While the process of setting up a business partnership is relatively straight forward, finding the right business partner to work with is an entirely different ball game.
While you might think starting a business with a friend or relative is a great idea, there are some important factors to consider before entering into a business partnership.
Five factors to consider when choosing a potential business partner
1 - Evaluate their personal attributes
What are they like as a person? Do they have a strong work ethic and take ownership and responsibility for their actions? And what is their attitude towards money? An individual who isn’t prepared to work hard, is prone to blaming other people, has a relaxed attitude to money or a significant level of personal debt may be the kind of business partner who adds to your problems, rather than helping you to grow and run a successful business.
2 - Do they have a proven track record?
Ideally, your business partner should have a proven track record in an area that’s important to the business. If you’re starting a business in an industry that is new to you, ideally your business partner should have knowledge and experience in that area. This is important as they will be able to bring an understanding of the core activities of the business and how it should operate.
If you do have experience in your chosen industry, look for a business partner with skills in complimentary areas such as sales, business development or marketing so they can help grow the business while your focus will be more on the operational side.
Tip: You should be wary of a potential business partner who ‘talks themselves up’ without a proven track record. Do your due diligence; this includes checking if they have previously run a successful business, reviewing financial statements, as well as contacting a lawyer to help you conduct a credit check and/or find out if they have been involved in any litigation.
3 - Consider each other’s financial status
When it comes to financial status, most people focus on covering start-up and operational costs, but there is a lot more to consider – especially if you have a number of personal assets (for example, a home, car, savings).
Depending on the structure of your business partnership, your personal assets could be exposed if the business goes into debt. So don’t be afraid to ask questions about your potential partner’s financial status. If you’re entering into a partnership where one person is more asset rich than the other, one person is carrying a much greater level of risk. This could impact on your relationship.
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4 - Agree on a business structure and risk exposure
Your business structure and partnership arrangement will ultimately define the level of risk each business partner may be exposed to. As part of your due diligence, you should consider whether to:
Tip: If you’re finding it hard to decide on a business structure, use our handy choosing your business structure comparison to understand the responsibilities, liabilities and protections each provides. You can also speak to your accountant for guidance on business structures and asset protection.
- enter into a general partnership agreement (prepared by a commercial lawyer)
- choose to be informal partners, with each partner operating independently with their own business structure but referring clients to each other).
- protect each partner’s personal assets, by setting up a partnership arrangement using a different business structure such as a company or trust.
5 - Define each other’s roles in the business
Take time to discuss and agree on:
- the time, effort and assets each partner will contribute
- how profits and losses will be divided
- how hands on/off each partner will be in the day-to-day running of the business
- how disputes in the partnership will be resolved
- the process for ending or resigning from the partnership if you one or more members decide to go their own way
- the process of valuation and buyout by one partner from the other/s if this should become necessary.
All this information should be covered in a written partnership agreement. Read our guide: Starting a business partnership for more information.
What to do when you’ve found the right business partner
Once you find the right business partner, it’s time to prepare and sign a partnership agreement. As this is a legally binding agreement, it’s best to have it prepared by a commercial lawyer. If you don’t have a lawyer as part of your business support team, read our guide: Choosing a lawyer to help you find the right one for your business.
More information
Before settling on a partnership, read more about the different business structure options available to you.
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