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Bringing In a Partner

Due diligence will tell you whether a partnership will benefit your company for the long term.
December 3, 2001

Q: I'm speaking to several investors who are interested in partnering with me in my company. What are some of the things I should consider when screening them? What are some of the ways I can ensure that I still have control of the business after a transaction?

A: You should evaluate an investor in the same manner they are evaluating your firm as an investment. Due diligence is a two-way street, and you should make sure you are comfortable with the incremental value your new partner will bring to your company-whether you are seeking a financial partner or a strategic one. Here are some things to consider:

With regard to your issue of control, it is understandable that your success to date raises a concern about losing control of strategic decisions in the future. There are a number of ways you can address this issue, depending on your specific situation:

If the sale of equity is the only option, keep in mind that you may not receive full value for the shares if you are only selling a minority interest. For example, if 100 percent of the company's shares have an aggregate market value of $10 million, a 40 percent interest may not necessarily be worth $4 million. The value of the 40 percent ownership may be discounted due to the lack of control associated with a minority interest.

Strategic investors generally become partners because they bring added value with their involvement. Therefore, conduct thorough due diligence and make sure you are comfortable working directly with them. Seek legal advice to make sure that the agreement covers key partnership issues ranging from the defining of responsibilities to dispute resolution methods.

Before you seek a partner, evaluate your options carefully. Make a list of the risk/return tradeoff between growing the business yourself and sharing ownership. Keep the big picture in mind-the main reason to bring a partner on board is to enhance the value of your business beyond where you can take it yourself.

Loraine MacDonald is director of advisory services at USBX, an investment banking firm specializing in the mergers and acquisitions of small to midsized businesses. She has been involved in the valuation and sale of privately-held businesses for over ten years.

The opinions expressed in this column are those of the author, not of All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.