Attorney Malte Pendergast-Fischer advises on how to make that call, and what to do before formalizing the relationship.
Bringing on a partner is an exciting endeavor that can take your business to the next level. But be aware that with the opportunities for growth comes challenges and different approaches, ideas and concepts that you might not want to consider or feel ready to consider. Planning, prepping, negotiating and being very good at compromise will be key to a successful partnership.
When you need a partner
When starting out in business for ourselves, we all have a vision or idea that we think will work. For some it is very clear. For others it starts as a hobby and evolves over time. That vision or idea is what drives us every day.
As any business owner can attest, the reality of running your own business requires more than that initial great vision — it also requires a huge amount of diligence and hard work. It demands that you be constantly on top of the minutiae, while never losing sight of the big picture. For it is often the minutiae that derails the train before the final destination is reached.
Add to these challenges of business ownership ensuring the calendar is filled with appointments or bookings, and the constant chasing of the next job never ends…
The sacrifices can be enormous, but equally so can the rewards.
But after all that hard work, one day you may wake up to find your business is thriving and you are having to turn people away because you simply cannot get to them. Maybe at that point you begin to specialize because these opportunities allow you to do so. Or if you no longer have to take any job you can get your hand on, perhaps you find yourself running faster because you don’t want to disappoint anyone, and hate to turn away business, so you decide to hire another assistant as a way to expand your business.
The last two options are often referred to as temporary band aids. In other words, they will keep the ship temporarily from taking in water, but eventually it will likely sink.
The other option is to take on a business partner. Opening the door and letting another person in to sit next to you on projects and decisions for the short term and long term benefit of the business requires a lot of trust. How do you trust someone to do as good and thorough of a job as you are doing? If you find the right person with complimentary qualities, it can be the step that takes the business to the next level.
Who to partner with
What are some of the things one should consider in bringing on a partner?
Does it make sense to do a trial run prior to getting completely in bed with one another?
Say you have narrowed it down and found the person you feel would be great for your business. Do you jump in right away and go full speed ahead? An often-used technique that allows both sides to get a better feel for each other is to do a trial run: Try working on a few projects together to get a sense for the other’s working patterns. While this will not reveal everything, since everyone will be on their best behavior, it will give some indications as to competencies and experience.
There is no question that a level of disruption will come with the introduction of a new partner. Anytime a new person enters a business, the normal flow of things will be upset.
But with disruption comes new qualities, new ideas, and new approaches.. Expecting and accepting that this will be a time of flux until everyone has acclimated to the new situation will go a long way to ensuring its success.
Protection from your partner
How can you ensure your business will be protected against disruption not only in the short term, but also in the long one?
It is extremely important to have everything in writing. The handshake, the gentlemen’s agreement are important to establishing the initial bond, trust, and rapport, but ten years from now that will not carry weight in a court room; only a written document will.
No one wants to go to court and, while that is a last resort option, doing the work up front and having the uncomfortable conversations in the beginning will go a long way to setting your business up for success (and avoiding court) in the future.
As someone who advises businesses on these matters, we have seen some very ugly scenarios play out years down the road because of a lack of planning at the beginning. These are almost always lose-lose situations. What I always stress to business owners considering taking on a new partner is, “Always put it in writing.” Creating a document that the partnership can live by has in many instances been the most important step a business owner has ever taken.
A critical part of the partnership agreement is the buy/sell provision: How much has each partner put into the business and what can they expect to get out should he or she decide to leave prematurely?
In general, the four “D”s should be addressed in connection with a breakup of the partnership or due to certain life events: death, divorce, disability, or departure. These are the questions that often go unaddressed at the onset of a partnership, in favor of seemingly more pressing pursuits related directly to the business. These are also the questions that come back to bite you. If someone leaves of their own volition or based on common understanding, what are the rules around working in the community doing the same thing? How will the book of business be split if that is allowed?
Not a fun conversation granted, but an extremely important one to have prior to getting going, because trying to tackle this when the partnership is breaking up is often a nightmare.
Partner’s piece of the pie
At what level is the new partner brought in? As a 50/50 equity partner, or at a minority level? How does the buy in work — lump sum, loans, deferred comp, share transfers?
In general, most advisors suggest you be as stingy with shares as reasonably feasible, because equity is always at a premium. This is also where it becomes important to consider your future business partners financial situation. A messy financial private life could give indications as to how the individual deals with finances professionally.
Know your numbers and what your short and long term strategies and plans are for the business. Many business have created advisory councils consisting of their CPA, attorney, insurance agent, and financial advisor to help navigate the waters around their business. Aligning yourself with a business advisor and or planner is very important.
Another important question to consider when drawing up your partnership arrangement is dealing with conflicts. When conflicts arise, how do you go about resolving them? Does one of you have overriding power? Do you bring in a neutral third party to help resolve the issue? If so, how do you decide who that person or persons should be? There will be times when bringing in a third party will be advantageous, but in general we suggest trying to sort most things out amongst yourself. Assigning areas of responsibilities to each partner for decisions in the event something is disagreed upon is useful option.
Divide and conquer
How will you define roles and responsibilities? Two sets of eyes, ears, and hands can do more than only one could previously. Finding a partner who adds a new dimension to the business is important, invigorating and can certainly be prosperous.
Dividing up and conquering is now an option.
How will the customers and the community be introduced to the new partner? Bringing in a new partner is an opportunity to rebrand and reeducate the public about your business. Many business are started overnight, and the chance to now change things based on lessons learned is another opportunity brought about by adding a new partner.
Malte Pendergast-Fischer is a lawyer, financial planner, and managing partner at the Green Ridge Group in Basking Ridge, New Jersey.