The importance of knowing your value when entering a partnership [Part 3]
Entering into a small business partnership can be very exciting. You’ve (hopefully) found someone who shares your vision, works well with you and has lots of great ideas. Together you feel you have what it takes to make your small business dreams a reality.
However, before you go about investing a lot of time and money with this person, it is prudent to take a step back and look at the small business partnership from all angles, for both of your sakes.
In the last two parts, we solved the problem with the different motivations and long-term visions that partners have at the beginning of their partnership. But even if everything seems to go well between you, these are the questions (and answers!) that will lead you to successful partnership.
Let’s begin.
Now your financial roles and viewpoints
At the end of the day, the purpose of any business venture should be to generate revenue and turn a profit. A small business partnership is a financial relationship, so discussing business finances from the outset is critical. Outside of a business context, finances aren’t necessarily a topic for polite conversation. But in a business relationship, honest and forthright financial conversations need to happen. Although financial decisions can be deeply personal, remember to talk through these next questions from a “strictly business” perspective.
- How will each partner contribute financially to the business?
- Who will be contributing financially?
- How much capital will be expected from each partner? When does that investment have to be made?
⚠️ Keep in mind that while the specifics of who will contribute what financially are important to your partnership agreement, financial resources alone are not a worthwhile reason to bring in a small business partner. If financial capital is all your partner is bringing to the table, that’s not a business partner — that’s an investor.
When considering potential financial contributions, remember that cash upfront is not the only — or even the most common — form of financial contribution that a partner can make. You might seek an outside investor, or you could take out a business loan to fund your venture. As small business partners, this is yet another decision you’ll need to make together.
- What is your potential small business partner’s tolerance for debt?
- What size business loan would you consider?
- Are you willing to put up collateral on a business loan, or to sign a personal guarantee?
- Are you comfortable financing short-term expenses on a business credit card?
⚠️ Different individuals have different levels of tolerance for debt and the risk that comes along with it. Before agreeing to a small business partnership, have a conversation about the possibility of going into debt for your business and your individual tolerance for risk in that scenario. Get specific about various scenarios to decide how you’ll handle debt within your small business partnership.
What financial liabilities does each of you currently hold?
Realistically, it’s likely that both you and your small business partner have some outside financial liabilities that might impact your cash flow, your income needs, and even your ability to obtain a business loan. Depending on the structure of your small business partnership, you are to some degree tied to your partner financially. It’s critical that you’re aware of any financial baggage they might be carrying.
If your potential small business partner is less than forthcoming about their financial situation, proceed with caution — and at the very least, make sure you choose a partnership structure that limits your personal liability.
- How’s your potential small business partner’s personal credit?
- How will you manage business expenses?
- Are you a natural spendthrift, counting every penny spent?
- Or are you more relaxed in the way you spend money for your business?
⚠️Overspending can be a major source of disagreements between small business partners, but it’s one that can be avoided by setting and sticking to a budget together. Decide on a reasonable budget for your business, then decide how you will go about decision making for additional expenses.
Will you or your small business partner take a salary from the business before you turn a profit?
You or your small business partner might need to take a salary for basic living expenses even before the business has technically turned a profit. Decide on a reasonable salary figure for your particular circumstances, and if only one of you is taking a salary, decide how this disparity will impact your profit-sharing structure.
How and when will business profits be distributed?
There’s no right or wrong way to layout your business’s profit-sharing structure and the decision could depend on several key factors. Who will be putting up the majority of financing? How will responsibilities or time commitments be split? Who will provide the majority of personal connections or expertise? All of these may factor into how you decide to split profits. Discuss with your partner how and on what schedule you plan to distribute profits, and put the details of your plan in writing so that all parties are clear on the terms.
Know your exit strategy
Even the most successful small business partnerships aren’t meant to last forever. Whether it’s in a few months, years, or decades, the time will eventually come for you and your small business partner to go your separate ways. That eventuality will be much easier to face if you’ve made plans for the separation.
What is your Buy-out plan?
A buyout typically occurs when one small business partner wants to move on from the venture while the other wants to continue.
- How will you determine a fair purchase price?
- What are the terms and process for the buyout?
How would you divide proceeds from a business sale?
In most cases, small business partners who decide to sell their venture split the proceeds according to their profit-sharing agreement. But some elect to follow separate terms for a sale. Discuss the circumstances in which you might consider a business sale, and create a written agreement for your terms.
All three parts of this article were created to provide real value for the young, motivated entrepreneurs, who are willing to grow and build businesses because of their desire to help people. Stay tuned for more helpful content!
Meantime, take a look at our company and work and get inspired (https://www.globalizeit.tech/)... and if you want to work together with us, contact us at hello@globalizeit.tech
