The uncertain economy has encouraged many people to form partnerships. The idea was that the pooling of talents and funding produce a business model that is greater than the sum of its parts.
Partnerships also carry certain risks, however. There’s a lot more involved in the process than simply forming a new team that happily works in unison for a common set of business objectives. Here are some things to consider if you’re entertaining the idea of forming a partnership.
The partnership agreement
A partnership can be an excellent way to pool resources and talent. However, if it’s based on a hastily crafted general partnership agreement, then you’re asking for legal trouble.
You’ll want to hire an excellent attorney to produce a sterling partnership agreement. This agreement should specify the roles within the partnership as well as the percentage splits among the various partners.
Roles and responsibilities
Although talent pools are a great way to improve operational effectiveness, they are not without drawbacks. For example, if you’re splitting the profits at 50% apiece in a two-way partnership, that might work fine at the beginning.
However, if the workload starts to become imbalanced at some point, such that one partner is doing the majority of the work while still only earning 50% of the profits, then resentments may ensue. This is why it’s best to establish the roles and responsibilities within the new partnership from the very beginning.
It’s often the case that partnerships are formed out of friendships, among family members, or between coworkers. In order to be successful, though, the partnership must be treated as a business, not a personal relationship.
This is true even if the owner is a “silent” partner or there is a disparity in the profit split (such as 80/20). Everything within the partnership, including goals, values, and personalities, should be aligned for the success of the business. This is why it’s important that the partners practice accountability.
Before your partnership is even formed and the agreement signed, it’s important that you and your partner(s) determine how you will be holding each other accountable for business performance.
As with some marriages, a newly formed partnership requires a “pre-nup.” Although a business venture can be formed for any number of years, it’s more than likely that you or your partner(s) will eventually want to bow out. Before that time comes, there should already be legal documentation in place that specifically details an exit strategy.
A credit check
Before partnering up with any individual, you’re going to want to run a credit check on that person. One of the worst things you can do is go into business with someone who may jeopardize the partnership’s chance to get credit because of his or her own poor FICO score.