12 Things to Consider Before Forming a Business Partnership

Business collaborations can help reduce risk, share ideas, and increase profits. Some entrepreneurs see the benefits and don’t consider the intricacies before forming a partnership. Some things need further thought. Below are 12 factors business owners should consider before forming a partnership and why they can be important to its success (or potential failure). Find time to read 14 best work from home businesses for nursing mothers.

1. Partnership Contract

This consensus agreement is more of a legal document than a tax document. Still, it helps define how much of the company each individual owns and how much loss they can claim. Expectations and lack of clarity tear apart countless enterprises. People assume relationship loyalty and that the other party has their best interests in mind, but that’s not true. When a business is tiny or not making money, it’s simple to assume the best intentions. Still, when plenty of money is at play, individuals govern with emotions rather than reasoning.

2. Values-and-goals alignment

Discuss values, vision, goals, and exit options. If you’re not aligned from the start, you’ll have troubles afterwards. Many entrepreneurs find it difficult to be honest and vulnerable about their company’s long-term vision and position as owners. The company will struggle without clear roles and duties. Start with a solid shareholders’ agreement. No one likes to think about the worst, yet everyone’s interests must be protected in case of death, divorce, or partnership split. Before problems arise, solve them.

3. Weaknesses/Strengths

Consider your own and their strengths and flaws. An audit reveals potential pressure areas in a business relationship, allowing you to resolve them proactively. This saves time and worries when the business is tight. I feel this encourages teamwork.

4. Expectations

Before starting a business together, partners must have crystal-clear roles, expectations, and goals. First, what do each partner’s business goals include personally? Unmet ambitions and needs complicate relationships quickly. Second, what is each partner’s position in the business, and are they qualified for it? Too often, one individual believes they’re carrying the business, or their partner isn’t achieving results, causing aggravation. How will choices be made, and is each given partner autonomy? Staying out of your partner’s lane reduces stress and panic and enables scaling.

5. Partnership scalability

Before forming a partnership, founders should consider, “Is it scalable?” New partnerships must be cost-effective. Time must be factored in. Property managers helped us reach more tenants. We believed a free relationship could only be a plus. We undermined how long it would take to convince each property manager, so we only got one after two months. All the time and effort spent on one property manager could have been spent on other growth channels.

6. Test-Drive

My friend started part-time when you made him a company partner. This helped us grasp each other’s working methods, jobs, and benefits. Two years later, I made him a partner. We both saw each other’s value. Before I made him a partner, we drafted a formal operating document with profit-sharing, wage, and exit conditions. A lawyer should draft this. Do a trial before introducing a partner, and make a legal document.

7. Taxes

The major consideration is tax ramifications. Partnership or S Corp? Does a foreign (non-U.S.) partner have automatic withholding? Do offshore companies make sense? New alliances and partnerships are exciting for income and earning possibilities. Still, it’s crucial to consider taxes to keep more of your money and not have to reorganize later when it may be too late.

8. Exit strategy

It’s easy to imagine how smoothly a new business will go, but how well you plan for problems might be crucial. Because I didn’t plan, I learned some of my toughest lessons. I began a business with a good friend. At first, we worked hard and saw success, but my partner stopped performing. Their objectives and interests shifted, and I was stuck doing all the work with no responsibility. Before starting a partnership, have a written departure plan.

9. Needing a Partner

Do you need this person? If you’re unsure, don’t partner. Partnerships hinder entrepreneurs’ decision-making. It’s a long-term connection (even if you have known them for years as a friend). Partnerships collapse frequently. There are many alternatives to partnerships that compensate both parties equally and prevent breakups. If you must partner, have a lawyer draft your agreement. A few thousand dollars is little compared to the $100,000 you’d spend on a breakup, and it could save the partnership.

10. Plan partnership dissolution.

Even the strongest business partnerships don’t last forever, and when they dissolve, emotions run high. When both parties are impartial, decide how you’ll handle partnership dissolution.

How will a partner be reimbursed if they leave the business? How will you divide the business’s sale proceeds?

Discuss how you’d approach certain scenarios. This gives you the best opportunity of ending your relationship amicably and profitably.

11. Set expectations early

Small businesses require much labour; thus, partners’ roles and duties should be outlined. It can be good to clarify both partners’ responsibilities like typical work.

How much time can both invest in the business? Do both people work full-time, or does one have a day job? How will you evaluate each employee’s performance?

Outline time, money, and responsibility contributions. Clarifying expectations early helps prevent problems later.

12. Share values

Shared short- and long-term values are vital for a good business partnership. Too many disagreements might affect the firm long-term.

Business partnerships resemble marriage in many ways. You must share values and commit to communicating through company ups and downs.

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