I was recently asked to submit an article about partnerships for the Small Business section of Business in Vancouver (BIV) magazine. The article, called Is a partnership the right choice for your business to weather these stormy times?, found in the Small Business section of this month’s issue is reprinted below:
As the economy sags many business owners are starting to think pretty radically about what they can do to preserve and prosper. Some will look for ways to reduce spending or downsize. Others might consider merging with a competitor. And still some wonder about taking on a partner to share the burden. But is a partner the right choice for you? This choice comes at the cost of giving up ownership of the company you worked so hard to build, so be very careful, do your homework and protect yourself.
Even in the best of circumstances, I believe that the first question any entrepreneur should ask themselves is “do I really need a partner to achieve my goals?” There are numerous arguments supporting business partnerships such as cost savings, shared risk, expanded client list, and enhanced services and management skills. But it all comes at the cost of giving up ownership of the company you worked so hard to build, so be very careful, do your homework and protect yourself.
My business partner and I have enjoyed 12 years of business success and our partnership has flourished because we are very different people. There exists minimal overlap between us although we share similar backgrounds, educations, and skills. This is in stark contrast to what we have witnessed over the years as friends have partnered with like-minded or similarly skilled friends, enjoying shared perspectives and core competencies, but ultimately ending in failure. The deep respect and trust that has developed between my partner and I has allowed us to delegate key decisions and tasks to each other. Our open communication allows us to speak freely, even arguing over important issues when necessary. But by challenging and complementing each other, we bring out the best in one other and in our team.
There are numerous steps that any reasonable entrepreneur should take before committing to anything as serious as a partnership.
Be assertive when questioning former clients, employers, employees about the candidate’s claims, background, reputation and abilities to make very sure you found exactly the right person is critical. Hire a good accountant experienced with valuations and complex ownership scenarios. Use a lawyer experienced in mergers and acquisitions to create a legal agreement which outlines the arrangement including a trial period and mechanism for if/when one partner leaves—whether you eventually part on good terms or bad, it’s best to enter a partnership knowing how you can get out. If you do your homework up front, you’ll save yourself a huge headache later.
But before you start to look for a partner, or talk to a corporate lawyer, SWOT yourself. A SWOT analysis is common first step in developing a business strategy, so why not do one on yourself? If you are honest with yourself, you’ll likely paint a picture of what’s missing in your business and of the type of person you require for a business partner. And make sure you SWOT your potential partner too before committing.
And even if you think you have found the perfect partner, be ready for things to change.
The hard truth is that people change. You may change. What happens in a year or two if your new partner decides they want to do something different and want out? Or maybe you do? Understanding this and being okay with it is a key to business survival and a strong reason to prepare a Share Holders Agreement that protects all parties involved.
We’ve all heard the comparison between business partnerships and marriages. Indeed, like a marriage, a partnership is easy to rush into, but painful and difficult to get out of. Just as a shotgun marriage will likely result in misery down the road, rushing into a partnership can be a costly mistake, ultimately sinking your business instead of saving it. Make sure you’re comfortable with each other before moving in together.
Another hard truth is that partnerships often fail. Things can go sour quickly—regardless of whose fault. An ill-conceived or poorly planned partnership that fails will reflect negatively on all parties involved and possibly lead to business failure. In the lead up to the split, the tension will grow like cancer in the culture of your team and staff may quit to save themselves the anxiety. Clients may lose confidence, and unlike children during a divorce, want nothing to do with either partner and just walk away.
The good news is that the economy will ultimately improve and good times are ahead for those who plan smartly. Ask yourself if your potential new partner, their reputation, their clients, and their working style will still look good once the market recovers. Don’t just opt to partner because you are shoring up for a short- to mid-term storm. Do it because it makes ultimate sense and because your business is more likely to survive to see the good times.