Lots of people dream of quitting their jobs and starting their own businesses. But only a fraction of them follows through with their ideas. What separates the dreamers from the doers? In many cases, it’s the fact that members of the latter group aren’t starting their businesses alone. They have a partner who is willing to take this brutal journey with them. Countless successful companies, from Apple to Twitter, began as small business partnerships.
Starting a business with a trusted friend makes the hard parts easier and the good parts that much better. You push each other through adversity and celebrate together when your hard work finally pays off. But we’ve all seen movies like The Social Network, where two best friends end up hating each other as the business grows. This is why small business partnerships must be approached with the utmost caution.
It’s rare to find someone who believes in your potential and will stand beside you in troubled times. The joy of this discovery often makes people jump into small business partnerships without thinking. To avoid this common scenario, you must be sure that you have indeed found the right partner and lay all of your concerns on the table before getting out your checkbook.
In this guide, we’ll answer these critical questions regarding business partnerships:
- What Should You Look for in a Business Partner?
- How Will You Know If You’ve Found the Right Partner?
- What are the Different Responsibilities of Business Partners?
- How Do Business Partners Pay Themselves and Split Profits?
- How Do Business Partnerships Apply for Business Loans?
What Should You Look for in a Business Partner?
It’s simply not possible for two people to agree on everything, no matter how alike they are. Business partnerships involve a lot of arguing and compromising, but only on relatively minor decisions. When it comes to the bigger picture, both partners must be on the same page.
This includes your short-term and long-term goals, values, work ethic, and expectations for each other. There must be no uncertainty in regards to responsibilities, financial contributions, compensation, and legal liabilities.
As you can see, these are all areas that could tear the partnership apart if they are not addressed from the get-go. Remember, this is you and your partner’s business, so it’s close to both of your hearts. Things that don’t seem to matter, like creative differences, could end up keeping you up at night. If you’re not pleased, it’s not like you can say the issue is out of your control.
Thankfully, you won’t have to worry about making these mistakes if you know your potential partner’s position on the aforementioned significant picture areas.
How Will You Know If You’ve Found the Right Partner?
There’s no doubt about it: clarifying the terms of a business partnership is uncomfortable. It’s not an easy conversation to have. But if you don’t get this information out in the open now, you set yourself up for an infinitely more difficult conversation later on. Since the partnership is not official, the worst that could happen is discovering that this person isn’t the partner you’ve been looking for after all. It’s disappointing, but it’s nowhere near as stressful as finding you’ve spent most of your savings starting a business with the wrong person.
You cannot assume to know your potential partner’s position on anything without asking. Thus, both partners should answer a list of questions that cover every possible subject of disagreement. For example, if both partners share the same vision for the business’s brand identity, there’s a low likelihood of creative differences with marketing materials.
Your answers should also be as specific as possible so you can envision particular scenarios. Are you prepared to answer phone calls from your partner at 1 am? What is the maximum amount of your own money that you are prepared to spend in your first year of business? This is one of those conversations where it helps to imagine things going wrong, or if your partner has a different opinion.
Business Partnerships: Goals and Motivation
The first batch of questions deals with you and your partner’s motivation for going into business together. You should not only have crystal clear goals for the company but for the partnership as well. Since you’re not a solo entrepreneur, your goals will directly involve the contributions of your potential partner. If you didn’t need a partner, wouldn’t you have just started the business on your own?
These questions will ultimately ensure that both partners want to take the business in the same direction and work towards the same rewards.
1. Why didn’t they just start their own business?
You must look deep inside yourself to adequately answer this question. Think about why the idea of a business partner is so appealing to you. Why do you make a better teammate than a leader? Why couldn’t you accomplish your business goals on your own? You shouldn’t pursue a partnership solely because you’re too afraid to start your own business. Like any business venture, partnerships only work if they are motivated by personal goals or passions.
Earlier, we noted that small business partnerships are destined for arguments that will test the strength of the relationship. A great business partner should be able to handle these moments with professionalism and rationality rather than letting emotion take over. Can you honestly say that the rewards of the partnership will outweigh the accompanying challenges?
2. What do they have that you don’t?
Strong small business partnerships are born out of mutual respect for talents and personal attributes. Neither partner should feel more or less important than the other.
Thus, both partners should be able to provide several reasons for going into business with this specific person. Why is your potential partner’s skill set the perfect companion for yours? Why are you so sure that the combination of your two skill sets will be successful?
While the previous question asked you to think deeply about yourself, this one asks you to think deeply about your potential partner. Do your personalities complement each other just as well as your skill sets? What makes this person an ideal partner for you and no one else? Think about the skills and character traits this person has that you could never find anywhere else or learn on your own.
3. What is their vision for the business?
Any type of business has a higher likelihood of success when the leader’s vision is as clear as possible. For this reason, both partners must lay out their short-term and long-term goals in great detail. How quickly do you want the business to grow, and to what size? Do you want to eventually sell the business or hold onto it for the rest of your lives? In addition to numerical predictions, consider the role the company plays in the lives of you and your customers five-ten years down the line.
Few movies exemplify the importance of this question better than The Social Network. Eduardo wanted to start advertising and earning revenue early on, whereas Mark was more concerned about growing Facebook’s popularity.
4. What are their personal goals and values?
Everyone has their own idea of what constitutes “success.” One person’s sense of success might be purely financial, while another person might place more value on helping people or social change. Your sense of success has a significant impact on your business decisions. For example, someone who just wants to make money probably won’t care about violating certain ethics or morals. This person wouldn’t make a good partner for someone who values honesty and integrity.
Simply put, two people with very different values or ideas of success should not go into business together. There’s no room for compromise here. This question is also crucial for developing the business’s brand identity, which is a reflection of the business’s values and goals. So, if you get these things out of the way now, you won’t have to do as much thinking before designing your website and marketing materials.
What are the Different Responsibilities of Business Partners?
The second round of questions establishes each partner’s responsibilities and expected contributions. This will determine the specific tasks, decisions, and problems that will be handled by each partner.
In the previous section, we said that each partner should bring an equal array of talents to the table. This allows you to divide responsibilities and prevent each partner from getting overwhelmed during stressful periods. And there will be a lot of them.
5. Which specific tasks will you be handling?
Each partner should create their own job description with as many responsibilities and details as they can think of. Start with your expertise, and then imagine the day-to-day tasks you’d be most comfortable with. What do you plan on doing every day? Then, consider the internal problems your industry is particularly prone to. Which of these problems are you more qualified to solve than your potential partner? When one such problem arises, you shouldn’t have to waste time arguing over who is supposed to solve it.
6. What responsibilities do you expect in a partner?
Instead of creating your own job description, create one for your partner. This should consist of the responsibilities you expect this person to fulfill, based on what you already know about them, along with your own weaknesses. The perfect partner should be strong in critical areas where you are weak.
When comparing descriptions, you might find that you overestimated or underestimated your potential partner’s skills. That’s okay: You can’t expect your partner to know everything you don’t. The point is to clear up those assumptions so you can figure out where you might need outside help.
7. What is your time commitment?
The previous questions about goals and visions should have clarified if you’re both on the same page about your commitments to the business. Will this be your full-time job, or just a side hustle until revenue takes off? In the case of the latter scenario, is it realistic to assume you’ll be able to focus on your new venture after long days at your current job?
Once these big questions are out of the way, you can move on to specific work hours and weekends. Remember that the risk of burnout increases with age. And if you commit to a certain amount of hours per week, you must honor that commitment like it’s your religion.
In summary, this is the part where both potential partners bring each other back to Earth. A partnership won’t survive if one partner is ready to work tirelessly, and the other would rather keep their sanity. On the other hand, the partnership is more likely to be successful if there is a reasonably equal time commitment from both partners.
8. How will you measure each other’s contributions?
One of the most significant risks of small business partnerships is one partner slacking off as pressure builds up. It’s only natural to blame your initial struggles on your partner when you feel like you’re doing everything you can.
To avoid this common scenario, discuss how you two will measure each other’s contributions. The best solution might be a project management tool that tracks each partner’s daily, weekly, or monthly responsibilities. Business partners need hard evidence that they are following through on their expectations. Otherwise, you’ll always assume that you’re doing the brunt of the work.
9. How will you resolve disagreements?
Disagreements are inevitable with business partnerships. They’ll be easier to resolve, however, if both partners know how the other prefers to handle conflict. For example, while one partner might prefer to solve disagreements right away, the other might need more time to process the issue and think of a solution. One partner might also have a mentor or industry idol that they look to for guidance. All in all, you’re just trying to get a sense of how your potential partner will react to those taut moments.
10. How will you settle legal disputes with one another?
Unfortunately, lawsuits between longtime business partners are not uncommon. The mental and emotional toll of running a business can tear friendships apart. Hence, both partners must enter the partnership, knowing full well that they could end up in a legal battle.
This battle will be much more civil if you’re already familiar with the process of settling it. What kind of lawsuits are particularly common for partnerships in your industry? What kind of disagreements lead to these lawsuits? Understanding legal proceedings is much harder when both partners aren’t exactly on the best of terms.
How Do Business Partners Pay Themselves and Split Profits?
Finally, the most uncomfortable conversation of all: Money. It’s time to determine each partner’s financial contributions and compensation. There shouldn’t be any surprises if both partners have answered the previous questions with complete honesty. You should already be aware of each other’s values, goals, and time commitments. These answers are supposed to provide an idea of each partner’s financial expectations.
One of the two partners might be less interested in financial success, possibly because they will be contributing less money. This partner should still put a lot of thought into the following questions and have specific answers for each.
11. How will each partner contribute financially?
It’s hard to answer this if you haven’t worked out specific startup costs, both one-time and recurring. Once you’ve done that, you must discuss which expenses will be covered by which partner. What will each partner’s initial investment be? How much will each partner contribute per month?
If one partner is contributing significantly more money, then that partner must be comfortable with that arrangement and not harbor any resentment. In other words, that partner must understand that their contributions will not be used as a tool for leverage during arguments.
12. How much debt can your partner take on?
Certain business expenses will be covered by debt, not cash. That debt could come from a variety of sources: business loans, personal credit cards, business credit cards, or even an outside investor. You and your partner must, therefore, discuss which expenses will be covered by debt, and how you’ll pay it back.
To answer both parts, each partner must know their limits for debt. Remember, taking on too much personal debt can make it challenging to be approved for loans and credit cards.
13. How will you spend your money?
While the previous two questions pertain to specific amounts, this one is more about spending strategies or policies. Will you be more conservative or aggressive with your spending? Do either of you have any significant investments in mind? Will you stick to a rigid monthly budget?
The main goal here is to develop a procedure for deciding whether to move forward or pass up an investment. You should also choose whether both partners must approve all expenses, or if some types of costs can go without the approval of both partners.
14. Will you or your partner take a salary?
This topic varies tremendously from business to business. Some new business owners go several years without taking a salary while others need to take one right away to cover necessary living expenses. If one partner isn’t taking a salary now, then when? Will they wait until the business draws a profit or until a certain time has elapsed? And based on the partner’s contributions and commitment, what is their idea of a reasonable salary?
If just one partner is taking a salary, you must decide how this salary will change once the business begins to draw a profit.
15. How will profits be distributed?
Business owners take their salaries from profits. So, what percentage of your business’s eventual profits will go to each partner? This question essentially determines the size of each partner’s salary and how frequently each partner will pay themselves.
Salaries are based on a myriad of factors. You and your partner must therefore decide which of these factors is most integral to the business’s success. For example, one partner’s expertise could be more valuable than another partner’s financial contributions.
How Do Business Partnerships Apply for Business Loans?
Applying for small business loans with multiple owners can be complicated, involved, and fraught with paperwork. However, being informed and knowing what to expect can make this process much less stressful.
Here are the five primary business loan protocols to prepare for as you and your partners enter the multi-owner loan application arena:
1. Do institutions view partnerships as single entities?
Just like your business, the small business loan is a joint endeavor. This is important to understand as it determines your borrowing power. Financial institutions will evaluate each owner individually. Mainly, they will see how each individual affects the partnership’s ability to repay the loan.
For example, an owner with a poor financial history will cancel out an owner with a strong financial history, putting the partnership’s borrowing power at the mid-range level. Owners with more significant ownership percentages may be given more weight, but you probably shouldn’t bank on it.
2. Will institutions consider each owner’s credit history?
Likewise, institutions will also consider each owners’ credit score and credit history. Thus, an owner with a lower score, less credit history, or too much personal debt could very well completely cancel out another owner’s perfect credit history.
You can prevent this outcome by ascertaining each owner’s credit score and credit history before even thinking about applying for business loans. If you already have an idea of what you can qualify for, there won’t be any unpleasant surprises when you hear back from institutions.
3. Will ownership percentages of less than 20% be considered?
Most institutions will only consider the financial histories of partners with at least 20% ownership. The SBA originally developed this industry standard as a means for evaluating larger businesses.
4. Will each partner have to put up collateral?
Depending on the institution, all owners with 20% or more ownership may have to put up personal assets as collateral. All owners with this much ownership might also have to sign personal guarantees.
5. Can you change ownership percentages to borrow more money?
You and your partners may decide to redistribute ownership percentage to improve your borrowing power. If so, you’ll have to do this at least six months before filing applications. This look-back policy is yet another product of the SBA. Even if you adhere to it, the institution will likely ask about the change ownership. For this reason, you should talk to your lawyer to solidify how you’ll respond.
As you can see, business partnerships cannot just apply for loans on the fly. Compared to other business entities, the preparation process requires more paperwork and financial digging. But that’s just the nature of significant initiatives for business partnerships. Everything requires more thought because more people are involved.