Deciding On A Business Partner Part 2 From Michael Barbarita
Deciding on a business partner – part two
In part one, I pointed out that partners in business together must have the following characteristics:
- Must be logical and unbiased in their thinking.
- Must eventually be at peace with all decisions.
- Partners cannot be bitter if they get diluted or when the ownership structure changes.
Here in part two, I will continue to point out things to consider when deciding on a business partner.
Partners Must Understand The Rough And Tumble World Of Commerce
Partners must be prepared for troubled times in the business exemplified by, lower salaries, dilution, difficult cash flow problems, and personal guarantees. The character of the partners must be in harmony during these periods.
One thing most partners do not understand is personal liability. Normally, business partners have to put up personal guarantees to get loans, credit cards, and leases.
Of course, the partners should do everything they can to avoid personal liability, but there are situations where it is the only way to move forward.
Partners Must Sign
All partners before the partnership starts must agree that they will sign any personal guarantee that the business needs and therefore when all partners sign a personal guarantee.
Let’s say to a bank for a credit line, it is almost always “joint and several” which means that all partners are personally liable for the entire amount of the debt.
As a result, it is conceivable that a minority partner or anyone partner could get stuck with 100% of the debt.
All partners must be aware of this and must agree in writing on how the personal liability exposure of all the personal liability scenarios is handled.
In other words, just because legally one partner gets stuck, an agreement needs to be reached beforehand on how the partner who got stuck is going to get reimbursed for the other partner’s share of the loss.
Your Partner Must Be As Passionate About The Business As You Are
If your partner(s) does not feel the passionate fire about the business and that burning desire to succeed at the same level that you do then it is best not to go into partnership.
If every partner isn’t sharing the same enthusiasm and the same commitment level then friction is likely to develop because it will show in the effort exerted.
Many partnership problems stem from one partner not thinking the other partner is carrying their weight. More times than not this starts with the energy level which is fueled by the passion the partner has for the business.
If it is not the same as yours it is almost a certainty that you will not think your partner is carrying their weight. You will develop resentment and then trouble ensues.
By the way, if you do not feel a passionate fire about the business you are starting or if you do not have a burning desire to succeed then forget about finding a partner, you are best served not going into business at all.
In future articles, I will address the attitude you have to have when starting a business.
Not All Partners Are Created Equal With Regard To Salary And Work Hours
Partners must understand that different partners take different skills to the table. Some of those skills are more valuable to the business than others.
The business needs to pay more money to the more valuable skill sets. This is difficult for many partners to understand.
Partners think that they are all equal when it comes to salary. You would not pay an assistant store manager the same as a CFO.
Comparisons need to be made as to the open market value of each partner in order to determine the proper salary. It is highly improbable that each partner will work the same number of hours in the business.
Some partners simply have more things they have to attend to outside of the business. Both the role the partner plays in the business and the hours worked make it improbable that you both should command the same salary.
These things need to be discussed upfront and agreed upon in advance of the relationship.
How profit ultimately gets split is a different story. Profit should be split based on the percentage of ownership in the company and have nothing to do with salary and hours worked.
I have more in part 3.
About Michael Barbarita
Michael Barbarita has owned and operated Retail, Manufacturing, and Service companies over the last 30 years. President of Next Step CFO Empowering Small Business Owners to earn multiple 6 figures in profit and build 7 figures in value. His vision is to give every entrepreneur an opportunity to be more successful in their business and to help them realize their dreams and create business value.
If you liked this content subscribe now!
Learn how to grow your coaching business from the best.