According to recent statistics, there are more than two million U.S. businesses organized as partnerships. While many of these companies are enjoying the benefits of their partnership structures, others are languishing in partner relationships that were ill-conceived and poorly executed. The decision to enter into a partnership is a big one. Before you make the partnership leap, here are some questions you need to consider: What role will each partner play in the business?
The most successful partnerships are ones in which the partners play complementary roles. For example, some leaders are gifted in generating sales and marketing while others are gifted at doing the administrative detail work. You need many different kinds of leaders to make your business successful. In an ideal partnership, each partner brings different gifts to the organization.
When partners possess similar leadership gifts, the benefits of partnership are greatly diminished. Also, conflicts may arise when both partners attempt to assume leadership over the same areas of the business.
To avoid conflict, sit down with your potential partner ahead of time to decide whether your skills and talents can function in a complementary fashion. Then formally lay out a plan to determine who will be responsible for each aspect of the business. How much capital will each partner invest in the business?
Partnerships can provide an influx of much-needed capital into a business. Instead of relying on one person's capital resources, partnerships have the ability to leverage the capital resources of two or more individuals.
Before you enter into a partnership, you need to decide how much capital each partner will invest. Although a 50/50 split sounds like a good idea for a two partner organization, it is much better for one person to invest more capital and have more control over the business so that deadlocks can be avoided.
You also need to consider what happens if a partner wants to leave the business. Do you have the resources to buy out your partner's share? Or are you willing to sell the company and divide the proceeds with your exiting partner? These questions won't answer themselves. You need to have the answers before you form the partnership so you can avoid surprises down the road. How will profits be shared and how much will each partner be paid?
Profit-sharing in partnerships isn't always as simple as multiplying the profits by the percentage of each partner's financial investment. Partners frequently bring non-financial assets to the business that may be worth more than financial capital (e.g. client contacts). Agree in advance how the profits will be shared and how much each partner will be paid. Am I ready to share my vision for the company?
One of the most significant sacrifices business owners make when they enter into a partnership is sole ownership of the company's vision. As a sole proprietor, the business owner has the ability to exclusively control and shape the company's destiny. In a partnership, you will have to share the company's vision with your partners. Make sure you are willing to do that before you enter into a partnership agreement.