7 Partnership Lessons Every Entrepreneur Must Master

April 19, 2017 @ 4:26 pm posted by David Finkel (Taxloopholes.com Advisor)

Are you thinking of bringing in a partner? Or formalizing a strategic relationship? Here are seven of the most critical lessons to consider before you finalize the deal.

Lesson One: Only bring on a formal partner if that is the only way you can gain the talent, resources, or other element from your prospective partner.

Formal partnerships should not be your first “go to” option. They are not to be entered into lightly.

Do you really need to partner? Can you joint venture or hire this company or person? Can you hire another firm or individual without the added complexity of bringing on a partner?

Lesson Two: Make sure you share common values and vision.

Don’t just look at the ways you fit, intentionally take a moment and list out all the reasons you shouldn’t partner with this person or this company. This will help you fully think through the fit before you go too far.

Do you share similar values? Will you both fundamentally be moving in the same directions? Do you both want the same or complimentary things? What things do you want that might be at cross purposes with each other?

Lesson Three: Integrity is a MUST in any choice of partners.

What evidence do you have of your potential partner’s integrity? Of their lack of integrity?

Have you done a background check of your prospective partner? Interviewed people they’ve worked with, including people who didn’t leave on good terms with them?

Lesson Four: How they exited from their past partnerships is a good baseline of what you can expect from them when they leave yours.

While investment prospectuses have to say, “Past behavior is not a guarantee of future performance” with human behavior it is your best clue.

Lesson Five: Make sure in your “partnership math” you don’t base it on time invested, but rather on value created.

All parties must feel fairly treated or the partnership won’t survive. Divide up the contributions all the partners are making to the business and put an equitable value on each of these contributions. Look for external measures of value – what would you have to pay for this contribution on the open market?

Rewards and control should follow contribution and risk.

If things change over time, your agreement needs to reflect how this will impact profit splits and equity ownership and by clarifying not just who is responsible to do what, but also the relative value of each of these pieces, you create a cleaner trail of the objective standards to help guide these later tough conversations.

Lesson Six: Date before business marriage.

Consider doing a “one off” joint venture to see what it’s like working together first before you jump into a long term business partnership. The more actual experience you have working with a potential partner, and the longer time period you’ve garnered that experience over, the more insight you’ll have with respect to how best to enter (or avoid) that partnership.

Lesson Seven: Get your written agreement done during the “honeymoon” stage of the partnership—up front!

If you can’t get things agreed to in writing when you’re “in love”, how will you get things equitably split at the end when emotions are high and attorneys are whispering?

This means have clear buy/sell provisions, disclosures and representations, and formal expectations of performance.

Also make sure you cover the five “D’s” in your partnership agreement:

  • Death — What happens if one of the principals of the partnership dies?
  • Disagreement — What happens if you and your partners reach an irreconcilable difference on a fundamentally important issue?
  • Debt — What happens if any of the partners becomes financially insolvent and declares a bankruptcy?
  • Divorce – What happens if one of the married partners gets divorced?
  • Disability — What happens if one of the partners is hurt and is no longer able to contribute time and talent to the partnership?

Here you have my top seven partnership lessons.

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