liability. Talk to an attorney before agreeing to a general partnership to evaluate the risks of the agreement.
- Limited partnership: A limited partnership structure is most often chosen when business partners are taking an uneven level of involvement in the business—in particular if one partner is taking an investor role without participating in day-to-day operations. Not all partner relationships can qualify as limited partnerships, so talk to your business attorney to determine whether this structure will work for your scenario.
- Limited liability partnership: As the name suggests, a limited liability partnership is a partnership structure that limits each individual’s personal financial responsibility. It is the partnership equivalent of forming a limited liability company, with many of the same tax and legal implications. If you’re forming a small partnership business with equal involvement by you and your business partner, a limited liability partnership might be the perfect structure for you.
Know Your Exit Strategy
Even the most successful business partnerships aren’t meant to last forever. Whether it’s in a few months, years, or decades, the time will eventually come for you and your business partner to go your separate ways. That eventuality will be much easier to face if you’ve made plans for the separation.
What is your buy-out plan?
A buyout typically occurs when one business partner wants to move on from the venture while the other wants to continue. In this scenario, how will you determine a fair purchase price? What are the terms and process for the buyout?
How would you divide proceeds from a business sale?
In most cases, business partners who decide to sell their venture split the proceeds according to their profit-sharing agreement. But some elect to follow separate terms for a sale. Discuss the circumstances in which you might consider a business sale, and create a written agreement for your terms.
What happens in the event of a partner’s death or disability?
It’s not something we like to think about, but there is always some chance that you or your partner won’t outlive your business. When you complete the legal paperwork to form your business partnership, you should also have legal documents written up directing plans for the business in the event that a partner dies. Talk to your attorney about various options for transferring ownership, and discuss together what’s the best solution for your particular business structure.
If a business partnership is indeed like a marriage, consider this process your premarital counseling. The more effort you put into thinking through and discussing your perspective on these issues, the more successful your long-term partnership is likely to be.
May these 21 must-know questions be your guide on the path to a rewarding venture together!
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from Fundera Ledger https://www.fundera.com/blog/small-business-partnership