It Takes Two
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Partnerships are the most intimate relationships in business. The sins of one partner are visited on the other, and your partner's debts may become yours. Even the tightest contract won't insulate you from a crooked or incompetent co-venturer. So be careful.
First, make sure you actually need someone else. Be specific. Are you looking for money, expertise and contacts? Or do you just need someone to compensate for your weaknesses? Put camaraderie aside, and make sure your prospective business partner will truly bring something useful to the table.
Next, consider your alternatives. There are numerous ways to work with people without making them partners. Maybe you just need an employee, a lender, a supplier, an agent or a creative alliance of some sort. Don't assume partnership is your only option. Many other well-defined business relationships can help you get what you want.
Thoroughly research your prospective partner. How well do you know the person? Even if he or she is a longtime friend, don't assume your business relationship will be similar to your social one. Everybody plays by different rules, and rude awakenings are common when friends go into business together. Talk details to make sure you're both on the same page. Contact your partner's personal and business references, because a professional background check is never a bad idea. After all, the time to find out whether your partner is a thief or a flake is before the fact.
When you cut a deal, there are issues every set of partners should negotiate. Most business ventures require certain formalities, such as written partnership agreements or the formation of corporations or LLCs. You should probably involve an attorney (and maybe an accountant for tax planning) to help you discuss and plan for common partnership problems, like one partner's withdrawal from the business, and when and how partners can buy each other out.
In friendly deals where the partners' goals are clear, one attorney often agrees to represent both parties. Such cases can reduce your legal fees and prevent negotiations from becoming adversarial. Because a shared lawyer cannot zealously represent one partner against the other, however, neither partner will get his or her best possible deal.
If you don't ask yourself these questions and get answers, you're inviting some bitter misunderstandings:
- What is each member contributing?
- What are individual responsibilities?
- How will profits be split?
- How will the venture's assets (money, physical property, equipment, intellectual property, clientele and so on) and liabilities be divided if it folds?
Authority: Which of the following decisions are to be made by one member, a majority, a supermajority or by unanimous consent?
- Borrowing money
- Signing checks
- Declaring bankruptcy
- Admitting new members
- Settling lawsuits
- Making members contribute more money
- Selling or licensing assets
- Hiring employees
- Other key business decisions
- When can a member be thrown out?
- What does that person get to keep if that happens?
- What happens if a member wants out on his or her own?
- When can a new member be admitted? What must he or she do?
- What happens if somebody dies or becomes disabled?
A speaker and attorney in Los Angeles, Marc Diener is the author of Deal Power: 6 Foolproof Steps to Making Deals of Any Size(Owl Books/Henry Holt).