How to Start a Business with a Partner
- Get to know your potential partner and learn about his or her personal and professional values, ideas and goals.
- Consult a lawyer and an accountant to draw up a written partnership agreement.
- Spell out an exit plan for you and the business.
Business partners often start businesses together with little planning and few ground rules. Sooner or later, they discover the hard way that what s left unsaid or unplanned often leads to unmet expectations, anger and frustration. Partners can clash over countless things, including conflicting work ethics and financial goals, roles in the business and leadership styles. What follows is a primer on how to avoid that and set up and sustain a business partnership.
First, ask yourself: Do I really need a business partner to build a successful company? Taking on business partners should be reserved for when a partnership is critical to success say, when the prospective partner has financial resources, connections or vital skills you lack. You may be better off hiring the other person as an employee or an independent contractor.
Communication is important at every stage of a partnership, and especially so at the outset. A common mistake business partners make is jumping into business before really getting to know each other. You must be able to connect to feel comfortable expressing your opinions, ideas and expectations.
If you haven t worked together previously, test the partnership out by tackling a small project together that showcases each other s skills and requires cooperation. This is also a way to learn about each other s personality and core values.
Ideally partners professional skills should complement one another, but not overlap too much. For example, you may be detail oriented and your partner may be a big-picture thinker. Or you may be an expert in marketing and sales, while your partner prefers to stay in the backdrop poring over financials.
To gauge how well you might work together, have a chat with each other s colleagues and family members. Key questions to answer include:
- Do you and your partner share personal and professional values, ideas and goals?
- Do you trust your partner s motivations and character?
- In what areas of everyday life and business do you agree?
Other points to consider:
- What if a spouse or kid later wants to join the business?
- How will it be handled if one partner acts unethically?
- What if one partner wants to move out of the country?
Potential partners may want to consider taking a two- or three-day retreat together to go over their individual expectations for the business and partnership, one by one, and compare notes. It can help the conversation to have the partners guess each other s expectations before revealing them to each other.
Be especially careful when partnering with close friends or family members. Like many marriages, business partnerships can end in bitter divorce. Consider whether you re willing to risk hurting your relationship if the partnership falls apart.
Approach a partnership with close friends or family as you might with strangers: Thoughtfully plan and prepare for every aspect of it in advance so there s no question about how difficult situations will be handled.
A note about partnering with a spouse: Working together puts an added strain on a relationship, and couples can quickly discover there is a little too much togetherness. Those who succeed often have learned to set boundaries keep the business from dominating every aspect of their lives. For example, they may have agreed to leave the office at 5 p.m. and put all conversation about work on hold until after the kids are in bed.
Once the decision is made to start a business together, you should create a partnership agreement with help from a lawyer and an accountant. Take this step no matter who your partner is. People with strong personal connections may feel certain that their supposedly unbreakable bond will help them overcome any obstacles along the way. Big mistake. Get a written agreement.
Every agreement should address three crucial areas: compensation, exit clauses, and roles and responsibilities. Include who owns what percentage of the business, who is investing what, where the money is coming from, and how and when partners will be paid.
Typically partners set up equal ownership and each contributes 50% of the initial investment. But terms can vary greatly. For instance, one partner might contribute more money if the other partner can bring in expertise or business contacts. As the business grows and changes, adjust compensation accordingly. For example, partners may agree to work initially without compensation, and to get paid after a certain revenue target is reached. In addition, if the business partnership brings on more people or if a particular partner is putting in more or less time, building some flexibility into the contract can let you adjust payments.
The agreement should also cover how you plan to exit the business. Include clauses that spell out cases in which one partner is obliged to buy out the other s interest for instance, if one wants to quit the business. For instance, it can state that the other partner must buy him or her out for a prenegotiated percentage of the business s value.
If neither partner wants to continue the business, partners can also liquidate and divide all assets. It s also a good idea to settle on in advance how to assess the total value of the business upon dissolution. The agreement should specify who appraises the business and the methodology to use.
Outline your expectations for how you ll operate your business. Clearly delineate the roles and responsibilities of the partners based on their skills and desires. This will eliminate turf wars and clearly show employees to whom they should report.
Establish routines for daily communication. For example, agree to talk twice a day at designated times and to re-evaluate their goals on a regular basis. At least once a quarter, sit down and discuss how you envision the future of the business and what steps to take in getting there.
Addressing these issues up front will help you better focus on your business later. How you work out the details of setting up a partnership could be an indicator of how well or poorly your prospective venture will operate. Inevitably, some potential partners will realize through the process they weren t meant to be.
Related WSJ Articles and Blog Posts:
- Sample Partnership Agreement — A sample document of how to structure your partnership agreement, from Small Business Notes, a small-business resources and information provider.
- Corporate Buy-Sell Agreement — An example contract that spells out how stock can be sold or transferred, from software maker Jian.
- Creating a Partnership Agreement — A list of subjects to discuss with your partner when structuring a partnership agreement, from Nolo, a publisher of legal information for consumers and small businesses.
- Plan Ahead for Changes in Partnership Ownership — A briefing on buyout agreements for planning what will happen when a partner leaves the business, from Nolo, a publisher of legal information for consumers and small businesses.
- Plan Now to Preserve Your Partnership — A look at what you need to plan beforehand to keep your partnership successful, from Score, a nonprofit for entrepreneurship education.
- Chart: Ways to Organize Your Business — A chart of ways to organize your business, from Nolo, a publisher of legal information for consumers and small businesses.