Get into Bed with The Right Partner!

Finding business partners can be a great way to accelerate your path to business. However, if you partner with the wrong people it can lead to financial ruin.

There are two types of partnership models you might want to look at:

Event-based partnership

If you have a wedding decoration business, for instance, you might have a preference for working with a certain cake decorator or a given caterer. If so, you could form an alliance. Look at business owners that complement your own business and agree to give each other referrals or to tender for new business as a single unit.

Permanent partnerships

Many people prefer to work within a joint venture (JV) or a partnership because the partner brings funds or skills which they don’t have. In such instances working alone isn't an option; if you have the idea and someone else has the money then you need to work with them and vice versa.

Partnership inevitably leads to a loss of control. This is the reason I have generally preferred to go into business on my own or to partner on an event basis. I prefer to have full control. I value other people's opinions but ultimately I want the buck to stop with me, I want the right not to listen.

That said, I know under the right circumstances I would partner up.

If you want to partner with somebody, here are some ground rules you should follow to increase your chances of success:

1.     Write a partnership agreement

If you can’t afford to pay for a lawyer, ask a lawyer friend to draft something for you pro bono. If that fails write your own partnership agreement using templates from the internet. Outline exactly what you expect of each other.

2.     Avoid going into partnership with friends

Sometimes great friends don’t make great business partners. If you have very different goals to your friend you will end up losing both the business and your friend.

3.     Assign each partner very specific, mutually exclusive objectives

One way of maintaining control over the business is to keep control of specific aspects of the operation whilst your partner controls others. If your roles and objectives are designed so that they don’t overlap, you have a better chance of working well together.

4.     Understand the difference between wages and equity

Be very clear on the distinction between wages and equity. A partnership-based business where each business partner has contributed 50% of the equity does not necessarily result in each partner receiving the same amount of cash out of the business.

If you decide to pay out dividends then in a 50-50 JV your dividends will be equal. However, if one partner does more of the work than the other then that partner may receive a higher wage.

Imagine a business that is not profitable and where one partner contributed equity but does not work on the business. In this case the partner that does work on the business will receive a wage whilst the funding partner receives nothing until a profit is being made.

5.     Discuss what your exit plan is, if there is one

It’s possible that you want to run the business until it reaches a certain size and then you want to sell it whilst your partner wants to run the business for life. If you don’t discuss exit plans at the start it could lead to adverse outcomes later on.

“When two friends have a common bank account, one sings and the other weeps.” Proverb

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