9 things to consider before forming a business partnership

Entering into a business partnership has its benefits. It allows all contributors to share the stakes in the business. Depending on the risk appetite of the partners, a company may have a limited or general liability partnership. Limited partners are only there to provide funds to the business. They have no say in business operations, nor do they share responsibility for any debt or other business obligations. General partners operate the business and also share its responsibilities. Since limited liability partnerships require a lot of paperwork, people generally tend to form general partnerships in business.

Things to Consider Before Establishing 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 spell business disaster. Here are some helpful ways to protect your interests while forming a new business partnership:

1. Be sure why you need a partner

Before you enter into a business partnership with someone, you should ask yourself why you need a partner. If you are looking for just one investor, then a limited liability company should suffice. However, if you are trying to create a tax shield for your business, the general partnership would be a better option.

Business partners need to complement each other in terms of experience and skills. If you are a technology enthusiast, partnering with a professional with extensive marketing experience can be very beneficial.

2. Understand your partner’s current financial situation

Before you ask someone to commit to your business, you need to understand their financial situation. When starting a business, a certain amount of start-up capital may be required. If the trading partners have sufficient financial resources, they will not require financing from other sources. This will reduce a company’s debt and increase owner’s equity.

3. Background check

Even if you trust someone to be your business partner, there’s nothing wrong with running a background check. Calling a couple of professional and personal references can give you a fair idea of ​​your work ethic. Background checks help you avoid future surprises when you start working with your business partner. If your business partner is used to staying late and you are not, you can divide the responsibilities accordingly.

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

4. Have a lawyer review the partnership documents

Be sure to get a legal opinion before signing any partnership agreement. It is one of the best ways to protect your useful rights and interests in a business partnership. It is important to have a good understanding of each clause, as a poorly written agreement can lead to liability issues.

You should ensure that you add or remove any relevant clauses before forming a partnership. This is because it is cumbersome to make changes once the agreement has been signed.

5. The association must be based solely on commercial terms

Business partnerships should not be based on personal relationships or preferences. Robust accountability measures should be in place from day one to track performance. Responsibilities must be clearly defined and performance metrics must indicate each individual’s contribution to the business.

Having a weak performance measurement and accountability system is one of the reasons why many associations fail. Instead of trying hard, the owners start blaming each other for the wrong decisions, leading to losses for the company.

6. The level of commitment of your business partner

All partnerships begin on friendly terms and with great enthusiasm. However, some people lose the excitement on the road due to the daily work. Therefore, you should understand your partner’s level of commitment before entering into a business partnership with him.

Your business partner(s) should be able to show the same level of commitment at every stage of the business. If they don’t remain committed to the business, it will reflect on their work and can also be detrimental to the business. The best way to maintain each business partner’s level of engagement is to set each person’s desired expectations from day one.

When entering into a partnership agreement, you should have an idea of ​​your partner’s additional responsibilities. Responsibilities such as caring for an aging parent need to be thought through to set realistic expectations. This allows for compassion and flexibility in your work ethic.

7. What will happen if a partner goes out of business

Like any other contract, a business venture requires a prenuptial agreement. This would describe what happens in the event that a partner wishes to exit the business. Some of the questions to answer in such a scenario include:

• How will the outgoing party receive compensation?

• How will the division of resources between the remaining trading partners take place?

• Also, how will you divide the responsibilities?

8. Who will be in charge of daily operations

Even when there’s a 50-50 partnership, someone needs to be in charge of day-to-day operations. Positions, including CEO and director, need to be assigned to the right people, including business partners, from the start.

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

9. You share the same values ​​and vision

Entering into a business partnership with someone who shares the same values ​​and vision makes running day-to-day operations considerably easier. You can make important business decisions quickly and define long-term strategies. However, sometimes even the most like-minded people can disagree on important decisions. In such cases, it is essential to consider the long-term objectives of the business.

Bottom line

Business partnerships are a great way to share responsibilities and increase funding when setting up a new business. For a business partnership to be successful, it is important to find a partner to help you make fruitful business decisions. Therefore, pay attention to the comprehensive aspects mentioned above, as a weak partner can prove detrimental to your new venture.