October 7, 2022

How to Evaluate a Potential Business Partner social imageThere are three main reasons you’d want to bring a business partner into your business. First, entrepreneurship can be a lonely ball of stress. When you share the load with someone else, you benefit from having a cheerleader, accountability partner, and an extra set of eyes—all wrapped up into one. Second, there’s no way that one person can know and do everything well as the business needs to grow and succeed. By bringing someone else into the business, you expand the range of skill sets, opportunities, and possible sources for financing. Finally, how else would you get someone to work for free, if not for “sweat equity”? These reasons aside, bringing on a business partner is not a decision you want to take lightly. 

When you go into business with friends, you bring a special asset to the company: your friendship. That friendship needs to be protected at all costs. And we make a lot of assumptions when we are dealing with friends. We assume that they will be forgiving of our foibles when we lose a client. They assume we will forego getting paid for a month because they had a personal emergency and needed a larger draw from the business. Placed in a business context, our assumptions could be wrong. While it seems counterintuitive, you need to be extra vigilant in negotiating and preparing a business partnership agreement with a close friend. After all, you have a friendship to protect. Sometimes, you can hire the skills you need in an employee or consultant, and you may be better off.

Evaluate a Potential Business Partner 3 reasons

Now, suppose you decide to go into business with a spouse or other close family member. In that case, you might benefit from “business partners therapy,” such as finding a mentor business couple or a regular session with an outside consultant to keep you focused on the bigger picture. Going on retreats 2-4 times a year can also make sure you’re working on the business and not just in it. This can do wonders for your relationship and the business.

Take Your Potential Partner for a Test Drive

If you are considering a partner who is not someone you know well. Try this approach. Just as you wouldn’t marry someone right after the first date, you want to make sure you’re taking the time to really get to know your potential business partner. You won’t just find this out over coffee or lunch date. Ideally, you want the opportunity to work together on smaller projects to see if it’s a good fit. There’s a lot that goes into a strong business partnership. 

  • Do you have compatible communication and leadership styles? 
  • Are you on the same page with your values? 
  • Do you have the same long-term vision for the company? 
  • Do you have complementary business skills?
  • What roles will you and your partner play in the business? 
  • Is there a fair division of labor between you? 
  • Are you each equally skilled in your respective areas of expertise?

Evaluate a Potential Business Partner 3 common issues image

The three most common issues small business partnerships face are the management of the business, financial matters, and what happens when a partner needs to move on. If leadership is lopsided, it can breed resentment and cause disfunction in this business. 

Financial issues are the number one issue that affects business relationships. Are you putting in an equal amount to get things started? Do you each get an equal share of the profits? How will you value what each contributes to the business? How will you decide what opportunities to pursue? What happens if the company can’t afford to distribute funds to the partners? Will one of you keep your full-time jobs to keep things going in the meantime? 

It’s best to use a partnership agreement. Business partnerships are as much about business as they are about partnership. It’s smart business to put things in writing, especially when there are so many variables involved, as there are with business partnerships. And, at some point, you’re going to die, and you need to make sure plans are in place for the business to survive your death. 

There can be any number of reasons why someone needs to leave a business. So, when setting up a partnership agreement, it should define what happens if a partner wants to leave or dies unexpectedly. Sometimes people’s goals change. Sometimes people’s personal needs drive a change in priorities. There needs to be a valuation process and buyout by one partner from the other/s if this should become necessary. You need an orderly transition should the business survive the departure. 

How to Evaluate a Potential Business Partner

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While setting up a business partnership is relatively straightforward, finding the right business partner to work with is an entirely different ball game. There are some important factors to consider before entering into a business partnership. Here are five factors to consider when choosing a potential business partner:

1. Personal Attributes

What are they like as a person? Do they have a strong work ethic and take ownership and responsibility for their actions? And what is their attitude towards money? An individual who isn’t prepared to work hard, is prone to blaming other people, has a relaxed attitude about money, or has a significant level of personal debt may not be the kind of business partner that can help you grow and run a successful business.

2. Proven Track Record

Ideally, your business partner should have a proven track record in an area that’s important to the business. Ideally, if you’re starting a business in an industry that is new to you, your business partner should have knowledge and experience in that area. This is important as they will be able to bring an understanding of the core activities of the business and how it should operate.

If you do have experience in your chosen industry, look for a potential business partner with skills in complementary areas such as marketing, business development, or finance so they can help grow the business while you focus more on the operational side. Do your due diligence. This includes checking if they have previously run or sold a successful business, asking to review financial statements, and conducting a background and credit check to find out about personal debt and previous litigations. 

3. Each Other’s Financial Assets

Evaluate a Potential Business Partner financial asset image

When it comes to financial status, most people focus on covering start-up costs, but there is a lot more to consider – especially if you plan to borrow money to grow the business. Suppose both partners have several personal assets (a home, car, savings, rental properties). In that case, you should declare upfront if they will be able to be used as collateral if a personal guarantee is required. You also need to consider if either partner has a spouse, as both the partner and his/her spouse’s signatures will be required should their home be needed as collateral for a business loan.

4. Agree on Business Structure and Risk Exposure

If you’re entering into a partnership where one person is more asset-rich than the other, one person carries a much greater risk level. And this needs to be discussed upfront. Many business loans require collateral. Your business structure and partnership agreement will ultimately define the risk level for each business partner. You can start with a partnership agreement template online, but you should speak to a lawyer or accountant for guidance on business structures and asset protection.

  • Use a general partnership agreement
  • Choose to be informal partners, with each partner operating independently with their own business structure but referring clients to each other.
  • Protect each partner’s personal assets by setting up a partnership arrangement using a different business structure, such as a company or trust.

5. Define Roles in the Business 

You should discuss each other’s strengths and define how parts of the business will be managed, including finance/accounting/banking, sales and marketing, operations and HR, and customer service.

  • How much time and effort can be dedicated to the business? 
  • What assets and upfront cash will each partner contribute?
  • How will profits and losses be divided?
  • How hands-on/off each partner will be in the day-to-day running of the business?
  • How will disputes in the partnership be resolved?

5 criteria to evaluate a potential business partner image

Use these five criteria to evaluate a potential business partner. When you find the right business partner for your small business, things will click! But start slowly with some project work first. Don’t forget to discuss the hard stuff and go over how things will operate. Making assumptions is bad for your business and your relationship. Best of luck evaluating your potential business partner and finding a partnership that will lead you to success!

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