10 Questions to Ask Before Committing to a Business Partner
Like a marriage, a business partnership often begins with enthusiasm and high expectations -- only to end in acrimony and legal proceedings. It's important to know as much as possible about a potential partner, including how his or her finances and family life may affect the business, before signing on the dotted line.
Here are some questions to ask before deciding if partnering is a good idea:
What do I need from a business partner?
What is your potential partner's financial situation?
It is important to have an understanding of someone's financial status and commitments before getting into a venture together. "It is tough to ask what they are currently spending on a house or in payments to an ex-spouse, but someone's prior financial commitments shape the decisions they will make in the short term," says Gregory Kratofil, an attorney and shareholder with the law firm Polsinelli Shughart in Kansas City, Mo., who specializes in small business interests. "If he has large outstanding obligations, but says he can get by on $35,000 salary, it is a red flag."
What are the potential partner's expectations on the time involved?
Partners don't have to spend the same amount of time, but it is important that they are on the same page as to each other's expected time commitments. How many hours a day does your partner expect to put into the venture, and do his expectations meet yours? "It is equally important to level set your partner's expectations on your time commitments," Kratofil says. "The age old adage that it's better to under-promise and over-deliver applies here."
Is your potential partner's commitment to the business as strong as yours?
Is there something in your potential partner's family life that might make the business a secondary interest?
If your potential partner has a pregnant wife or is taking care of an elderly parent, he may be distracted from the business. That's why you have to be brutally honest when thinking of forming a partnership. "The partner can say, 'My wife is behind me 100 percent.' But I want to talk to the wife," Phibbs says. "If they're too distracted by a family issue or their family isn't behind them, the business may be doomed from the start."
How would he or she handle a tough situation?
It's important to know what your potential business partner will do if he has his back up against the wall -- and it will happen, Phibbs says. The best way to discover this is to look at what he's done in past business ventures. If he couldn't meet payroll, for example: Did he do the right thing and dip into savings or borrow from a credit card or a friend? Or did he pay employees late, or not at all? Or worse, did he skip paying payroll taxes? It all comes down to character issue, Phibbs says, adding, "Payroll taxes are a federal obligation. If that's negotiable, you can bet your partnership is also negotiable."
What questions do they have for me?
If a potential employee doesn't ask any questions in a job interview, you might be less likely to hire him because of a perceived lack of interest. The same applies to a potential business partner, who should want to know about your character, reliability and expectations. "I want them to ask me the same tough questions I ask them. If they say it doesn't really matter, it could mean two things: their expectations are too high or they might be kind of flighty," Phibbs says. "Things may be fine now, but in a month or two, they may want to change things or even get out of the deal."
What is the potential partner's standing in the community?
A lot of people seem good at first, but that may be their skill -- seeming good at first, Moore says. Once they get their foot in the door, it may be difficult to get them out. Talk to former employees to see what they were like to work with, or for. If you're looking for someone with money connections, verify that they have money. If they say they have great connections, see if those connections go beyond just being recognized and given a slap on the back. "A business partnership is not a marriage, but there should be some sort of courtship process that you can verify that they are who they say they are," Moore says.
Are they willing to put everything in writing?
Many partnerships are cemented with a handshake, but this can be a recipe for disaster. It's crucial to put it on paper -- not only what is expected of each partner, but the consequences if expectations aren't met. "There's something about actually putting it in writing that exposes the potential problem areas in the partnership," Moore says. If someone has a family emergency and disappears the first six months of the business -- even though it may not be through any fault of his own -- are you still expected to give that person a certain percentage of the business? "If someone simply isn't pulling his or her weight, you need to be able to get them out without destroying the business," he adds. "And if it's in writing, there's no arguing it."
Do I really need a partner?
If you can get someone to do something without giving them a stake in your business, it's always better, Moore says. People get wrapped up in the idea of needing to work with someone, but it's not always a good idea. Sometimes you need somebody to show up from 9-5, work hard and go home, he says, adding. "If you're cash poor, or it's a startup and you don't expect to make money right away, taking on a partner might be the better option. But if you can just pay somebody to show up and work, it's generally a better option than giving them a stake in the company."
And now a bonus question....