Entering into a business partnership can be a great way to combine the talents and skills needed to build a successful company. But if the partners aren’t able to effectively work together or have different ideas about how to run the business, it can lead to damaged relationships or a failed business. If you’re thinking about entering into a business partnership, here are seven questions you should ask your potential partner before you commit.
1. Do You Share the Same Vision for the Company?
Do you and your potential partner agree on plans for the company’s future? It’s an important question, because your vision for the business will influence how you manage the business. For instance, if you want to sell the business as soon as it becomes profitable, you’ll likely make business decisions based on short-term goals. But if your partner’s vision is to build a business to pass on to heirs, that person’s decisions will include long-term planning and goals. One way to determine if your visions are compatible is to create a vision statement together. Dun & Bradstreet offers some great advice for how create one.
2. What are Your Strengths and Weaknesses?
One of the greatest benefits to a partnership is that each of the partners contributes different strengths and skill sets to the business. While you may be a genius at marketing and sales, you’ll also need someone to handle the business operations and financial aspects of the business. The right partner will bring the skills that you may lack to the table, and vice versa. Sit down with your potential partner and talk about what skills each of you has to offer, and then determine whether your combined skills will help the partnership succeed.
3. How Much Money Will You Each Contribute to the Business?
Not all business partnerships begin with each party contributing 50 percent of the capital, and many partners determine the ownership equity based on the percentage of money contributed to the partnership at its formation. For instance, if your partner plans to contribute two-thirds of the capital, then you may decide he or she is entitled to two-thirds of the equity. It’s important to keep good records of all contributions, so disagreements won’t occur in the future.
4. How Much Time Can You Dedicate to the Business?
When building a business, the amount of time each partner puts into the company is just as important as the capital, but for different reasons. Most startups require a huge time commitment, and if one partner puts in a lot of hours but the other doesn’t, it can cause friction. When both partners understand how much time they are expected to contribute, there won’t be unrealistic expectations, which can help head off conflicts. Keep in mind that not all partners have to put in equal amounts of time, but if that’s the case, you should agree on that in the beginning. Many partners address this issue by making time commitments a factor in the ownership equity, just as they do with capital commitments.
5. How Will You Handle Conflict or Trying Circumstances?
Partners typically have equal authority, unless you stipulate otherwise in your partnership agreement. If your partner doesn’t handle tough situations well, it could put the business in jeopardy when it comes to finances, employees, or dealing with tricky vendor and customer situations. If you haven’t known your potential partner long enough to have a firm understanding of his or her character, do some digging by asking questions about past conflicts or difficult situations and find out what happened.
6. Will You Agree to Put it in Writing?
To avoid conflicts or misunderstandings, you should create a partnership agreement that outlines all of the critical areas of the business. Legal information site Nolo.com recommends addressing these areas in the agreement:
- The name of the partnership
- Each partner’s contributions
- Allocation of profits, losses, and draws
- Definition of each partner’s authority and decision-making ability
- Management guidelines
- Procedures for admitting new partners
- What happens if a partner withdraws or dies
- Dispute resolution
7. What’s Your Exit Strategy?
No matter how well you plan your partnership, the unexpected can happen and one partner may want to exit the business. It will make it easier if you have discussed this possibility with your partner and planned what will happen in that event. If they have to leave, will they want you to buy them out? Or would they prefer to sell their interest to another party? By having this discussion before you commit to the partnership, you will both have a clear understanding of expectations ahead of time.
By addressing each of these issues with your potential partner before committing to go into business together, you’ll have a clearer idea of how well you will work together and be better equipped to deal with challenges that may arise.