At business strategy implementation time, the question of whether or not to take on a partner can arise for a number of reasons. The most common include:
- A shortage of cash at critical times such as startup and expansion
- Loneliness or lack of confidence
- A previous relationship that is appropriate to continue into business
- A strategic need for a long term skill set
When starting up your own business, taking on a business partner is another way of saying that you want to give away or sell ownership of your business, together with a proportionate share of future profit and eventual sale of business proceeds.
It is common to hear of people who consider offering e.g. a web designer a share of their business in return for a website. This is a big mistake to make. At the outset your business has little or no value so it appears as if you are trading nothing for a service worth a couple of thousand dollars.
It seems like a good deal at the time. However, when your business succeeds and grows, it will become the most expensive website on earth and a source of great regret for you.
One of your goals when starting up your own business should be to preserve as much ownership as possible. If it’s absolutely essential to trade your equity to achieve short term goals, then consider a basic buyback option agreement that you can exercise later at your discretion (talk to your lawyer).
If you set out a valuation method (talk to your accountant) then you effectively put a future price on your equity and it enables you to buy back ownership of your business. Do the math first because it could cost you more to put the agreement in place than it does for the service cost you are trying to avoid.
Partnerships, including company co-directorships, add another level of complexity to your fledgling business. A person who knows nothing about your business could suddenly be playing a big part in your business strategy implementation. They may not share your vision, passion or values. They may force your business in a totally different direction.
It is for these reasons that partnerships have historically been a major source of conflict in business. I have seen many businesses fold and disband over the years because the partners couldn’t agree on the time of day, let alone the important direction and management decisions.
If you do enter into a partnership for a strategic purpose, you should seek legal advice in regard to a partnership agreement or a shareholder agreement, whichever is appropriate. You should also consult an accountant in regards to a valuation formula for buying and selling equity.
The goal of a written agreement is to clearly set out the rights and obligations of each partner and, amongst other things, how to deal with disputes, changing circumstances in the future, new partners, exiting partners, and sale of equity.
For more business strategy implementation tips visit http://www.garyweigh.com
Until next time!