(partnerships – 5 minute read)
Let’s talk partnerships. No, not ‘partnerships’ as in the business structure. I’m talking about bringing on a business partner. Another person to share the joys, pains and gains (and possibly losses) of building your business together.
I’m sure you’ve heard the story: one individual seeks out another like-minded individual to start something awesome together. That’s how it is supposed to work, in theory. The reality is that a lot of business partnerships end up souring. However, business partnerships can help your business grow exponentially if done right.
I’ve seen a lot of businesses come and go in my 15 years working in accounting and finance. Here are some tips on building better business partnerships that I’ve learned over the years.
Partnerships are 1+1 = 3
One plus one equals three. Yes, I can count, I’m an acCOUNTant. But bear with me here.
The concept of 1+1 equals 3 means that if you’re bringing someone on board your business with you, your revenue output should more than double. For example:
Tansy runs a legal advisory firm. She’s the sole employee in the business. Last year the firm made sales of $250,000. Tansy was approached by another lawyer who runs their own business to combine their businesses together. If the new business only makes $500,000 in the next year or two, there is no point to the partnership. Tansy will still be taking home $250,000. For the partnership to be worthwhile, the new business should at least be making more than $500,000 (like $600,000 or $750,000).
The point is: if you’re entering a partnership, you’re surrendering your control over the business. You become accountable to your business partner. For a partnership to work, you should be making more from the business than you were before.
Pre-revenue partnerships are all about skills
Got a cool idea or killer app that you’re developing but haven’t released yet? In which case, calculating 1+1 = 3 will be tricky, since you haven’t made any money yet. But the basic idea of compounding your return with a partner still remains.
In this case, you want to be looking for individuals whose skill sets complement your own. It’s harder to predict the revenue you’ll make on your own. But its easier to identify what your skillset is and find someone who can support that skillset. For example:
Chan is an amazing software developer. He’s developed a websecurity software that is virtually hacker-proof. However, he’s struggling with bringing it to market. The business hasn’t made any money yet so he can’t afford a sales and marketing manager. He recruits his friend Peter who has experience in software marketing to sell the software. In exchange, he gives Peter some shares in his start-up.
At a pre-revenue stage, you’ll want to identify where your skillsets lie and what gaps need to be filled. Only bring in partners that can help plug in that gap. Be careful when bringing in individuals with similar skills to you at this stage- you can always hire them once you’ve made your money.
Partnerships are built on expectations
Business partnerships and romantic relationships have one thing in common: they’re built on expectations. I guess it’s no surprise that many businesses are run by couples. Each partner has a set of expectations that they have to live up to. It is important that these expectations are established at the start of the partnership.
Each partner will have their role. Clearly establish what that role and the expectations are for that role. Let’s go back to Tansy’s example. Tansy brought in a partner because she wants to increase the company’s sales. The expectations are outlined as such: Tansy will be responsible for bringing in 30 new clients each year, the new partner will be responsible for delivering services to those clients. In this respect, Tansy is responsible for networking and sales and the new partner is responsible for doing most of the legal work.
The expectation is that Tansy will work hard to network and market the business. The new partner’s expectiation is to work hard (with some help from Tansy) to provide the legal services to those clients. As long as both partners are living up to their expectations, the partnership is productive! When expectations are not met, things turn toxic.
Avoid toxic partnerships
I’ve seen a lot of business relationships collapse. Often there are fundamental disagreements on how to run the business. Sometimes its just that one partner is not doing enough or taking too much funds out of the business (sometimes both!).
Here are some signs of toxic business partnerships:
- Partners are not communicating regularly (you should be speaking to your partner at minimum once a week on business matters)
- Partners are still drawing funds from the business even though cash flow is poor
- A partner is not doing their job (or what they promised to do – make sure you have clear metrices to measure work done!)
- Partners are disagreeing on how to run the business (some debate is healthy, but if all partners totally disagree with each other – that’s bad)
- Partner(s) straight up disappear and you can’t contact them no matter what
Generally speaking, you may have a gut feeling if your partnership isn’t working out. If you think things aren’t working, talk to your business partner and see if you can both come up with a solution. If not, its always better to exit early, than to stay in a toxic partnership.
Does an investment make you a partner?
No.
If someone invests in your business, they are not your business partner. They are an investor. They’re expecting you to double or triple their money. If they don’t work in the business or help it grow, they are just an investor.
I’ve seen different variations of this scenario play out. A group of four friends set up a business but only one of them is doing all the work. The other three just invested money into the venture. What happens next is resentment. The working partner resents the other friends for not doing any work in the business and the investing partners will resent the working partner for not making enough money on their investment.
If someone wants to invest in your business, make it very clear that it is JUST an investment. They can give suggestions on how to run your business, but ultimately you have to have day to day control over your business. Don’t make them your partner unless they want to do the work alongside you.
It’s better to be single than in a toxic relationship
Just as it is with romantic relationships, business relationships are the same. If you can’t find a partner to make it work, you’re better off running the business on your own.
There’s no pressure to go out and find a business partner. Focus on growing your business and growing as a business person. At the risk of sounding like a relationship advice column: when the time is right, you will find the right partner for you!