Your business is thriving. However, operating a business on your own can be become increasingly more difficult as your business grows and expands. Merger/acquisition opportunities, competition, retaining staff, new locations, capital, health, family pressure and business succession are some of the many reasons small business owners establish business partnerships. Forming a business partnership presents an exciting opportunity for all partners, however it requires careful planning to be successful.
Welcome to part 3 of our surviving or thriving series: Business partnerships. Click through to read part 1 and part 2 of our series.
Four ways business partnerships can help your business thrive
1. Skills and experience
One of the best reasons to partner is the skills and knowledge a carefully selected business partner brings to the table. These can be a deeper skillset of existing skills to support vertical improvement, or a completely new skillset that allows horizontal growth. With skills also comes wisdom in the form of experience. Also related to skills and experience, comes a range of peripheral benefits well-chosen partner brings to the table.
2. A new sounding board
Critical thinking skills, and even just fresh eyes can be a powerful deterrent to groupthink and confirmation bias that can often occur when businesses have had low change at the decision making and ownership levels in a business. A new business partner brings a fresh mind, and fresh set of eyes to challenges and opportunities, and can provide valuable insights and constructive criticism.
There is a difference between having a goal and sharing a goal. A good business partner will hold you truly accountable when things inevitably start to slide, and can also be a powerful source of emotional support. This can alleviate a lot of the discouragement that can occur during low points of business.
4. Increased cash, increased opportunity
A new partner will often bring a needed infusion of cash into the business. Cash helps in the day to day in many ways, and a strong cash balance can also assist with raising capital. With cash comes increased opportunity and growth.
A new business partner can also bring opportunity in the form of new business networks and introductions that can be highly beneficial. A partner also provides opportunity in the form of opportunity cost – with an extra set of hands, your time is freed up to explore new avenues and initiatives that would otherwise be untapped.
Four steps to build a successful business partnership
To minimise the risk of partnership failure, it is recommended potential business partners have:
1. A clear idea of shared objectives and outcomes
2. Develop a plan for the new business
3. Document the terms of the partnership arrangement and
4. Purchase appropriate business insurance to protect future partnership assets
1. Ensure you have asked the right questions of your prospective business partner
Most people going into partnership have had some form of previous business or personal relationship with the prospective partner(s). Due to this existing personal relationship it is often difficult for business partners to objectively assess their prospective partner’s personal and business qualities.
- Why are you going into business with other business partners?
- What are your expectations?
- Will all business partners be active in the business?
- What will be each business partner’s role?
- Do other members of your family understand and support your commitment to the new business?
- Are all business partners prepared to disclose their financial information to the other partner?
- How much cash and/or other assets will each business partner be prepared to initially commit to the business and how much are they prepared to lose if the business fails?
2. Business Life Planning
The first step is to ensure you and your business partner share the same values, standards and ethics but not necessarily the same skills. Once you have determined this to be the case, you and your partner should participate in a Business Life Planning process to document and agree the future direction of the new business and timelines to achieve agreed business outcomes/targets.
3. Partnership/Shareholders Agreement
Once you have reached consensus and alignment you need to document the terms and conditions of the partnership arrangement. This is often the most difficult part of the partnership building process as it requires partners to commit to certain courses of action, not necessarily favourable. It resolves key issues concerning disputes, valuations, sale, dealing with lack of performance and an agreed process for potentially admitting new partners into the business.
4. Buy/Sell Insurance
The final step is to ensure your partnership assets are protected in the event of the death or permanent disablement of a business partner. Purchasing Buy/Sell Insurance is one way of minimising partnership risk. Buy/Sell insurance has mutual benefit: the family of the deceased benefits, and the company does not experience any financial loss. It also can be extended to cover to serious illness and injury, total permanent disablement or serious medical trauma. Policies can be owned in various ways including cross-owned (owned on behalf of the lives of other owners), or through a super fund trustee.
Seek independent, impartial advice
Independent specialised advice can make it easy for you to build a successful business partnership, centred around the correct shared objectives and outcomes. Our Business Advisory team is skilled in delivering strategic reviews for business partnerships, and can advise if this is the best solution for your circumstances.
If you are pursuing a business partnership, complete our Business Advisory contact form below and our team will be in touch to discuss how we can assist.