Merchant Advance Blog

Blog Article: Business Partnerships – Do They Help or Do They Hurt?

 

Business partnerships are like entering into a marriage. It’s a big commitment and involves becoming financially interdependent. They can create value, make you feel great, and allow you to achieve more than you would be able to individually. But they can also become catastrophic headaches, create conflict, and ultimately lead to disaster. Having been in a few different business deals with different partners, I have seen some of what works and what doesn’t work (at least for me). I have also been fortunate to be able to get to know and learn from a lot of other business owners that I am happy to call our clients. The most important things I have found are as follows.

1) First, make sure you’ve found the right one. Don’t get into something with someone you haven’t known for a long time. You need to not only trust this other person but also understand their strengths and weaknesses. You need to have an idea of what they are like to work with and where they can add value. Looking at their past business history is helpful too – where have they been successful and where have they failed? Ask around and understand this.

2) Be clear about what each partner’s responsibilities and deliverables are. How much time is each partner going to spend at the business? Which functions are they responsible for? And most importantly, what do you expect them to deliver? It is critical to have these things laid out up-front before pen hits paper.

3. Get a shareholders’ agreement. After you’ve done #1 & #2, it’s not enough to just shake on it and get going. You need to write these things down. You need a “divorce mechanism” such as a shotgun clause (which outlines how one party buys the other one out if they want to go their separate ways). If there are deliverables then the share ownership should be contingent upon those deliverables being met. For example, I once had a partnership with someone where I was going to do the day-to-day work, and my partner was going to raise the money for the business. I ended up doing both, and the partner was along for the ride, but we had no shareholders’ agreement to provide for how the ownership would be restructured if everything ended up falling on my shoulders. This eventually became a problem and caused a battle that ended up costing me dearly. If we had an arrangement set out in writing this could have been avoided.

In short, some significant up-front work needs to be put in before you go into a business partnership with someone. It may seem like it’s not worth it in the early days. You might think “this thing is just an idea at this point, and it’s all upside – if it works then great – if not then I move on – nothing ventured nothing gained – so let’s just get going on the business and not worry about a shareholders’ agreement”. The problem is this stuff absolutely needs to get dealt with before any value actually gets created in the business. It’s a lot easier to decide how the future pie will be split before there is any pie at all. Figure that stuff out when everyone is friendly – it will greatly increase the probability of things staying friendly – and it will create the framework that will allow you to just focus on growing the business in the long-term instead of arguing about it.

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