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Deciding on a Business Partner
Partnerships can be a terrific way to pool resources and a great opportunity to increase your capital reserves. However, there are some things that you need to know about having a partner that are very important. When two or more people get into business together there is risk that needs constant assessment. However, more importantly there is and should be an extensive thought process as to whether or not it is a good idea to partner up in the first place. Getting involved in partnerships is a major decision in one’s business life.
Partners in business together must have the following characteristics:
• Must be logical and unbiased in their thinking. It is not all about one partner. Sometimes the logical business decision can disadvantage one partner over the other(s). It is critical that the partner(s) being disadvantaged is logical in their thinking to be able to separate what is right for the business from what is right for the disadvantaged partner. If this is not the case the partnership is in for some rough going. Is your partner or partner to be logical and unbiased in their thinking? It is critical that they are as you will see in all of the other characteristics.
• Must eventually be at peace with all decisions. Although it is healthy to have different opinions and constructive arguments, eventually all partners must understand that a decision needs to be made and although it may be contrary to one partner’s opinion the dissenting partners must be at peace with the decisions in order to bring the group back to harmony. If this does not happen grudges are formed leading to further problems in the partnership. This especially happens when there are only two partners in a 50-50 partnership (sometimes referred to as a dual suicide) and there is a one to one tie in a decision that needs to be made. One partner wants to go one way and the other partner wants to go the other. The first thing to do is to see if it makes any sense to do a hybrid of both decisions. This means take something from each decision to make a final decision. If that does not make sense then the partners need to collectively determine if one partner has more expertise in the area being discussed than the other partner. This is when egos need to be cast aside. If one partner has more experience and expertise in a particular subject then it is usually best to go with the decision of that partner. Once again you are assuming that the partner with the expertise is logical in their thinking (see above). If the issue is still not settled, then each partner has to look at the risks and opportunities of each point of view. When that is done and egos are cast aside and the risks and opportunities of each point of view are carefully evaluated, then one partner usually sees the other point of view. Can you do this with your partner or partner to be? Are you at peace when your decision is not accepted? Is your partner or partner to be at peace when their decision is not accepted?
• Partners cannot be bitter if they get diluted or when the ownership structure changes. There are many times when a business needs more money and the partners have to ante up or look outside for other funding sources or even close the business. Sometimes there are partners who do not have the money or do not want to invest in the business at the particular point in time when money is needed. These partners who do not participate financially cannot be bitter when their stock ownership gets diluted. One reason a partner may become bitter is the partner who is not putting up money may have been the founder of the business and is now being diluted to where they are a minority stockholder. This is a difficult pill to swallow for a founder. However, it is only fair to the partners who are risking the additional capital that they get additional stock for the risk they are taking. Dilution can also happen when none of the company’s partners do not have the money to keep the business going and need to go outside to get money. The dilution when going outside tends to anger minority partners but it is only fair and it is part of the rough and tumble world of commerce. There will be more about the rough and tumble world of commerce in part 2.
I hope I got you thinking. I have more in part 2.
Deciding on a business partner – part two
In part one, I pointed out that partners in business together must have the following characteristics:
- Must be logical and unbiased in their thinking.
- Must eventually be at peace with all decisions.
- Partners cannot be bitter if they get diluted or when the ownership structure changes.
Here in part two, I will continue to point out things to consider when deciding on a business partner.
- Partners must understand the rough and tumble world of commerce. Partners must be prepared for troubled times in the business exemplified by, lower salaries, dilution, difficult cash flow problems and personal guarantees. The character of the partners must be in harmony during these periods. One thing most partners do not understand is personal liability. Normally, business partners have to put up personal guarantees to get loans, credit cards and leases. Of course, the partners should do everything they can to avoid personal liability, but there are situations where it is the only way to move forward.
All partners before the partnership starts must agree that they will sign any personal guarantee that the business needs and therefore when all partners sign a personal guarantee let’s say to a bank for a credit line, it is almost always “joint and several” which means that all partners are personally liable for the entire amount of the debt. As a result, it is conceivable that a minority partner or any one partner could get stuck with 100% of the debt. All partners must be aware of this and must agree in writing on how the personal liability exposure of all the personal liability scenarios is handled. In other words, just because legally one partner gets stuck, an agreement needs to be reached beforehand on how the partner who got stuck is going to get reimbursed for the other partner’s share of the loss.
- Your Partner must be as passionate about the business as you are. If your partner(s) does not feel the passionate fire about the business and that burning desire to succeed at the same level that you do then it is best not to go into partnership. If every partner isn’t sharing the same enthusiasm and the same commitment level then friction is likely to develop because it will show in the effort exerted. Many partnership problems stem from one partner not thinking the other partner is carrying their weight. More times than not this starts with the energy level which is fueled by the passion the partner has for the business. If it is not the same as yours it is almost a certainty that you will not think your partner is carrying their weight. You will develop resentment and then trouble ensues. By the way, if you do not feel a passionate fire about the business you are starting or if you do not have a burning desire to succeed then forget about finding a partner, you are best served not going into business at all. In future articles I will address the attitude you have to have when starting a business.
- Not all partners are created equal with regard to salary and work hours. Partners must understand that different partners take different skills to the table. Some of those skills are more valuable to the business than others. The business needs to pay more money to the more valuable skill sets. This is difficult for many partners to understand. Partners think that they are all equal when it comes to salary. You would not pay an assistant store manager the same as a CFO. Comparisons need to be made as to the open market value of each partner in order to determine the proper salary. It is highly improbable that each partner will work the same number of hours in the business. Some partners simply have more things they have to attend to outside of the business. Both the role the partner plays in the business and the hours worked make it improbable that you both should command the same salary. These things need to be discussed up front and agreed upon in advance of the relationship. How profit ultimately gets split is a different story. Profit should be split based on the percentage of ownership in the company and have nothing to do with salary and hours worked.
I have more in part 3.
Deciding on a business partner – part three
This is part three of a three-part series
In part two of this series I pointed out that partners in business together must have the following characteristics:
- Must be logical and unbiased in their thinking.
- Must eventually be at peace with all decisions.
- Partners cannot be bitter if they get diluted or when the ownership structure changes.
- Partners must understand the rough and tumble world of commerce
- Your Partner must be as passionate about the business as you are
- Not all partners are created equal with regard to salary and work hours
Here in this third and final part I will continue to point out things to consider when deciding on a business partner.
- Only one person can run the company and the day to day of the business . It is a good idea for one partner to take the lead role in the business. That way one person will be viewed by the suppliers, customers and employees as the point person. Sometimes this can make the partners not taking the lead role feel inferior and bitter. Before the partnership begins, this issue needs to be addressed. Although it is important for the suppliers, customers and employees to have one point person, the suppliers, customers and employees need to know that you have a partner(s) so they understand how decisions that may have been made can be changed.
- There is no room for “I told you so”. If either you or your partner(s) or prospective partner(s) are “I told you so” people the partnership is doomed to fail. For example, let’s say that you are in a 50- 50 partnership with one other person. Let’s assume for this example that a very difficult decision has to be made relative to the hiring decision of a key employee. Let’s also assume that you think person A is the best choice and your partner thinks person B is the best choice. Let’s also assume that you go through the logical steps outlined in part one of this series when there is a gridlock between partners. Let’s assume that after that logical process your choice (Person A) is chosen and eventually hired. Your partner grudgingly agrees. Person A turns out to be a problem employee and a bad choice. Your partner tells you repeatedly that they told you so and that it was a stupid decision to go with person A. How do you like that? Partners have to realize that bad decisions are going to be made in a business and no matter which partner was leaning which way the worst thing one can do is say I told you so. It will create bitterness and will destroy the partnership.
- I am sorry but majority rules. When one or more partners control the majority the majority rules the day. No matter how unfair one thinks that is. It is simply an absolute law in business. Yes, that means the majority can make all of the decisions and if you are a minority partner you are going to have to live with that no matter how much money you put into the venture. Some partners cannot deal with this fact and before you enter into a partnership with someone please make sure they understand the consequences and think through all of the possibilities that can occur because of this absolute rule!
It is important to note that these partnership parameters laid out in this three-part series includes offering employees stock options or grants. When you offer employees, stock options or grants they are partners! If you do offer employees opportunities to own stock then make sure there is at the very least a vesting period. Vesting means that they have to work a certain amount of time or certain very specific goals are achieved before they actually are a stockholder.
The best thing to do with this information regarding partners is to review all of these points with your potential or current partner beforehand and document what you have agreed to so that when these situations come up and emotions get high you can refer back to what you agreed to in calmer times. Partners need to go into these business deals with their eyes wide open and need to take into account all the factors that are involved in partnerships.
Here is my final word of advice. When you go into partnership with one or more people you need a partnership or stockholder agreement and make sure the points covered in these three articles are covered. Believe me, this is a must.
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