6 Questions to Answer Before Entering into a Business Partnership

Business is about relationships. The people you choose to partner with and the method you use to engage them will determine the success of your company. Take your time and choose wisely.

thinkpanama / Foter.com / CC BY-NC

There were three of us that cofounded CollegePlus, with each partner bringing something unique to the table. Brad is the accelerator who can see the future and is always challenging our thinking toward new ideas, Woody puts the gas in the tank ensuring the revenues that keep the motor running, and I am the brake pedal who makes sure we’re going slow enough to keep some gas in the tank and fast enough to stay ahead of the pack.

Like any other human relationship, we have experienced points of tension and have made (and continue to make) our fair share of mistakes along the way. It has been through these mistakes that we have learned the greatest lessons. Overall, we have been able to achieve together what none of us would have been able to do alone.

Here are a few questions to ponder before formalizing your next partnership:

  1. How well do I know my business partners?  Fortunately for Brad, Woody, and I, we had the opportunity to work together extensively before formalizing our partnership, but for many this just isn’t possible. Make sure you take it slow and get to know a potential business partner on a professional and personal level before yoking yourself with them. Find a project to do together, go for a round of golf, and have their family to your house for dinner. Through these activities you will discover more about their working style and their values.
  2. Do we share common values? This is very important to understand because values will drive actions. If one partner values maximizing profits above all else and another partner values giving back to the community, they will have radically different opinions on decisions about money and significant conflicts will arise, especially if these differences are not discussed beforehand. You will never be able to find someone that is an exact values match but take the time to identify your similarities and differences. Talk through your differences and how they will translate into the company values. Formalize your company values in writing. Patrick Lencioni’s book, The Advantage is an excellent resource for this process.
  3. How much structure is important? When entering a business partnership, it is important to formalize the relationship through legal documents. Establish a company agreement and bylaws that outline how you do business. Get the lawyers involved at the beginning of the relationship so you don’t need them at the end.
  4. What do we each bring to the table? You should be able to clearly define why this partnership makes sense. If there is no tangible benefit, you are simply adding complexity to your business and should either find a different partner or go it alone.
  5. How will we make decisions? There are at least two types of decisions that need to be defined. The first group would include corporate or ownership decisions such as adding additional business partners, taking on debt, and electing a Board of Directors. The framework for these decisions should be laid out in your company agreement or bylaws. The second group is management decisions such as hiring of key employees, decisions around strategy,and budget priorities. The titles you and your partners assume (CEO, CFO, etc) will be some indication as to how management decisions will be handled, but it will still be important to discuss and align expectations as much as possible in the beginning and make adjustments on an ongoing basis.
  6. What is the exit strategy? There is a high likelihood that one or more partners will want to exit the partnership at some point in the future. There should be a clear plan in place in anticipation of an exit. Can the exiting partner sell to anyone or only to existing partners? Can a partner leave the day-to-day operations of the business and remain an owner? Is there a plan to sell the business in its entirety at some point in the future? There are no right answers but it is important that these questions are considered at the beginning in order to avoid confusion and conflict later. Again, spending a few thousand dollars with a seasoned business consultant or attorney to guide you and your partners in setting up your corporate structure is well worth the investment in my opinion.

Does this all sound like a lot of work? It is! However, by laying a solid foundation for your business partnership in the beginning you will significantly increase the likelihood of your partnership’s success.

What has been your experience with business partnerships? Join the discussion below.

-RPY

2 thoughts on “6 Questions to Answer Before Entering into a Business Partnership

  1. It is great to get some inside perspective on partnerships here, and I am inspired by what the three of you have done with CollegePlus.

    I think this mindset is also healthy for an employee. Instead of people looking for jobs where they will be cogs told exactly what to do for a paycheck, we should enter into work with the mindset of a business owner. Every employee does represent a business, and his or her actions will help determine the overall direction of the company. Besides, owning one’s work is a lot more fun.

    Thanks for letting us coaches team up with the leadership and the rest of the crew!

    • Great point, Bryan. The more a company can cultivate an ownership mentality among it’s employees, the more innovation will occur and the less “management” will be needed. Thanks for the comment!

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