Starting a new business can be an exciting time, one that is full of opportunities and risks. For many small business owners, starting (or expanding) a business with a partner can provide significant benefits, from the ability to raise additional capital to new and complementary business skills. However, business partnerships can present their own challenges. Hence, it is important to understand what factors business owners should consider when evaluating a potential partner.
With the Covid-19 recession exposing more small business owners to the possibility of bankruptcy or other financial burdens, it is more important than ever to exercise your care when choosing a business partner.
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Ideally, a business partner will bring a variety of resources, skills, and talents to your company that will improve your company’s chances of success. However, it’s important to know that adding partners to your business can help Complexity that can be challenging. It is therefore important to ideally contractually clarify expectations, roles and contributions.
The Small Business Administration offers entrepreneurs a wealth of support in managing business partnerships.
While a “handshake” agreement may be sufficient in many cases, it may be advisable to formalize your partnership agreement in the event of a dispute or unforeseen event. It is also helpful for tax clarity as each partner must Include your share of business income or loss on your personal tax returns.
When evaluating a potential business partner, consider the following professional characteristics:
- Creditworthiness and Financial Integrity: Strong credit ratings and a lack of financial flaws can indicate the kind of responsibility and good financial management that are essential to a partnership. This is also useful for obtaining additional credit or financing at the best interest rates and terms.
- Experience in your branch: Positive experiences in a similar or related company or industry are beneficial not only because of the skills a potential partner has developed, but also because they make your company more attractive to investors. A track record builds trust.
- Business acumen: Does your potential partner have good financial or accounting skills? Are they strong sellers or marketers? Such a business acumen is critical to running your business.
- Complementary strengths: If your strengths lie in quantitative areas, you can also choose a partner with strong marketing or networking skills. A good partner complements your existing strengths.
- Similarity of vision and values: Share a similar vision for the company’s success, In addition to aligned values, you can ensure that you are working harmoniously towards common goals.
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How to share responsibility in a business partnership is a little more complicated than it sounds, especially when you are entering into a formal partnership agreement. Considerations include:
- Active vs. silent partnership: Will this partner have voting and decision-making rights or will they just be silent investors?
- Everyday responsibility: What roles will you play on a daily basis? By clearly defining responsibilities, each partner can focus their talents and efforts where they are most effective and minimize possible disagreements.
- Capital contribution: How much capital will each partner contribute? What percentage of the profits will they enjoy?
- Dispute resolution: Have a clear plan for how to deal with disputes – including legal ones.
Of course, personal chemistry and friendship can and should play a role in partner selection, but they shouldn’t be the only – or even main – factors in your selection, they say Harvard Business Review. This is because your company’s business for success relies on far more than just friendly relationships. Choosing a partner who will add value and essential skills to your business can increase your chances. Also, the dynamics of friendship can evoke emotional responses that can affect decisions that should be guided by reason. By focusing solely on your business, you can build relationships that will strengthen your position in the marketplace.