What to Consider When Working With Partner(s)

Posted on Posted in Entities

Most businesses in the US are, or are started as, sole proprietorships.  However, for those of you who want or need a partner in your business, there are a few questions you should be discussing before anything really gets going.

Expectations

All the partners should get on the same page about what they expect out of the relationship.  This includes questions like:

  • Are we more interested in positioning the company for a sale, or for building a long-term lifestyle company?
  • What role are each of us going to play in the company today?  How about 5 years from now?
  • Do any of the partners anticipate changing their roles in the future for any reason?  This could include bringing job duties more in line with interests, or for personal and family reasons.
  • Do the partners expect that this will be a full-time commitment, or will some partners be expected to work only part-time?  Will this change as the business grows?
  • Do the partners expect to be able to live off the business, or will they have to get/keep day jobs?  Will this change as the business grows?
  • How much and what type of communication is expected?  Do certain partners have “ownership” of certain decisions?  How will they keep other partners in the loop?

Money

Money is a very difficult topic for most people.  We don’t usually get to practice communicating what we think we’re worth to other people, and it’s considered gauche to tell other people what we earn.  Therefore, a lot of business owners tend to go into money conversation unprepared.  That does not mean you get to skip these questions however!  Setting a solid foundation regarding what each partner can expect from the business and the other partners can save a lot of heartache down the road.

Topics to discuss include:

  • How much money (capital) does the business need to get started?
  • How much money does the company need to operate for the first year, or first five years?
  • When can the company realistically expect to break even or start making a profit?  Note: this can be long after revenue begins, depending on how much money it takes to get the business started.
  • How much should each partner get paid, if anything?
  • Do the partners want investors?  If so, what is the investment strategy?
  • If the partners are bootstrapping, is there a budget for the business?
  • If the partners are using credit, what sources of credit are available, and on what terms?
  • How much has each partner given to the business, or spent for the business?  Do the partners expect that contributions to the company will continue?  For how long?
  • How much is each partner expected to contribute to the business?  If one partner can’t meet that expectation, what happens?

Ownership

This is where all the above questions are leading, eventually.  Each partner will need to know how much of the business they own.  This matters for taxes, compensation, dividends, later sale of the business, etc.  The two biggest mistakes business owners make in this area are (1) agreeing to an even split (50/50 or 33/33/33) without real discussion as to why and what it means and (2) not airing their discomfort with a certain ownership percentage and letting their resentment build.  Both of these strategies can, and often do, lead to problems and complications down the road.

Instead, what all partners should do is make a list of everything they have contributed, or plan to contribute to the company and value all those contributions.  These may include:

  • Cash
  • Physical assets, such as computers or equipment
  • Real estate
  • Time – the actual number of hours each partner has provided to the company
  • Intellectual property, such as graphic design, logo design, internal processes, document creation, customer lists, etc.
  • Costs of the company the partner has paid

Each partner should add up the value of everything on their list, and start from there.  If the ownership is weighted more towards one partner than another, this is a good time to have a discussion about whether one partner should have significantly more ownership than the other and what that means for the partners and the company.  Any of these numbers should be a starting point for discussion, and not necessarily the end result.  If any partner is unhappy with the deal they are getting, that should be resolved at this point, not three years down the road.

This can be a very deep and emotional discussion, but it can prevent so many later issues by getting everyone on the same page and pulling in the same direction from the very beginning.  It also helps to practice your communication with each other and can provide insight into what your partner will be like to work with over the coming years.  This is an important part of the business process, so don’t skip it!

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