Taking on a Business Partner? Six Questions You Should Ask

Taking on a business partner can be a great way to raise capital, add value to your existing business, and expand your company. It’s also a serious decision – one to make with care and legal consultation.

Before agreeing to a partnership, it’s best to go through an extensive discovery phase, similar to a courtship before marriage. Learn all you can about a potential partner, how he worked in the past, why she left her previous position, and other information that describe how a partner views work and the workplace. If these views don’t sync up with your views, keep looking for a new partner.

Here are six questions you should ask any potential business partner to minimize the chances of potentially serious problems in the future:

1. What role do you expect to play in our mutual venture?

Having two CEOs is not a good idea. Even if you sell 50 percent of your business, someone has to be in charge. If your prospective partner wants to run the day-to-day operations, are you going to be comfortable? Will you trust your new partner to continue current procedures and to enhance the existing corporate culture? It’s essential that you, the business owner, fully understand the expectations of a potential new partner before you sign any agreement.

2. How will we, as partners, handle disagreements?

A “must-ask” question, since you know there are likely to be disagreements. And some disagreements simply can’t be settled. What then? Typically, when taking on a new partner, the current owner drafts a buy-sell agreement that’s used in cases where partners are at an impasse and simply can’t settle their differences. A buy-sell agreement is triggered by a defined set of circumstances, i.e., when impartial arbitration fails.

3. What happens if you become disabled, get a divorce or die?

Terrible topics, no doubt, but questions that must be asked. Otherwise, you may find you’re partners with a surviving spouse or an unhappy ex-wife. Once again, prepare a buy-sell agreement that enables you to buy out a partner whose personal or health circumstances change. A buy-sell agreement equips you to hold onto the full ownership of your company without having to take on a new partner you never planned on.

4. What happens if you fall behind in your debts?

Another tough question. Your prospective partner may have a spotless credit record now, but what if she suddenly finds herself facing unexpected medical bills or a loss of family income?  Your business is an asset owned, in part, by your business partner. Therefore, the company is involved if your partner is suddenly faced with a home foreclosure or a huge, unexpected debt. Keep the partners’ personal and business lives separate in any agreement you draw up, to help avoid losing capital or your company because you must assume your partner’s debt.

5. What are the things you most value in a company?

You want a partner who shares your values – an individual who values and rewards company loyalty, who plays by the rules, and works with you, not against you. Here’s one example: You may feel that outsourcing is unfair to your current employees who’ve worked hard to build your business. Your new partner may view outsourcing as a cost-cutting measure designed to increase margins. You value employee loyalty; your prospective partner values business efficiencies and the bottom line. This can be a big problem.

6. Do you leave work at the office or do you take it home with you?

A sound business partnership is based on equality. Equal duties, equal hours worked, equal responsibilities – all come into play in a successful business partnership. If you’re putting in 60-hour weeks and your new partner is working 30 hours a week, it won’t take long for you to resent the disparity in work ethics. Look for a partner who’s willing to work as hard and long as you are to build your business to greater profitability.

Get It in Writing

The key is to get it all in writing. Ask the tough questions without fear. Develop solutions to problems before those problems ever arise. Create an agreement where each partner’s expectations are clearly laid out so there aren’t any surprises.

A partnership is much like a marriage. Make sure you have a detailed “pre-nuptial” agreement, drawn up by a legal professional, to protect all that you’ve worked so hard to build.

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.