In a best case scenario, the potential business partners work together or have worked together in an employment situation, or in some kind of supplier/vendor relationship. However, even these situations do not always reveal a future business partner’s hidden weaknesses. In less ideal situations, business partners are thrown together as a result of a funding arrangement to take advantage of a business for sale or some other small window of opportunity the marketplace provides.
As an accountant, I have observed many mismatched partners with respect to both skill and personality. These relationships are usually doomed. Today I will discuss some of the issues you need to consider when selecting a business partner.
Complementary Skill Sets
Most businesses will require three skill sets: financial, product/services and sales/marketing. Sometimes you can succeed without the financial skill set if you lean on your accountant, but ultimately, most businesses need a strong numbers person to keep track, plan, forecast and analyze the numbers. In a product-oriented business, you need someone to build the product or run the production side. Sometimes that skill set also includes a financial skill set, but not often. Lastly, you need someone who can sell the product. Often that is an attribute financial and production people don’t have. The reality is that when you are starting a business, at most, you will typically only have two of these skill sets. Thus, one person will have to fill the gap and you may require some professional assistance for the financial or sales side.
In a small business, it is vitally important that partners have complementary skills. If you duplicate skill sets, you may be dooming your business venture from the beginning. Two production or financial guys will often have a very difficult time generating business for a new company.
Roles Within the Business
Defining roles within the company is very much related to ensuring complementary skill sets. Defined roles create clear boundaries and hopefully prevent one partner from sticking his or her nose in the other’s area of responsibility. Defining roles at the beginning of a business partnership essentially ensures you are responsible for your area of expertise.
How Well Do You Know Your Partner?
Whether you have worked with your future partner(s) before or not, it is very important to undertake a background check. I have seen several business partnerships break-up, and when the dust settles it comes to light that one of the partners had similar issues elsewhere. Try to speak to people in your industry who have had contact with your potential partner.
Does Your Partner Have Connections?
Look for a partner that has a strong network or connections within your industry. If your partner has a strong network, he/she may open doors for your new business very quickly. However, it has been my experience that when people tell you they are bringing customers with them, the customers do not necessarily follow immediately. Be wary when a partner promises customers will follow them. It may not be their fault, but clients often want to wait to ensure a new business is stable before changing suppliers, consultants etc.
Shared Vision and Values
It is vitally important that business partners share the same initial vision and values. When there is not unanimous consent on the initial business vision, the business can fragment and become dysfunctional quickly. That is not to say partners will ultimately continue to have the same vision and agree on everything, but at the outset; there must be consensus. In addition, business partners should have similar core values.
Skin in the Game
There may be cases where you have a silent partner or an angel investor, but in the typical business situation where two or three people join forces, it is important that equal value be contributed to the business either in
Shareholder Agreements and Decision Making
Many new businesses cut costs by skipping the drafting of a shareholders’ agreement; this is risky. If you forgo an initial shareholder agreement for monetary concerns, you must agree with your partner that as soon as the business is on stable footing, you will engage a lawyer to draft a shareholders' agreement.Some key terms you want to consider in a shareholder agreement are noted in this online template agreement.
There are a multitude of other issues to consider when choosing a business partner. However, if you undertake due diligence and cover off most of the issues above with your potential partner(s), you have a much better chance of succeeding together.
The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.