Monday, June 24, 2013

Tips for Forming a Successful Partnership

Beth and I have helped a few clients form partnerships in addition to forming our own.  We have also seen some business partnerships fail do to poor planning.  Here are a few keys points to consider when contemplating a business partnership.

The most important element to a successful partnership is the compatibility of the partners.  They need to make sure their visions for the business are in sync before the business launches and they also need to set up the infrastructure for decision making as the business grows and develops.  The best way to insure that your visions match is to put everything in writing.  It is easy to hear what you want to hear and be fooled into thinking you want the same thing.  It is much harder to make this mistake if your vision statement or mission statement is written out in great detail.  This may not be the statement you make public as it may be more detailed that the world needs to see, but it is crucial to determine if the people are meant to be business partners.

The next subject that needs to be tackled is the division of ownership.  What ownership percentages work best for the potential partners?  Beth and I are equal partners which was discouraged as many people feel having equal ownership with only two partners can created stalemates.  We have not found this to be the case, but it is worth considering. 

Once you determine what the ownership percentages should be, the partners need to decide what the buy in will be.  This is a much more complicated decision which we will address next week.  After the buy in price is determined, the next subject will be division of duties.

The partners should create a list of all duties the owners will be responsible for (and for a small business, this will probably be everything!) and then split them up based on individual skills and preferences.  Make sure you think how best to divide up the unpleasant as well as fun jobs to try and balance each partner's workload.  You will also want to look at tasks in terms of time they take on a daily, weekly and monthly basis to make sure the workloads are balanced and achievable.

The final thing to determine is how the owners will be compensated.  Partners in a LLC generally do not get paid with paychecks, but by taking draws.  The method for determining how much the draws should be is also very important.  It may not be equitable to pay yourselves based on ownership percentages.  One partner may have had more money available to invest in the business and therefore may own a larger percent of the business, but if the partners are working equal hours, equal draws may make sense.  However the draws are calculated, make sure the process is documented in writing to, once again, prevent misunderstandings or miscommunication.  Partners should also be open to changing the manner in which draws are calculated if they find their original method doesn't create the results they were looking for.  What they want is for each partner to feel as if they are being fairly compensated for their work on behalf of the business. 

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