5 Things You Need to Know before Establishing a Business Partnership

5 Things You Need to Know before Establishing a Business Partnership

The idea of entering into a partnership can be incredibly appealing to small business owners. It can bring together like-minded individuals in collaboration to drive the company forward and facilitate growth. Many businesses operate extremely efficiently as partnerships, providing mutual support, and enabling business owners to share responsibilities and duties without incurring the expense of taking on additional staff.

The right business partner brings vital skills, experience, and enthusiasm, enhancing the venture’s potential. Putting two, four, or six heads together helps business owners to reach a wider audience, or land that big deal.

Partnerships are not for everyone, however. Nor is it the appropriate business structure for all enterprises. Entrepreneur coach and small business strategist Bennett Johnson cautions that with the exception of some medical, legal, and financial companies, most business partnerships fail, ending in a bad way.

He points out that many individuals enter into partnerships with a tremendous amount of emotion, but little thought, explaining that the biggest consequence of a failed business partnership is the destruction of entrepreneurial dreams. In this article, we look at important considerations for anyone thinking about entering into partnership.

1. Reasoning

Johnson points out that business partnerships usually fail because they were established for the wrong reasons. He advises clients who are considering entering into a business partnership to look at why they want to form an alliance. If it is for any of the following reasons, Johnson advises reconsidering:

To compensate for one’s own limitations. Being bad at bookkeeping or sales is not a good reason to pool your resources with someone else. Johnson recommends that, in this scenario, business owners look at hiring or outsourcing instead.

To increase connections. A great entrepreneur invests in developing their own network of connections.

Lack of resources. Starting a business on an unequal footing could lead to power struggles and resentment down the line.

Lack of confidence. As Bennett Johnson explains, owning a small business can be a scary, lonely experience, but that is not an adequate reason to join forces with someone else.

2. Legalities

Even partnerships between family members should be delineated in writing. Although a formal partnership agreement is not a legal requirement in every state, a well-crafted document detailing the terms of the relationship insulates each party from personal liability issues.

Putting the terms of the agreement in writing forces prospective partners to consider the implementation of their entrepreneurial vision, enabling them to identify issues that could potentially cause contention later down the line. Parties need to consider what will happen if the relationship sours.

People enter into partnerships with the intention of making it work, but the unfortunate reality is, not all do. Prospective partners need to consider what will happen if something goes wrong, formulating an exit strategy. Similarly, they need to contemplate what will happen if a partner dies, or they want to take on new partners at a future time.

3. Roles and Responsibilities

It is important to define each partner’s duties to manage expectations. In many partnerships, business responsibilities are not shared equally. Nevertheless, consensus between all of the partners on the allocation of duties is critical to the partnership’s success. If one individual feels short-changed, the relationship can become rather uncomfortable, typically ending in separation.

Each partner should have their own job description outlining their role and responsibilities within the business. The more specific the definition is, the less room for ambiguity, and potential conflict later on.

4. Values

In a business partnership, clashing work ethnics and expectations can have disastrous consequences. Personal values drive business decision making, so it is critical that partners are aligned in terms of ethical standards and priorities.

Before entering into a business partnership, it is important to take the time to get to know each of your prospective partners, identifying their goals, values, and financial situations. Working with a partner who does not share your ethical standards and business values could not only create conflict between the two of you, but also affect your reputation with clients and the public.

You can learn a lot about someone from their digital footprint. Press mentions and blog posts can also provide insights on their business pedigree and previous entrepreneurial successes, or failures.

5. Background Checks

The world of venture capitalism and angel investment is a popular hunting ground for fraudulent characters. To protect your enterprise and investment, it is vital to complete background checks. A Google check is a good place to start, but it is a good idea to ask for references and run a complete background check on anyone who will be in a position of power within the company prior to entering into a business partnership.