Partnership pointers to prevent failure for first time business buyers

We sat down at the conference table across from two first time business buyers. They were eager to hear what we had to say and excited about the business opportunity that was before them. 

But they weren't sure how to structure the purchase, how to form a business entity, or how to create a partnership that would survive the inevitable ups and downs of business cycles. 

And so, we gave them a few very powerful pointers that I am going to also share with you in today's post. 

There are a few tragic mistakes that we see first time business partners frequently do in business. They are: 

1. Assume that both partners will work equally as hard in the business. 
2. Overlook that there's a massive difference between working IN the business and working ON the business. 

Both of these mistakes have the power to not only risk the business but risk the friendship or partnership as well. And many, if not most business partners I talk to say that their relationship is almost more important than the business. 

In a perfect world, everyone wants both, right? 

So, how do I create a successful business and still stay connected with my partner in a healthy way? 

I am going to share a few simple tips that will take massive pressure off you and your partner, help guard against resentment, and give you both a solid foundation on which to build your successful venture. 

First:

Accept that you both won't give equal effort to the business -- at least not all the time. 

It is almost impossible for two human beings to both put forth effort that is exactly equal -- and even if by some miracle you and your partner are able to do just this, it's unlikely that your partner will view your contribution as significant as theirs, and vice versa.

Simply put, at the end of the day we are all human, subject to human error and misunderstanding. 

You can guard against the resentment that can erode relational trust in situations such as this by accepting that each partner's contribution will be different. 

Questions to consider: 

• What strengths do you each bring to the partnership? What roles will each of you fill specifically?
  
• Do you want to adjust ownership percentages in light of expected contributions? Instead of the very popular 50/50 partnership split, one of the partners may prefer a 20% ownership stake since at that level the SBA won't require a personal guarantee, if you opt for an SBA backed loan, for example.
• Will one of you work full time in the business while the other keeps a full time role in another professional endeavor?
• Will you both work the business part time while retaining full time work elsewhere for a period of time as you build momentum?
• Will one of you start full time in the business and the second partner phase in over a period of weeks, months, or years?

There are a variety of ways to peel this onion but it is important to have a transparent conversation with your business partner about each of the aspects so that the two of you can be as equally yoked as possible. 

Secondly, many new partners overlook the difference between working IN the business and ON the business. 

Many new partners accidentally assume that they will simply split all the profits of the business based on their ownership percentages. It isn't quite that simple.

The trouble with this assumption is that new business owners forget that usually you must also work IN the business as an operator or technician. 

For example, let's say you have a health care company. That company needs owners that will be responsible for decisions such as operations, leadership, and finance. That company will also need operators or technicians to take care of patients and do the actual work of the service the company provides. 

It is crucial that the partners define and delineate between the work they do as owners (reviewing financials, hiring, making strategic decisions) and work they do in the business as technicians (caring for patients or speaking with patient's family members).

It is advisable to:
1. Define your role(s) as owner. What will each of you do specifically as owners of the business?
2. Create and abide by a job description that you fulfill for the company. 
3. Pay yourself a fair wage for the work you do IN the company.
4. Pay out the profits the company makes according to ownership percentages AFTER you pay yourself (and other employees + cost of goods sold).

Let's look at an oversimplified example: 

Company Revenues = $500k

Partner 1 Wages
for working IN the company 40 hours x $15 = ($600) 

Partner 2 Wages
10 hours x $15 = ($150)

COGS = ($350k)

Gross Profit = $149,250.00

Expenses = ($75k)

Net Profit = $74,250.00 

If the owners have a 50/50 partnership, the new profit would be $37,125.00 each-- remember that is separate from and in addition to the wages each would receive for their work as technicians IN the company delivering the product or service. 

Make sense?

Are you or someone you know considering a partnership? How do you believe these ideas would work for them in a real world application?