Should I have a business partner?
// July 15th, 2009 // View Comments // business startup
Having seen the startup, growth, sale (and occasional demise) of hundreds of companies, I have noticed one alarming trend.
A significant majority (I’d say over 80%) of partnerships that start off with the greatest of aspirations and commitment, end.
Some end well. Most end horribly.
So if you’re embarking on a new enterprise, here are 5 tips to consider as it relates to partnerships.
Tip 1: Go it alone: 9 out of 10 times you are going to be better off going it alone rather than bringing in a partner. It may sound crazy but even though a partner may be the obvious way to get free labor and support as you start your company, you’re going to end up paying too much in the long-run. Think about it this way. Let’s say your “partner” works their tail off for 2 years in your business for no compensation. Ask yourself this question. What is their time worth? 100k per year? 250k per year?
Let’s say you give them a 20% (or worse yet, 50%) stake in your company up front? Let’s play this out…
5 years from now you sell the company for $20 Million? What’s 20-50% of 20 Million?
Do you see where I am going with this?
What seems like a great idea when you have no money and equity value becomes a horrible idea when a big conglomerate wants to know where to mail the 10 million dollar check for your “partner’s” piece of your pie.
Go it alone. Especially during the first 2 years of your company. You’ll be glad you did.
Tip 2: Share revenue not control: Ok, let’s say you really do need a key player to be part of your launch team. How about sharing revenue rather than equity? You are way better off splitting profit with them for a window of time rather than giving them a life-time share of equity in your company. Your attorney can give you 15 different ways to draft a revenue share agreement that lets this individual get all the great benefits of working with you without sharing in control through equity.
Tip 3: Do a buy-sell agreement up front: Let’s say you absolutely have to have a partner. Who am I to argue? At least make sure that you have a buy-sell agreement in place the day you form your corporation. I’ll reiterate that so you really hear me on this one. The buy-sell agreement needs to be in place the same day as your company is formed. Waiting a day beyond that is going to complicate the discussion and chances are, you’ll never end up having the discussion.
The fact is, people’s priorities change over time. Your eager partner today can turn into an absolute missing person 15 months from now when you are still working 12 hours a day in the business. My shoulder has been used as a crying post more than a handful of times for entrepreneurs who regretted handing over chunks of their company to individuals who absolutely deserted them when times got tough.
Do a buy-sell agreement so that if your committed partner turns into a missing person, you have a way to take them out of the equation for pennies on the dollar vs. sharing top dollar with them when it’s time to sell the company.
Tip 4: Have realistic expectations: Even after you sign a buy-sell agreement with your partner, have realistic expectations for the long-term partnership. Like I said earlier, people change over time. Heck, you may be the one doing the changing. Maybe you’ll find that 10 months into the business you are the one who has to step out of an active role for personal or business reasons.
Have those open talks with your partner now. Talk about the various scenarios. What if they have to step away? What if you have to?
What if you end up putting in more hours, more money, more contacts? Or vice-versa?
Having those open discussion now and then documenting those discussions will make sure you have a happy transition. If it ever comes.
Tip 5: Get advice: If you are not sure of all the options available outside of a straight equity partnership, get some advice. If you talk to an attorney, make sure you’re talking to one who specializes in corporate law and has a proven track record with small business. Your uncle Jim who happens to be an attorney may not be the best choice.
If you’re talking to a business advisor/coach, make sure they have some personal operating history with partners. Ideally, you should be getting advice from someone with some “partnership battle scars”.
In closing, I don’t want you to get the idea that I am opposed to partnerships. I have had some incredible partnerships that still exist today. However, I’ve also been part of (and seen) some that caused tremendous stress and heartache.
Take the time to look at all your options. Do the hard work and have the difficult conversations now.
You’ll be glad you did.
Your fan,
Joe…
