How to Pick a Business Partner
Selecting a business partner might be the single most important decision you make when trying to start a business. It may even be more important than selecting what your business will do.
Business partners are like marriage partners: you are legally obligated to act in the other's best interest. In business, we call this a fiduciary responsibility. Unfortunately, many people rush to get into business with someone who they know little about or how they will work in the context of the business. What most first-time entrepreneurs often do not realize is that disputes between partners is often one of the most common reason businesses fail, so make sure you are being deliberate about picking a business partner.
Before you start your business, before you form an LLC or open a bank account, you need to ask yourselves these questions:
Do you even need a business partner? One of the fastest growing types of small business is the single-owner business, often called a "solopreneur." If it is so popular, why not try it for your business?
The biggest downside to not having a business partner is what I often call the "echo chamber." If you are the only owner in the company, you are not really accountable to anyone other than you. Yes, you might have employees or a business coach, but you will not have anyone in the thick of it with you, forcing you to make critical decisions. Employees will probably rubber-stamp your decisions, sight-unseen. A business coach can urge you, but that motivation might die as soon as you leave your meeting. A partner is really the only person that can make you act in a business when you are an owner.
This should be honest, but I consistently find the need to reiterate this: Pick someone who will benefit your business. At the very least, is this someone who is going to work hard in your business? Is this someone who is going to care if this business succeeds or dies? Do not just pick someone because you feel obligated to them because you came up with the idea together one weekend at the bar. You have to have more than that.
In my years of practice, I have been amazed at how many business partners just stopped showing up to work. They always had excuses, but the truth was that they simply were not invested in the business. A friend pitched the idea, and when it came down to it, it was fun for a little while, but then the business started to look like work.
Sadly, this is the most common reason I have personally seen that business partnerships fail. It was not lack of money, or time, or resources, it was that the waning partner liked the idea as a side project but was never fully invested in the long hours and uncertainty necessary to really run a business.
Cover Your Weaknesses
If you are serious about making a scalable business, you are going to need help. If you look at some of the most successful companies in history, the owners of the company were generally some dynamic duo that shared little of the same skill set between the two of them.
A successful businessman once told me that you need three people in a business: a finder, a grinder, and a minder. You needed someone who could find and develop business, someone who could do the work, and someone who made sure the client stayed happy. Recognize what skill set you have and intentionally look for a complimenting skill set in a business partner. There is no need for only two grinders to own the same business, for instance.
Divide and Conquer
Once you have determined your relative skill sets, the next step is to determine what your roles and responsibilities will be. Chances are, if both of you are doing the same thing in the business, then there are some major areas of your business that are getting completely ignored. You need to have some division of responsibility.
As I talk about with my clients, every business needs three skill sets covered: Business, Marketing, and Operations. Most people are very strong in one skill set. Some people are very strong in one set with some competency in another area. No one I have ever met is competent in all three areas. However, this does not matter because of a thing called the specialization of labor.
Generally speaking, two people can accomplish significantly more in one day than one person can in two days. The reason is fairly simple: as you do something, you get better at it. If you can't focus on that thing, someone else will learn to do that faster and better than you. You might be the familiar with the saying, "Jack of all trades, master of none."
A critical step in getting your partnership together is to discuss what each of you will do and how you will do it. Who will be in charge of getting customers in the door? Who will be in charge of making sure the work is competed? Who will make sure that the business strategy is working and that the company is profitable?
My favorite mug in my office is the Pessimist's Mug. It has a nice little line on the side to let you know when the mug is "half-empty." As a lawyer, it is my job to look at the worst-case scenario. However, most of my clients are entrepreneurs and, therefore, eternal optimists. This creates a problem.
Roughly half of businesses fail. When they do, there often is less in the bank than necessary to cover the outstanding debts of the company. Some of those debts might be guaranteed personally by one of the owners. What do you do then?
You need to have the hard conversations with your business partner. Are you in 50/50 for everything, profits as well as debts? Is one partner only in for a certain amount of money? What happens if the business is then wildly successful? A miserable failure? There are dozens of questions to ask, and that's often my job: to know the right questions to ask to get you thinking about what might happen if things go bad.
Put It in Writing
Now that you have had the difficult conversation with your business partner, nail everything down. It is dangerous to assume that you both will remember this conversation accurately in 5 years when the business is on the verge of bankruptcy.
These types of agreements are called different titles depending on what laws you are under. They are called partnership agreements, founders agreements, buy-sell agreements, operating agreements, and bylaws, but they are all practically the same thing: an agreement with your business partner detailing how your business starts, how it runs, and, if necessary, how it ends.
While you can probably get by running a modest business on your own, you are probably going to need a business partner to play in the big leagues. You need to pick someone who is going to be just as passionate in 10 years as you are today about your business. You also need to pick someone who compliments your skill set, shoring up your weaknesses with their own strengths. Then, finally, you need to have the hard conversation about what happens in a worst-case scenario, and commit that understanding to paper so you remember what you decided.
These are questions and issues I deal with on a daily basis. If I can help, I hope that you will either give me a call at 205-545-7278 or complete the form on this page.