Over the years I’ve moved into and out of dozens of joint ventures and partnerships, which have made me millions of dollars. Below are some of the best of what I’ve learned when forming a partnership.
First, remember that a long-term business partnership is like a marriage. You want to ease your way into it with open eyes and LOTS of communication on the important issues that will eventually come up.
Here is a list of questions to consider as you think through the viability of any long term partnership:
- Values: Do you share similar values? Will you both fundamentally be moving in the same directions?
- Conflict: How does your prospective partner deal with conflict and does it match your style of dealing with conflict? In times of stress will your partner stay the course or cut and run? How has he/she dealt with conflict in past personal and business relationships? What clues are you able to uncover that reveal the real story?
- Work ethic: What type of hours will this person work? How much real work will they put into those hours? How effective are they?
- Integrity: Do you trust this person? Is your trust based on real data or an emotional connection? How has this person behaved in the past? Does this person consistently meet their big or small commitments? Will this person do what’s right, especially when it isn’t convenient or profitable?
Also, once you’ve made the decision to enter a long term business partnership with someone, make sure you choose the right legal structure for that business.
We all know we are supposed to “get it in writing,” but there are five things your partnership agreement must cover that many entrepreneurs forget. I call them the “Five D’s of Partnerships.”
The Five “D’s” of Partnerships
Death: You should take into consideration what will happen if one of the principals of the partnership dies. Usually this is handled by a buy-sell clause that is funded with a life insurance policy.
Disagreement: What happens if you and your partners reach an impasse, or an irreconcilable difference on a fundamentally important issue? How will you handle it? It’s important to have a carefully thought through buy-sell agreement as a last resort.
Debt: If any of your partners becomes financially insolvent and declares bankruptcy, will you have to take that partner’s creditors as your new partners? Usually in the case of bankruptcy the economic interest of the insolvent partner reverts back to the other partners, which protects members of the partnership.
Divorce: Let’s say you’re a partner with Sally, but she and her husband Jim get a divorce. If the divorce settlement gives Jim a half of Sally’s interest in your partnership, do you really want to be forced to take Jim into your partnership? You need to decide up front how you want to handle this contingency.
Disability: What happens if one of the partners is hurt and is no longer able to contribute time and talent to the partnership? How will this affect their ownership interest and the way profits are split?
I strongly suggest you consider all five of the D’s and incorporate your answers in your written partnership agreement.
Ten “Bottom-Lines” to Consider When Forming a Partnership:
- Get your agreement in writing.
- Make sure you share common values and vision.
- Integrity is a MUST for any partner.
- Evaluate your prospective partners past exits from business and personal relationships, which may reveal how they will behave if your business relationship ends.
- Strive to make a partnership work, by making it less favorable to leave or quit the partnership.
- Divide contributions evenly among partners and put an equitable value on each of these contributions. Rewards and control should follow contribution and risk. When situations change over time, your agreement needs to reflect how this will impact profit splits and equity ownership.
- Choose the right legal structure at the start of the partnership.
- Get your written agreement during the “honeymoon” stage of the partnership—up front!
- Consider doing a “one off” joint venture to see what it’s like working together before you jump into a long-term business partnership.
- Incorporate your answers to the “Five D’s” in your written partnership agreement up front.
Remember, the roles and requirements in a partnership will change over time. Make sure you keep the dialogue with your partner(s) open along the way.
David Finkel is the best-selling author of over 40 books and courses, including The Maui Millionaires for Business. He is a successful business owner who has bought, built, and sold several multimillion companies over the past 10 years. To learn more about his tools for business owners, visit him on the Web at www.MauiMillionaires.com.