Running a company on your own can be very isolating. It’s not just because you work alone, it’s often the case for many business owners that they don’t even feel comfortable talking honestly or deeply about their business with their spouse. Because of this, working with a business partner or co-owner can fill a critical gap and help you keep slogging through hard times. Your relationship with your business partner plays a unique role in your life, but it still shares a lot with other types of close personal relationships.
Just like long-term friendships or romantic relationships, healthy, valuable and harmonious business partnerships take a good deal of effort from all the people involved to make them work. If you decide to put that work in, a business partnership can be a truly rewarding experience: a massive force for getting stuff done. When the going gets tough, it is reassuring to have someone else in the trenches with you. On the other hand, when you’re experiencing success it can be really rewarding to be able to celebrate this with someone that knows what it took to get there. You ride the highs and lows with your business partner in ways that others just can’t understand.
Our own business has been founded on the idea of partnership. Ever since we launched in 2010 we have had multiple owners and multiple businesses. We’ve been very fortunate to see it work well and to have enjoyed the ride thus far.
In our years of operation, we’ve helped countless partnerships with their accounting needs. We’ve seen what works and we’ve seen what doesn’t. We want to share these insights with you. This article will give you the insider information on what you need to consider when you are deciding on whether to embark on a business partnership. So, now, it’s time to review our top 8 tips for deciding whether a business partnership is right for you.
1. Ask yourself if a business partner is worth it?
The first thing you need to decide is whether you want a partner at all. This depends on the type of business you’re starting.
Some business models have been tried and tested thousands of times over. For example, service businesses such as trades and professional services have thoroughly proven themselves as small operations. You know the business model works because there are plenty of examples of successful small businesses in those spaces. In cases such as these, you can do well at a small scale and are less threatened by large players trying to compete with you. Service businesses, as compared to product-based businesses, are less about commoditisation and are therefore less about price pressure. Instead, the focus is on the delivery of value at the point of service.
However, for the same reasons that these businesses work well when small, they can be difficult to scale up. Therefore, the need to share the burden of risks and rewards isn’t as critical. Having multiple partners in this space isn’t necessarily going to allow you to achieve more. You would need a compelling reason to take on an equal partner for a business like this.
At the other end of the spectrum, you can have high-risk business ventures and businesses that depend on economies of scale. For example, if your business is a start-up that is trying to disrupt an industry, it would be rare for any one entrepreneur to have the full skill set needed to succeed. Similarly, if you are trying to start a product-based business, outside capital might be needed to make your supply chains profitable.
In these situations, you really need to share the burden with people who are as dedicated as you are. You would also need to ensure they’re the right person or people with the right mix of skills to complement your own abilities.
2. Do your interests align?
The key to long-term success in a business partnership is creating a situation where everyone wins. This means you must be clear about what “winning” means to each party, and whether those ambitions are compatible. Therefore, ask yourself:
Are you aligned on the “big picture”?
At Eagle Financial, we say there are three fundamental components of a business “big picture”. These are:
- Why do you do what you do?
- Where do you want to take your business?
- What do you and your business stand for?
When thinking about the why and where of your business, you need to consider both your personal reasons and the factors that make your business compelling. Ask yourself, what do you want the business to achieve? Once you have an answer, now ask: how will this enterprise inspire your staff and clients to help you get to that goal?
It is equally as important to establish the core values of a new business. Clearly articulated values provide a wealth of benefits. They act as guiding principles for your team members. They facilitate greater autonomy. They can help people take initiative. A set of values that people can believe in also builds loyalty among staff and clients. Finally, strong values are a compass to orientate you when you’re faced with difficult choices along the way.
Of course, not everyone will have the same answers and differing visions can be equally valid. The fact remains that if business partners aren’t on the same page, then it is simply impossible for the business to succeed. For more information on how to approach these questions, take a look at our “Guide to a Better Business” at eaglefinancial.com.au.
A fair sharing of rewards
Once you’ve found a partner who shares your big picture vision, you now must iron out the details of the partnership. Sure, some businesses can “bootstrap” in the early days, as whichever partner has a spare moment does whatever task is most pressing, with each earning very little as the groundwork gets laid. However, when it comes time to reap the rewards, you’ll need a structure in place. You want to avoid a situation wherein one partner is contributing far more than the other, yet the distribution of rewards doesn’t reflect that.
Whether those rewards are pure profit or something else, such as equity, you need a plan to distribute them fairly. An even split isn’t always the best definition of “fair”. For example, we often see situations where one partner is revenue-generating and the other is responsible for administration or sales. Example: you might be a skilled tradesperson who does not feel comfortable hustling to drum up clients. Teaming up with a salesperson seems like an easy win — the perfect marriage of operations and business development!
However, if the difference in roles is not managed well, it can lead to one partner feeling resentful. That is, one partner can feel that their own input is far more valuable than the other person’s. If you want your partnership to succeed, you must come to a clear agreement about how much each partner will contribute and how much that contribution is worth.
What direction are you heading in? And, how far will you head in it?
It’s critical that business partners have a similar level of motivation and a shared long-term vision. If one partner is a workaholic, always beavering away and wanting to achieve more, then the other partner must be in alignment with this.
For example, if you have one very driven partner and the other partner just wants to reach a set level of income and then clock off, you can expect tensions in that relationship. Alternatively, if one business partner is nearing retirement and the other is in the early stages of their career, they will bring very different priorities to the endeavour.
3. Ask not what your business partner can do for you…
This might sound cheesy, but bear with us: successful business partnerships operate just like successful sporting teams or marriages. They only work when people understand the group is greater than the sum of its parts. That means they succeed when partners work for the partnership, and not just for themselves.
Your time in business will be full of ups and downs. Hopefully more of the former! Many of your competitors will go out of business simply because they’ll neglect the things that are hard. In any event, your success won’t happen overnight. Yet, over time, tenacity and perseverance can bring incredible achievements. A business partner can be an incredible asset when you are facing the inevitable challenges of starting a business. It’s far easier to keep motivated when you see the positive effect that your progress is having on someone else.
Human beings are hardwired to put others before themselves. As the old saying goes, “the plumber has leaky taps in his own home”.
As a business partner, you take on responsibility for your partner’s success as well as your own. While that might sound like a burden at face value, it can be an incredible motivator. Plus, it also works in reverse: they will, in turn, take on responsibility for your success. If it’s you alone who bears the cost of a lost customer, it’s easy to let it slide and move on. Conversely, if a loss affects your business partner, you will have an additional motivation to do what’s needed to fix the situation.
There’s no denying that the responsibility of a partnership is a two-edged sword. You make yourself accountable to someone else, but that accountability can help you through the rough patches. To make it work, you have to ask yourself: do you genuinely want more for your partners than you want for yourself?
4. Be careful of business with friends or family
Never work with animals or children, and don’t do business with friends or family. This is wisdom so ubiquitous that people automatically assume it is true. While we think the statement is a bit unfair — plenty of family businesses do well — there’s no doubt that personal relationships can complicate business arrangements.
Business is full of ups and downs and emotions can escalate when friends, siblings, in-laws or parents are involved. There’s just no escaping all the extra baggage that a personal connection brings. There’s nothing worse than seeing best friends argue over a business challenge to such a degree that the company collapses and the two never talk again.
You have to consider what factors drive your personal relationship and whether those qualities are ones you want in a business partner. Also, think about how the person handles conflict. Be cautious if your friend or family member is quick to hold a grudge or assign blame. Be aware that you’re risking a permanently damaged relationship should the business run into tough times.
This doesn’t mean a friend or family member is never the right choice for a business partner. Business ownership and management are challenging pursuits. The road is always bumpy. So, ask yourself, who do you want next to you in the trenches? After all, we are close to our friends and family members for a reason. We can expect a high level of commitment and loyalty from them. Just make sure each of you does the work to separate business compatibility from personal compatibility.
5. Understand the peril of ‘exit’ being an option
One of the key items of a shareholders’ agreement is deciding what will happen if one partner wishes to leave the business. There are many possible reasons for this. Some common ones include:
- The partners no longer get along
- The business has not met financial expectations
- One partner has received a better offer
- One partner has simply lost interest.
These scenarios are the reality of many business partnerships. They must be covered in your shareholders’ agreement. However, we believe that when exiting the partnership is too easy, it can undermine the chances of the business to succeed.
For why, let’s look at the book Beyond Order: 12 More Rules for Life by psychologist Dr Jordan Peterson. In it, he explains that the idea of “keeping your options open” can be extremely perilous to a marriage. For example, there are 7.9 billion people in the world, and 100 million or so might have made exceedingly good partners for you. You certainly don’t have the time to try them out, and therefore there’s essentially no chance you’ll find the theoretically perfect person.
It follows then that asking yourself, for the rest of your life, whether you found the ideal person is an awful idea. Rather, Peterson proposes that you do not seek the “perfect” person, so much as set your mind to appreciate the person you do have. If you have an easy escape route, you’ll be less inclined to do what’s needed to make the relationship work. As they say, “love the one you’re with”.
Although Peterson focuses on romantic connections, these insights apply equally well to the choice of a business partner. Running a business is a long journey, requiring a serious level of commitment. It is certainly sensible to have worst-case scenario planning agreed upon and documented. However, it’s just as important to proceed with the mindset that you will both work relentlessly towards making the business a success, even when the chips are down.
6. Dream big, plan small
A failure to set realistic expectations can be the death-stroke of a business partnership and even for the business itself.
If there are lofty expectations for profit and it doesn’t come through, one partner might find themselves in financial distress and needing to look for other work. Failing to plan pragmatically can lead to the disappointment of one or both partners, conflict and loss.
When setting out, picture yourself in 20 years and looking back. Are you going to be satisfied with having decided to pursue this venture? Will you regret not doing it?
7. Can 1 + 1 = 3?
Some tasks have a simple relationship with human effort. If there are boxes to be moved, two people of similar strength will move them twice as quickly. As soon as a project gets more complicated than that, things get much more interesting.
For example, Walt Disney and his brother, Roy, had very different strengths. Walt was a visionary – he dreamed like no one else. The Disney empire would simply not exist without him. Despite his incredible talent, Walt was not a good organiser. He would get frustrated at the practicalities and would often turn his attention to new ideas and leave old projects unfinished.
Roy, on the other hand, was far less creative, but he was an exceptional operator. Diligent and tenacious, he ensured Walt’s best ideas were implemented properly. Although he is less well-known, it is fair to say that Roy was equally responsible for the Disney juggernaut we know today.
This is an example of 1 + 1 = 3: two people with different traits who really complemented one another to achieve much more together than they could have as individuals.
In his book, Rocket Fuel, Gino Wickman expands on this idea. Wickman explains that there are two leadership styles in business and that combining them can be a tremendous advantage. The first style is the “Visionary”. The Visionary is the strategic thinker, the idea generator and they ooze passion for the business. The visionary is always looking for new opportunities but struggles to stay focused, to hold people accountable and to deal with the details.
The second style is the “Integrator”. This leader is excellent at management and holding people accountable. The Integrator is relentless at executing the business plan and filtering the Visionary’s ideas. They are responsible for assessing what can and can’t be done.
A natural tension always exists between a Visionary and an Integrator. After all, it is the Integrator’s job to say “no” when it is warranted. However, when handled properly, this dynamic ensures that there are always new ideas, that only the best ideas are pursued, and that those pursued are seen through to completion. And this is how 1 + 1 = 3.
Look at your own combination of business partners. Think about how the group can add up to more than the sum of its parts. If you can’t then you should have another really, really good reason to be in business together. It needs to be more than just alleviating the anxiety of “doing it alone”. If you’re not going to more than double your output, impact or profit, then you’re better off doing it yourself and keeping control.
8. Are you both operating under similar tax and legal rules?
It can be a real challenge to have partners based in other countries. This stems from the fact that there can be complications when sharing profits or signing legal agreements. Some considerations include:
- Your legal obligations in the other country
- The ramifications of those obligations on your business
- The jurisdictions you will be required to pay tax under.
While these things are certainly not insurmountable, it’s much easier to manage when all partners reside in the same country. When considering a partnership that crosses borders, you have to check the fine print much more thoroughly.
Deciding to go ahead with a business partner
In this blog post, we’ve examined the major aspects to consider before making the decision on setting up a business partnership. Keep these points in mind as you draw up your plans. Try to have a solid response to each one. And if, after going through all of them and working through any questions or concerns on your mind, you still feel like “yes, I want to pursue the business partnership” then please read “Business Partnerships: Part 2 – The Practicalities”.