Broker Check
Time to Partner Up!

Time to Partner Up!

July 01, 2022

How a partnership can help

A partnership can be extremely helpful when starting up or running a business. Have you ever heard the expression "two heads are better than one?" Well, that's exactly what a partnership is for! A partner allows you to utilize the experience of others who may have a different perspective or set of skills than yourself. With two or more partners you can also divide the workload that comes with developing a business and specialize your tasks to fit one another's strengths. There's also the less known expression "two wallets are better than one." Having a partner can take some of the strain off funding, as they can help cover a portion of the costs. There are also tax benefits associated with partnerships!

Though partners can be great when the right people work together, it's also important to be aware of the disadvantages. When partners come in, they take a piece of the pie. That means you lose some profits and control every time a partner is brought in. The slice of that pie is up to the agreement you establish. Partnerships aren't a magic wand, but rather a double-edged sword. A bad partner can drive your business to the ground, so picking the right ones is essential.

Picking your partner

Choosing the right person to partner with isn't easy. While there are a number of factors that need to be looked at when picking a partner, we'll start by giving you the 3 most important ones:

  1. Trust
  2. Value
  3. Practice

The most important factor when choosing a partner is trust. If you are unable to trust your partner then no other factor matters, and the partnership is doomed to fail. When evaluating a partner's trustworthiness, you have to look at them as a partner rather than a person. A friend may be very loyal and honest, but if you can't trust them to submit documents on time because he's forgetful then he probably wouldn't be the best partner. You don't have to be best friends with your partner to trust them, you just have to trust that they will be able to handle their tasks and contribute to the business.

That brings us to the second most important factor when looking at potential partners—the value they bring. Your partner's strengths should complement your own. For example, if you are a great salesperson but struggle with more operational aspects of the business, it would be best to bring in someone who can make up for your weakness. This balance doesn't just apply to strengths and weaknesses, but also industry knowledge, experience, age, etc. The more balance your business has in its management team, the more prepared you will be for the hurdles that will come. Ideally, you want someone who can bring value in several different areas. If your partner is someone that can easily be replaced, then they probably aren't the best choice.

Last, but certainly not least, you have to put the partnership into practice. Before you make things official it's best to try your new partnership out to see if your assumptions about your partner and how you work together are correct. A partner that looks great on paper might not work out in practice. If you haven't worked with them previously, whether it be at a job, project, or event, then you should set a specified amount of time to serve as the "trial period" for the partnership. If things go as expected and you both are satisfied with the current situation, then you can go ahead and make the partnership official.

Starting a partnership

The key to having a partnership run smoothly is having a strong framework. This means having a written partnership agreement that outlines every aspect of the partnership and what will happen in case of all kinds of different scenarios.

"Hope for the best, but be prepared for the worst"

When establishing a partnership, you also must decide what type of partnership you are going to have. There are three main types: General, Limited, or Limited Liability. For more details on the different types of partnerships, check Corporate Finance Institute's article here.

Knowing when to part ways

Some partnerships don't last forever and it's important to know when your partnership has outgrown its worth. If you feel like a partnership is limiting yourself rather than pushing you beyond your limits, then it may be time to leave. It may be helpful to take an honest look at what you and your partner are providing to the business every so often. By looking at what you are contributing, your partner is contributing, and what you are achieving together, you can evaluate the strength of your partnership. Depending on what you see, there may be more value in ending the partnership or bringing in another partner.

If you decide to terminate the partnership, then it's best to try and do so without hostility. By aiming for compromise, you can avoid tarnishing your relationship with your now ex-partner and avoid an often lengthy and costly legal battle.

Learn from experience

This article was inspired by our podcast with Chris Wiley: Do It For Yourself – Episode 13

Chris got his start in the restaurant business and went on to open 5 stores of his own with his partner and longtime friend, before transitioning into real estate investing. In this episode, Chris shares his experience in a partnership of over 20 years and why he decided to part ways. Be sure to check it out!