Taking on a business partner has many benefits – they are a confidant and peer to share the load with, they enable you to broaden your contacts and external relationships and they allow you to complement each other’s strengths and weaknesses.
However, a business partnership can quickly turn pear shaped if you haven’t had the hard conversations up front. These conversations cover the topics of motivation, business focus, control, exit, equity and financial management.
The outset is the right time to have these discussions, to be clear about your expectations and anticipate any issues that may arise.
Some of the questions that you should discuss in the early days are:
Motivation
- What are your personal goals and what do you want from the business?
- How do you want the business to develop?
- What risks are you willing to take?
- What will you do if one of the partners is disengaged and not performing?
Business focus
- What elements of your business plan are you unwilling to change?
- Will the business be your primary focus or will you retain other jobs or business interests?
- Will there be times when you can’t commit full-time, especially if the business can’t pay you initially?
Control
- How will you make important decisions such as business value, issuing shares, acquisitions, hiring and firing executive staff?
- Will other partners or investors be brought on?
- Will you set up a board to make these decisions or make them yourselves?
- Will you have equal voting rights?
Exit
- When and how do you see the business being sold?
- What are your other options for cashing out your share of the business?
- What if one of the owners is affected by illness or other personal circumstances?
- Who owns the clients and intellectual property?
- Will you have a noncompete agreement?
Equity and financial management
- How will you split equity?
- Will you each get an equal share or will you calculate percentages based on a measure such as your individual contributions to the business?
- If you invest cash in the business, how is this to be treated? As debt or convertible debt?
- Does cash investment affect the type of shares your own?
- What will owners be paid and how might that amount change in the future?
- How will the company be financed in the future? Self-funded or externally funded?
- What happens if funding isn’t obtained?
Misunderstandings and disagreements between business owners are often the cause of a business’ demise.
Discussing these issues in advance allows you to make rational decisions, before emotional or financial influences can come into play.
It’s equally important to document how you will handle them, in order to facilitate easier management of issues down the track.
If you do the hard work up front, you’ll give the relationship with your business partner a solid foundation to build on and your start-up business its best chance of survival.
Marc Peskett is a partner of MPR Group, a Melbourne-based firm that provides business advisory services as well as tax, outsourced accounting, grants support and financial services to fast growing small to medium enterprises.
