Buying A Business With A Partner

I have received far more inquiries and questions recently from people who are thinking about buying a business who are considering doing so with a partner. This is undoubtedly a result of people having less money to invest right now, fewer third-party financing options available in the current economy and more people within similar industries and networks being unemployed

While I am a huge proponent of a good partnership, the reasons cited above do not by themselves justify going into business with someone else. A partnership is a huge undertaking and commitment, and while the benefits can be excellent, there is a lot to consider.

First and foremost, you must have unwavering trust in the other party. If you have any question about the other person’s integrity, do not even consider going into business with them, even if they are the sole vehicle for you to be able to buy a business.

You must also share a harmonious view of the type of business you want to buy and its core attributes. This is especially important to address before you delve deeply into the process of finding a business. Understanding each partner’s long-tem goals and making certain you both share the same objectives can make the entire difference between a long-term successful partnership or one that is doomed to fail. Spend the time to articulate what each partner is really looking for in a business including the type, size, number of employees, the products, industry, etc. You also must be crystal clear what each party will contribute to the business both financially and in skill.

If both partners will be operational, then the objective is to each possess skills that compliment each other, and are not redundant. The concept is to leverage your individual talents to “divide and conquer” the tasks at hand. It is also important for there is a clear boss. I am not a fan of equal partnerships if only because it lays the foundation to bring the business to a standstill on every major decision. It is certain a sensitive subject and unless you have a specific mechanism to deal with the daily operating decisions, you can run into problems.

In cases where one partner will contribute the funding while the other will be the operator, there is a price to pay for having access to the money. I have seen many cases where a partnership begins well yet over time the operating partner starts to begrudge the financial partner who is not involved on a daily basis. As the business grows, they (the operator) start to feel the money person is simply not contributing anything to the business. While this may be the case in theory, you must keep in mind that the financing they initially provided is what allowed you to get into the business initially. They took the bigger risk early on and rightfully deserve the spoils.

No matter how well-intentioned the parties may be in the beginning, your relationship is guaranteed to change over time. Even if you are the best of friends, once you toss money into the mix and work side-by-side each day, your feelings towards the other person may change. They may get better; they may get worse, but they will not remain the same. My late uncle Benny used to say “you never know a woman until you live with her and you never know a man until you work with him” and rest assured that these are wise words indeed. It is something to give great consideration to if in fact you are contemplating a partnership with someone who is a close friend or family member. It is always easy to deal with any issues that arise as long as the business is doing well, but should there be problems, the impact can go far beyond the scope of the business and impact your personal life and family dynamic, so make sure you are mature enough to deal with it and have a mechanism to do so.

A Proper Agreement Must Be In Place

My brother and I owned a thriving business for many years. I trust my brother with my life, but nevertheless, we had a very a concise operating and partnership agreement in place specifically to avoid any family fallout. Moreover, we both agreed that should anything have happened to either one of us, the last thing we needed was to have the other’s spouse suddenly involved in the business. Ultimately, I sold him my shares and the process to do so was done within days, without a hitch.

It is well worth the time and money to have an agreement drawn up by a competent attorney that will outline the parameters of the partnership and identify who is responsible for what, how to deal with disputes, a dissolution or sale of the company. Of course there are other significant factors to consider such as adequate levels of protection for each party and especially in cases where it is not an equal partnership. Here again, having a proper agreement in place before starting out is so important (just ask Tiger Woods). It is the type of agreement you will draft and hopefully never look at again, but if you need it, then it will be there, and it will eliminate a lot of anguish and needless expense.

Drafting such an agreement is just good business sense. It can become tenuous so be prepared. The negotiation of this agreement is also an opportunity for each party to measure up the other, to see how they operate in a more stressful environment, and how amenable they are towards reaching a reasonable and equitable agreement. Interestingly enough, plenty of potential partnerships fall apart when the parties are trying to reach an agreement. Ultimately, that is a good thing. If two prospective partners cannot come to a partnership agreement, how on earth will they \be able to work together?

While aligning yourself with a partner could prove to be an excellent decision when buying a business, make sure they are the right person to not only help you build the business but someone whom you can count on to be in the trenches with you during the tough times.

Comments

[Clinton]

Excellent advice, Richard. And when there are more than two partners it becomes even more important to have a written document to refer to should a disagreement arise. In some cases I've known partners to have a neutral third party who can act to decide disputes - all parties agree to be bound by his decisions. A particularly tricky issue is how to value the company should one of the partners want to buy the other/s out.

[knightsbridge business sales]

Very nice.

[W3 Business Advisors]

Valid points here Richard! Making sure you are partnering with someone who has the same values and goals in business as you is important. The goal should be the success of the business as a whole not it's individual parts. Also having the proper agreement in place to "divorce proof" the business is essential as well.

[Jason Webb]

let me add one more point
When you are going into business you are looking for people who share similar levels of commitment.

Thanks/-
Jason Webb
entreper