Before you Go into Business with Someone

Marriage and business partnerships are similar for many reasons, good and bad. They can provide you with emotional and financial support, complement your talents and allow you to achieve more than you can on your own. The not-so-good similarities? Decisions are made on the basis of emotion, couples are blindly optimistic, and too few contracts (business/ prenuptial) are signed. The result? Over 50% of marriages (60% if you are under 25), and 70% of business partnerships fail.

With these sobering statistics, you should tread carefully with partnerships (and marriages for that matter). Before considering one, check your motives. Ask yourself exactly why a partner is appealing. The adage about happiness holds here: run toward, not away from something. If you are not confident, a financial mess and hopeless at business, do not look for the business equivalent of a fairy-tale knight. You need to conduct enough research about your industry and proceed at a pace that makes you confident in your own right. You also should also have enough financial resources (or means of accessing them) to at least survive a few rough business months. When partners’ financial contributions are too lopsided it can create dangerous power struggles. And if you are hopeless at business and just “an ideas” person, look for another career.

That is not to say that a partner should not complement your skill set. Many great partnerships are structured this way. As in a marriage, however, you should be fairly self-sufficient on your own. You need to understand the core aspects of your business AND be able to hire/contract people to do tasks that are not an efficient use of your time. Only when you can survive on your own, are you are in a position to find a relatively equal business partner. This is the type who can stretch you and your business to new heights.

When you meet someone who seems both interesting and interested, do not just go with your gut! Do your due diligence and check references and past relationships (suppliers/customers/ associates). It may seem underhand, but if a great deal is at stake, professional background investigations may be cost effective here. If the person “checks out”, and you feel comfortable working with them, the next step is a draft contract. (This clarifies expectations and can give you more insight into the other persons’ motives, behaviour and whether the partnership makes sense).

Please don’t rely on oral agreements or scribbles on a napkin! Crafting a solid LLC/partnership agreement beforehand prevents so many future crises…whether your business succeeds OR fails. Even if it feels like overkill discuss and document things like:

• The ownership split. This includes an allowance for future funders/employees. If you plan on substantially growing your company you may need to reserve or issue 5-10% future equity to attract C-suite talent, another 7-10% for management, 10-20% for employees and up to 40% for later investors.
• Who is in a position of day to day control?
• how much time will the partners be expected to devote to the business?
• what happens if a partner leaves?

If you have reached this stage and things are going smoothly, it is time to pay for a lawyer with expertise in partnerships to look over your contract and provide the finishing touches. Depending on your industry and situation, they will be able to highlight any snags and offer suggestions based on their experience. With this legal go-ahead a successful business “marriage” is more likely.

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About the Author:

Krista Tuomi is a professor in the International Economic Policy program at School of International Service, American University. She has worked for many years as a policy analyst in the areas of innovation and investment. Her regular Bizwomen column, media interviews, and research focus on topics that include angel investing, crowdfunding, non-profit management and fundraising. 

She also conducts workshops in the US and abroad on all forms of small business and non-profit financing. Her passion for the field of innovation and entrepreneurship extends to her pro-bono work.

Currently, she works with SCORE, Greenwood, Boots to Business, Martha’s Table, Black Girl Ventures, Syracuse’s Institute for Veterans and Military Families, and the Angel Capital Association.