Choosing A Business

I have received far more inquiries and questions recently from people who are thinking about buying a business who are considering doing so with a partner. This is undoubtedly a result of people having less money to invest right now, fewer third-party financing options available in the current economy and more people within similar industries and networks being unemployed.

While I am a huge proponent of a good partnership, the reasons cited above do not by themselves justify going into business with someone else. A partnership is a huge undertaking and commitment, and while the benefits can be excellent, there is a lot to consider.

First and foremost, you must have unwavering trust in the other party. If you have any question about the other person’s integrity, do not even consider going into business with them, even if they are the sole vehicle for you to be able to buy a business.

You must also share a harmonious view of the type of business you want to buy and its core attributes. This is especially important to address before you delve deeply into the process of finding a business. Understanding each partner’s long-tem goals and making certain you both share the same objectives can make the entire difference between a long-term successful partnership or one that is doomed to fail. Spend the time to articulate what each partner is really looking for in a business including the type, size, number of employees, the products, industry, etc. You also must be crystal clear what each party will contribute to the business both financially and in skill.

If both partners will be operational, then the objective is to each possess skills that compliment each other, and are not redundant. The concept is to leverage your individual talents to “divide and conquer” the tasks at hand. It is also important for there is a clear boss. I am not a fan of equal partnerships if only because it lays the foundation to bring the business to a standstill on every major decision. It is certainly a sensitive subject and unless you have a specific mechanism to deal with the daily operating decisions, you can run into problems.

In cases where one partner will contribute the funding while the other will be the operator, there is a price to pay for having access to the money. I have seen many cases where a partnership begins well yet over time the operating partner starts to begrudge the financial partner who is not involved on a daily basis. As the business grows, they (the operator) start to feel the money person is simply not contributing anything to the business. While this may be the case in theory, you must keep in mind that the financing they initially provided is what allowed you to get into the business initially. They took the bigger risk early on and rightfully deserve the spoils.

No matter how well-intentioned the parties may be in the beginning, your relationship is guaranteed to change over time. Even if you are the best of friends, once you toss money into the mix and work side-by-side each day, your feelings towards the other person may change. They may get better; they may get worse, but they will not remain the same. My late uncle Benny used to say “you never know a woman until you live with her and you never know a man until you work with him” and rest assured that these are wise words indeed. It is something to give great consideration to if in fact you are contemplating a partnership with someone who is a close friend or family member. It is always easy to deal with any issues that arise as long as the business is doing well, but should there be problems, the impact can go far beyond the scope of the business and impact your personal life and family dynamic, so make sure you are mature enough to deal with it and have a mechanism to do so.

A Proper Agreement Must Be In Place

My brother and I owned a thriving business for many years. I trust my brother with my life, but nevertheless, we had a very a concise operating and partnership agreement in place specifically to avoid any family fallout. Moreover, we both agreed that should anything have happened to either one of us, the last thing we needed was to have the other’s spouse suddenly involved in the business. Ultimately, I sold him my shares and the process to do so was done within days, without a hitch.

It is well worth the time and money to have an agreement drawn up by a competent attorney that will outline the parameters of the partnership and identify who is responsible for what, how to deal with disputes, a dissolution or sale of the company. Of course there are other significant factors to consider such as adequate levels of protection for each party and especially in cases where it is not an equal partnership. Here again, having a proper agreement in place before starting out is so important (just ask Tiger Woods). It is the type of agreement you will draft and hopefully never look at again, but if you need it, then it will be there, and it will eliminate a lot of anguish and needless expense.

Drafting such an agreement is just good business sense. It can become tenuous so be prepared. The negotiation of this agreement is also an opportunity for each party to measure up the other, to see how they operate in a more stressful environment, and how amenable they are towards reaching a reasonable and equitable agreement. Interestingly enough, plenty of potential partnerships fall apart when the parties are trying to reach an agreement. Ultimately, that is a good thing. If two prospective partners cannot come to a partnership agreement, how on earth will they be able to work together?

While aligning yourself with a partner could prove to be an excellent decision when buying a business, make sure they are the right person to not only help you build the business but someone whom you can count on to be in the trenches with you during the tough times.

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Negotiating & Structuring The Deal

As financial markets continue to remain tight, individuals who are considering buying a business may look to doing so in conjunction with a partner.

In addition to the financial benefits of dividing the down payment requirements, partnerships can be excellent business structures when done right. By done right I do not mean the actual legal structure of a partnership but rather by having the right person as your partner.

Partnerships are very similar to marriages except that there is money involved at every stage and so business partnerships can in fact take even more than matrimony to be successful.

For the purpose of this blog, I will discuss partnerships where both individuals will be investing and each planning to be involved in the daily running of the business being purchased.

There are five major considerations to keep in mind if you are going to buy a business with a partner:

Shared Vision:

Before two individuals get into business, it is critically important that they each articulate their visions for the business and how they see themselves and the company over the next few years. Sharing their individual hopes and dreams with each other to be certain the parties are in concert is the only way to ensure their plans are aligned.

It is natural for there to be small differences of opinion however; if, at the onset, the partners are not in perfect harmony about how they envision the future, it is likely that the two individuals will never be on the same page about how the business should operate.

Before the reality of the business sets in, partners have to feel as though they can conquer the world together. Trust your gut: if the future relationship with the potential partner does not feel right in your gut, you probably should not walk down the aisle with them.

The Foxhole Syndrome:

Every business will go through various stages of growth, decline, good periods, legal issues, cash flow challenges and other difficult situations. It is generally easy for partners to get along when things are going well, but what about when the going gets tough? Is your potential partner someone that you would want in your foxhole? Will they be someone that will put the interests of the business before their own? Will they fight the enemy together with you? In other words, will they have your back?

Divide and Conquer:

A full assessment of the individual partner’s strengths and weaknesses must be undertaken. The ideal partnership is one where each party brings “need” to the deal. The goal is to have one plus one equal three.

The skill set of the partners should compliment each other, not be duplications, so that each one can focus on separate disciplines within the business (i.e. one handles sales, the other operations) and therefore the business can thrive by having an owner in charge of various areas of the company.

It is so important for the two parties to be open and honest with each other so that realistic expectations are set between themselves to avoid any unnecessary friction in the future.

Future Capital Needs:

In the event that the business requires additional capital in the future, are both partners in a position (at least at this point) to contribute additional funds? If not, that will potentially impact the corporate structure. There is a standard mechanism to deal with this issue which we will discuss in a future blog, but for now, it is a point that the individuals must address before they jump into business together.

Understanding The Difference Between Employee and Shareholder:

Business partnerships have two specific components: 1. the individuals each own a certain percentage of the business and 2. the partners can be employees of the business responsible for performing certain job functions. The two categories are, and must remain, completely independent of one another. Situations happen where one of the parties is either unable or incapable of doing their job and may have to be dismissed as an employee. That does not mean they necessarily have to sell their equity in the company. As such, while both partners may share in the profit distributions commensurate with their holdings, only one of the partners may in fact remain operational in the business and therefore entitled to a salary for their work. Having an understanding of these two separate disciples is crucial for the partners and moreover, having a very concise mechanism to deal with this possibility is fundamental to any partnership agreement.

As mentioned above, in a future post I will discuss the legal components to partnerships and the most effective remedies to deal with some of these matters, but for now, focusing on the intangible aspects of getting into business together is undoubtedly the first step to be examined. Looking at the relationship from a perspective of “what will life look like” after the partnership begins is a wonderful and critical exercise for the parties to conduct.

Partners have to be brutally honest with each other just as a future husband and wife should be BEFORE they say “I do” because just like a marriage that breaks up, a business partnership that fails can be very costly and painful.

Have a great week!

Richard Parker

Diomo.com

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