Entrepreneurs tend to begin their road to small business alone - a sole proprietor structure limits the accountability and makes the tough decision making just a tad easier. After all, it is their headstrong egoism that has driven them to get this far and battling another like-minded partner can mean rough seas for a start-up.
At a certain point in the development, partnerships become a valuable consideration. Partnerships can create more freedom and provide the potential for garnering higher profits. They can also be potentially volatile. Before considering foraging a partnership ask the following questions:
- Do you have the same goals - both short and long term? Is your vision the same? Without the same end game, the partnership is destined for disaster.
- What are the responsibilities of each partner? What are the roles? Clearly define these before entering into any formal agreements.
- How will you determine percentage of ownership? 50-50 seems logical, but is not advisable.
A successful business depends on decision making and that's not always possible when key stakeholders have equal say. A 49%-51% is about the best that can work for a business but if that's not possible consider creating a board to settle disagreements.
Once the guidelines are decided, form a binding agreement. A solid contract clarifies the relationship when questions are raised. The US-based Small Business Association recommends the partnership agreement should include:
- Equity invested by each partner
- Type of business
- How profits and loss will be shared
- Partners pay and compensation
- How assets will be divided in case of dissolution
- Guidelines for changes or termination of partnership
- Clause for dispute settlement
- Guidelines in case of death or incapacitation
- Restrictions of authority and expenditures
- Length of the partnership
With these ten factors reduced to writing, each partner can focus on achieving the agreed vision and not be distracted by internal disagreements.