16 Things to Consider Before Joining a Business Partnership

by: Jon Cadieux on Monday, October 27, 2014

Things to consider and discuss before forming a business partnership You've probably heard the old adage that a business partnership is a lot like a marriage. I’d say that’s a true statement. Both a marriage and a partnership usually start out with lots of enthusiasm, excitement, optimism and great expectations. Unfortunately, many end in bitterness and legal proceedings.

I can't stress how important it is to really get to know your potential business partner(s) before you jump in. This includes their personal finances, family background and whether they have a criminal background. There’s nothing worse than finding out they have a history of poor money management or worse after you've already signed on the dotted line.

So before you rush headlong into a “business marriage” with a friend, coworker or, for that matter, a complete stranger, it’s worth taking the time to consider some of the things listed below. Having all potential partners work on this separately, then getting together to discuss, will really help get things on the table in the beginning. No surprises later on. This will also be a good foundation to build a partnership agreement on.

1. Mission, Vision and Core Values

Can you agree on a mission statement?
Do each of you see the business the same way. Who you are. Who’s your ideal customer? Why do you do what you do?(less than 75 words should do it)
Can you agree on a vision statement? (A description of what your business will look like in an ideal world: focus of services/products, quality and quantity of staff, equipment, facilities, niche in the community, etc.)
Can you agree on Core Values? (To treat each other as well as your associates and staff with open communication, honesty, integrity, compassion/tactfulness, with interdependency, etc.)

2. Do all potential partners have a similar approach to serving your clients?

3. Do all potential partners have similar financial goals?

4. Do all potential partners think similarly about fee structures and pricing?

5. Financial goals

Can a successful _____________ (remodeling, siding, etc.) business in your area support more than one family equally?
What’s each of your definition of a successful business?
How do you define financial success?
Are you more an advocate do what’s right for the client or for the owner’s pocketbook?
How do you establish fees?
- (Cost plus? Market Conditions? Project Difficulty? Client budget? Other?)

6. Staffing What level of expertise?

Experience?
Licensed?
Compensation?
Training?
Should you hire family members?
- Consider what it would be like if your partner has family members in the business and you don’t.
- Consider different worse case scenarios:
  - Do you have it in you to fire a family member?
  - Do you have it in you to let go a family member when business gets bad?

7. Work and time off?

What will your business hours be?
Store/Office hours?
Are you expected to be on call?
Are you expected to work evenings and weekends?

8. Benefits and expense reimbursements?

Insurance Benefits? Offer or reimburse?
Mileage reimbursement?
Meals and other entertainment expenses

9. Business and trade referrals?

Who will you refer business to that is outside your expertise?
Refer some or all?
Can you agree on subs?

10. Roles as owners/managers?

Who contributes money and how much?
Decide who will handle:
- Marketing
- The money
- Sales Bookkeeping
- Project management
- Design HR
- Staff management
- Paying the bills
- NOTE: don't be afraid to outsource; i.e. get a professional bookkeeper, hire a marketing firm, etc.

11. If you already have a business and are considering bringing in a partner

How much are you willing to give up? 50%? 25? 10%
Business only or business and vehicles?
Real Estate?
Are business and real estate held separately?
Stock or assets? (Incorporated or not? Create a new entity?)
Cash or sweat equity?
Financing?
Owner financing?
Access to earnings distribution to service debt?
Over what time?
Do you have an exit strategy?
Who will exit first?
Bonus payouts?
Frequency?

12. Expansion plans? Long-term goals?

Can you stay at your current location or will you need to move in order to grow your business?
Open more stores/design centers/DC’s?
Change or expansion of services?
List what areas you all would like to evaluate for possible expansion and what milestones you need to reach before you expand.

13. Exit plans (prepare for all options)

Sell to additional partner
- Death or disability (cross insure)
  - Each partner may want a life insurance possible payable to the other partner.
    - This helps the other partner buy the business from the partners estate.
- When would you like to retire from the business?
  - Does that fit with your partners expectations?
- What’s the plan if you and your partner(s) can’t stand each other?
  - Who leaves?
  - How much do they get paid?
  - How do they get paid?
  - Or, should you break the company up, each taking part?
Take in additional owners and sell to them
Should you sell the company to new owners?
Will partners need to sign a non-compete agreement?

14. Change to an existing business.

Does change need to occur?
How will it happen?
In what time frame?
Who will be responsible for the change?
Resources needed?

15. What now if starting a new business?

Each partner needs to answer the above questions. (download the pdf below)
Let the other(s) review your answers
Set a meeting between all potential partners to have an open and honest discussion
Reconcile any differences that come from the meeting. If you can't agree on most of these topics, then it’s probably not a good idea to enter into a partnership.
Agree on a timeline and start drawing up partnership and operating agreements.

16. What now if adding partners to an existing business?

Follow the steps in item #15
Have the value of an existing business appraised by a qualified person
Draw up purchase agreement.
- It’s probably a good idea to have a qualified corporate attorney help put this purchase agreement together but if you want to save a few bucks you might be able to get one from www.rocketlawyer.com or www.corpnet.com.
Prepare staff and clients for change

Download the complete questionnaire for your use here.

This article was originally posted on KBinsider.com, a 455 Media Group, LLC website dedicated to helping home improvement professionals manage their businesses.