What should I consider when choosing a business partner? Here are 6 tips!
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8 June 2021 at 4:21:01 am
A reliable partnership depends on the partner you choose!
Technically, a business partner is a commercial party, who initiates an alliance with someone who has a common business interest to pursue. This relationship is contractual in nature that commits both of them into the business. In this article, we will share 6 important tips when choosing a business partner.
Do not rush into a partnership before you establish trust with your partner. Have you done background checks on this person? Does this person share the same business vision and goal with you for short and long term? Is the business approach viable? Can this person work with you in worst-case scenarios?
It is often that we are blinded by the excitement of partnership that we forgot the rational implementations. Always establish clear understanding before making a partnership decision.
2) Quantity of partners
A business venture can have more than one business partner. However, the more the partners, the more difficult it is to implement a decision since everyone has differences in opinion. It is important when selecting more than one partner, always ask; How useful is this partnership to the business? Are there alternatives? Is there a good chemistry between these partners? What percentage should this partner be getting? Will other partners be agreeable to this?
There’s a saying “too many cooks spoil the soup”. Always communicate with existing partners and understand different point of views before getting in more partners.
A partnership should include clear duties, responsibilities and who manages which area of the business. This provides clarity when conflicts arise and avoid any misunderstandings.
Also, who can authorise and sign on company’s behalf have to be explicitly defined to avoid confusion when anyone in the company seeks approval to execute something, especially in the form of funds. This also includes unanimous voting as well for business situations requiring decisions of partners to be made collectively. How these arrangements should be done has to be determined right at the start!
4) Bookkeeping and finances
Any contributions in terms of time, assets, money have to be clarified and stated clearly. This affects profits and compensations derived from various business partners and should be explained with clarity in the form of properly signed documentations.
All forms of profits, losses and taxes should also be consistently documented for bookkeeping to ensure accountability. This also allow partners to have a channel to better understand the company’s situation in a transparent manner.
5) Exit terms
In the possible event of a business closure, the partners also need to be clear on how to conduct an exit strategy and determine the manner of dissolution of the partnership agreement. This facilitates a smooth transition.
Sometimes, a partner would choose to end the partnership either voluntarily or involuntarily along the way and therefore the agreement has to cater to such a change too. This applies to other situations like partner expulsion due to unsatisfactory performance or non-competing agreement for terminated partners to disallow them to conduct similar businesses as a competitor. The scope of work and time of duration of compliance should be specified clearly to protect this business venture.
Hence, any legal issue arose from events like this or future partnership disagreements to settle in or out of court has to be clarified in the documentation. All of this would ensure the partnership begins and ends with the right expectation in order to handle the business in the best possible way for the partners.
6) Legal Documentation
With all the above factors identified, having a legal team to manage this partnership is essential. The lawyer should specify all agreements and go through them together with the partners. And upon the consent of these partners, signature must be present.
A few key points to note when you do these documentations are;
i) If the partner has a spouse, he or she has certain ownership to the business, so in case of a divorce, a legal arrangement has to be made contractually to settle that scenario. Pay close attention to the contractual details from the partner in order to ensure both parties agree on stated terms where everything has been laid out in the open.
ii) Who has the right to authorise the movement of funds, how many partners are required to make a decision, how can the voting be done and under what scenarios will it be voided?
iii) Who has how many percent of the business? In the event of an acquisition and investment scenario, how will the ownership be affected?
It is always important to be mindful that proper documentation and scrutiny of the partnership details affects the business. Improper management can result in unnecessary conflicts which may not be beneficial to the progress of the business venture.
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