9 things to consider before entering into a business partnership

Entering into a business partnership has its advantages. It allows all contributors to share the shares in the company. Depending on the risk tolerance of the partners, a company can have an open partnership or a limited partnership. Limited partners are only there to finance the company. They have no say in business operations, nor are they responsible for debt or other business obligations. General partners operate the business and also share its liabilities. Since limited partnerships require a lot of paperwork, people tend to form general partnerships.

Things to consider before building a business partnership

Business partnerships are a great way to share your profits and losses with someone you can trust. However, a poorly executed partnership can prove to be a disaster for the company. Here are some useful ways to protect your interests when building a new business partnership:

1. Be sure why you need a partner

Before you enter into a business partnership with someone, you must ask yourself why you need a partner. If you are just looking for an investor, a limited partnership should suffice. However, if you are trying to create tax protection for your business, the general partnership is a better choice.

Business partners should complement each other in terms of experience and skills. If you are a technology enthusiast, working with a professional with extensive marketing experience can be extremely beneficial.

2. Understand your partner’s current financial situation

Before you ask someone to volunteer with your business, you need to understand their financial situation. Starting a business may require some initial capital. If business partners have sufficient financial resources, they do not need funding from other resources. This reduces a company’s debt and increases the owner’s equity.

3. Background check

Even if you trust someone as your business partner, there’s no harm in doing a background check. Calling up a few professional and personal references can give you a good idea of ​​their work ethic. Background checks will help you avoid future surprises when working with your business partner. If your business partner is used to sitting late and you are not, you can split responsibilities accordingly.

It’s a good idea to check if your partner has previous experience running a new business. This will tell you how they fared in their previous endeavors.

4. Have the partnership documents reviewed by a lawyer

Make sure you get a legal opinion before signing partnership agreements. It is one of the most useful ways to protect your rights and interests in a business partnership. It is important to understand each clause well as a poorly written agreement can lead to liability issues.

You should ensure that you add or delete any relevant clauses before entering into a partnership. This is because it is cumbersome to make changes after the agreement is signed.

5. The partnership should be based solely on terms and conditions

Business partnerships should not be based on personal relationships or preferences. Strict accountability measures should be put in place from day one to track performance. Responsibilities should be clearly defined and key performance indicators should reflect each individual’s contribution to the organization.

A weak accountability and performance measurement system is one of the reasons why many partnerships fail. Instead of making an effort, owners start blaming each other for the wrong decisions that lead to business losses.

6. The commitment level of your business partner

All partnerships begin amicably and with great enthusiasm. However, some people lose excitement along the way due to the daily drudgery. Therefore, you must understand your partner’s commitment before entering into a business partnership with them.

Your business partners should be able to show the same level of commitment at every stage of the deal. If they don’t remain committed to the business, it will be reflected in their work and can also be detrimental to the business. The best way to keep any business partner engaged is to set the desired expectations for each person from day one.

When entering into a partnership agreement, you must be aware of the additional responsibilities of your partner. Responsibilities such as caring for an elderly parent should be carefully considered to set realistic expectations. This gives room for compassion and flexibility in your work ethic.

7. What happens if a partner leaves the company?

Like any other contract, a business venture requires a marriage contract. This would outline what happens if an affiliate decides to leave the business. Some of the questions that need to be answered in such a scenario are:

  • How does the exiting party receive compensation?

  • How are resources divided among the remaining business partners?

  • And how will you divide the responsibilities?

8. Who is responsible for day-to-day operations?

Even with a 50:50 partnership, someone needs to be responsible for day-to-day operations. Positions, including CEO and director, must be assigned to appropriate individuals, including business partners, from the outset.

This helps in creating an organizational structure and further defining the roles and responsibilities of each stakeholder. When each individual knows what is expected of him or her, they are more likely to perform their role better.

9. They share the same values ​​and vision

Entering into a business partnership with someone who shares the same values ​​and vision makes day-to-day business much easier. You can make important business decisions quickly and define long-term strategies. Sometimes, however, even the like-minded can disagree on important decisions. In such cases, it is important to keep the company’s long-term goals in mind.

bottom line

Business partnerships are a great way to share liabilities and increase funding when starting a new business. In order to make a business partnership successful, it is important to find a partner who will help you make fruitful decisions for the company. Hence, pay attention to the above integral aspects as a weak partner can prove detrimental to your new venture.