8 Key Questions to Ask When Forming a Business Partnership

Great Partnerships and Joint Ventures help business owners achieve their dreams faster. Yet most do not succeed, having failed to answer to these key questions.

Maybe you are forming a partnership for a new startup? Perhaps you are bringing in an equity partner to your business for the first time? Or you have identified that a significant growth opportunity would be easier realised by creating a joint venture.

Even before you ask the legal and accounting questions involved, you need to be clear about whether you and your partner/s will be successful together. Failure to do so can set your plans, and financial position, back by years.

These 8 questions cover both the STRATEGIC and OPERATIONAL elements of your enterprise. These may require a number of meetings to review and discuss. External guidance, from an advisor experienced in partnerships and JVs, isn’t necessary but can accelerate the outcomes. You can download the questions here.

(Case Studies are drawn from my own experience over 10 years as a business owner and business advisor. Names and industries have been anonymized.)

4 Strategic Partnership Questions

1. What is the Commercial Vision for this enterprise?

  • How big do you want to grow (revenue, staff numbers)?
  • Is this an Income or an Equity business?

It’s not essential that both partners have an identical vision, but they must be aligned. If you want to reach $24 million in revenue in 5 years and your partner wants $3 million, then you have a fundamental issue. Your desire to recruit, train, handover, grow will overcome their unwillingness to do so, no matter how ‘great’ or ‘easy’ you think it will become.

An analogy I use is two parties planning an overseas holiday. To get there, you have to walk down the garden path, take a taxi to the airport, and hop on a plane to your destination. If you want to go to Bora Bora, and your partner does not, it’s important to know where they want to go. Sometimes, their vision only extends to the end of the garden path, or to the airport. The taxi trip alone is their holiday dream, and they don’t mind farewelling you (ie, handing over equity or control of the business) so you can fly to Bora Bora. Your visions are aligned and this trip can take you both where you want to go.

But if they want to fly to London, or take a cruise, or never leave the living room, then you have a problem.

The two fundamental elements of your Commercial Vision are size and purpose. Specifically, how big (or not) do you want to be? And is this primarily an Income or an Equity opportunity? Each of these choices will impact daily or weekly decisions you have to make in your business, so misalignment here will mean your partnership will become a tug-of-war not a successful venture.

Case Study A – David and Andrew

David has built some IP to help business coaches deliver more value and increase their rates. Andrew has experience in growing this type of business.

David’s personal vision is to earn $100,000 per annum in passive income so he can do more charity work. Andrew wants to build a business helping other people like David, rather than dedicating his life to this specific opportunity.

They agree on a Vision to build a $1.5 million company, with margins at that level supporting a paid Manager and healthy dividends (Income) for both Partners they can re-invest in other ventures. Their Visions align.

There’s nothing right or wrong about this choice – this business could grow larger with margin re-invested to grow equity value instead of being pulled out. Had one partner had this vision instead, conflict in the relationship could have doomed either from achieving their plans.

Or Chess.

Or Chess.

2. What are the Cultural Values we choose for this enterprise?

  • Would I bring this person home for dinner?
  • What is our aligned Intent?
  • What are the 3 core values of our venture?

It’s surprising how many business owners go into business with people they don’t like, because the commercial opportunity is so great. It’s less surprising how many of these ventures fail.

The simplest way to align Culture is to genuinely assess whether you want to be in business with the other person. The barbecue test – would I bring this person home for a family meal? – is one I follow.

Those seeking a more comprehensive answer may decide to complete an Intent and Values exercise with the partnership. Can you agree on an Intent (eg, ‘To change peoples’ lives’) and 3 Core Values?

Don’t give in to temptation and have a long list of values. This is about determining whether you are compatible – if you can’t work together to define 3 core values, you will struggle to implement an aligned Culture as the venture grows.

3. Are your natural Behavioural preferences complementary?

  • What are your Communication styles?
  • What are your Risk appetites?
  • What are your Leadership strengths?
  • What are your natural Pace tendencies?

I won’t go into detail here, because you can read and watch a lot more about the 4 Behavioural Indicators I recommend on the Shirlaws Compass webite.

In short, it’s easy when forming a partnership to focus on the greatness of the opportunity. But ensuring your natural behavioural preferences (which are different to personality indicators) will work together is a crucial part of Cultural Due Diligence. Every investor who has seen ideal Commercial Due Diligence descend into failure recognises the role partners and leaders have in a venture’s success … otherwise.

I recommend comparing and contrasing these four behaviours in a Partnership because they cover aspects where alignment is key (Communication, Risk) and others where a balance is preferable (Leadership, Pace), while at all times acknowledging that we are all a composite of many different traits.

Business Indicators for Partnerships

Case Study B – Drew and Yvette

Drew had successfully grown her style consultancy into a million dollar business, and brought Yvette on board to help franchise the system for national growth. Yvette’s package was a mix of income (below market rate) and equity (to compensate, and align their incentives).

Having completed Commercial Due Diligence, the partnership was formed, but they agreed that no equity would change hands for the first 6 months, while they undertook Cultural Due Diligence. They had identified potential areas of conflict to monitor.

During this time it became clear that Drew and Yvette’s Risk and Pace profiles were incompatible. Drew was a risk taker who moved fast, and was used to being the sole CEO making decisions. Yvette was entrepreneurial, but more methodical – this was a complementary skill set, but meant partnership meetings were constantly frustrating with Drew feeling handcuffed and Yvette feeling she never had a say before decisions were made.

After six months it was agreed not to proceed with the partnership. A messy business divorce was avoided and by identifying that it was behaviours, not personalities, that were the problem their relationship was able to continue.

4. Who has which preferences regarding Income, Equity, and Control?

  • What is the order of your preferences?
  • What is the order of your partner’s?

A fundamental error most new partnerships make is viewing Income, Equity, and Control (IEC) as the same decision. For example, they give an equal share of equity, pay all partners the same salary, and have equal say over decisions. This needn’t be the case.

If you had to select one of these three as being of primary importance to you, which would it be – Income, Equity, or Control? Which is least important? You now have your priorities (eg, my order is Equity, Control, Income).

Compare these with your partner’s. If they match, this has potential benefits for your commercial vision but may create conflicts in how you structure the business. In particular, if both of you want Control you may create the molasses of decision-making-by-consensus. If neither of you want Control, who will step up to make the big decisions?

Some common solutions that acknowledge different priorities include:

  • Creating joint ventures rather than simple partnerships, to incentivise an equity-minded individual (see Case Study C);
  • Incorporating Control features into the Shareholders Agreement or Constitution. For example, specifying which decisions the CEO can make will empower that individual. Specifying decisions that require a super-majority (2/3rd or 3/4tr majority) of the Board or Shareholders (taking on debt, new partners, expenses over $10,000 etc) ensures minority shareholders still retain some control;
  • Different Share Classes can also be used to de-link equity percentages from control, with the Murdoch Family and Mark Zuckerberg being pertinent examples of where equity has been sold without control being given away.

Even when forming your new partnership, it’s worth noting that Structures may change over time as your IEC preferences change. For example, they may be revised to support younger partners wanting accelerated growth AND older partners adding value while winding down, rather than the traditional professional services model of expecting all partners to act similarly – which restricts young go-getters (who then leave) and demands the wrong focus from knowledgeable senior partners who don’t want to be pushed (and then leave).

Case Study C – Ethan and his Top Performers

Ethan had built a successful recruitment company with around 20 staff. Like most business owners, this company was his primary retirement vehicle – his priorities were Equity Control Income.

But he had seen several top performers leave the business to start up their own in competition. One had cited a lack of ‘progression’ – ie, Ethan was not willing to take on Partners for fear of diluting his nest egg and losing control. Most of these potential partners were Income Control Equity oriented – they wanted to make more money, and control more decisions, working for themselves.

So Ethan set up a new structure. When top performers approached certain criteria, which Ethan knew from experience often triggered an exit, they were presented with a proposition: the opportunity to start their own company, fully funded and supported by Ethan who would hold 75% of the new equity.

The top performer’s options were:
a) New Venture, with $0 Income, 100% Equity, 100% Control OR
b) Joint Venture, $100,000 Income, 25% Equity, 50% Control.
Achievable milestones and valuations were put in place to help them buy their way from 25% to 75% ownership.

Through this approach, top performers realised their dreams sooner. And Ethan has maintained his primary business while also being a shareholder in, to date, 4 separate joint ventures. The Valuation of his Equity for retirement has grown significantly.

Are you asking all the right questions?

Your answers about Vision (how big!), Behaviours (how fast!), and IEC will help as we shift into the Operational space, where the questions to ask become more specific.

4 Operational Partnership Questions

5. What are the expected upfront Contributions?

  • Contribution of money
  • Contribution of time
  • Contribution of clients / leads
  • Other

When starting the new venture, who will be contributing what (in terms of money, time, clients, and other elements such as office space, equipment, intellectual property, or networks) during the start-up phase?

If you don’t have a simple business plan, you may need to draft one in order to answer this question. It needn’t be detailed – but all parties will want to know whether you’ll need $1,000 or $100,000 invested before the business becomes self-sustaining.

Note particularly that dollars aren’t the only factor when determining value contributed, a mistake that can cause frustration now or in the future when the equity splits are reviewed.

6. What are the expected Contributions over time?

Covering the same elements, what is each part expected to contribute in the future?

This may be necessary contributions (eg, $5,000/mth for payroll rather than $50,000 upfront) or they may be linked to milestones, desired and feared . For example, success in one location (however defined) may trigger an additional investment from the partners to open a new location.

Alternatively, what happens if the business fails to become profitable / self-sustaining before the money runs out? Are partners expected to invest more, or will this be optional (with the possible consequence of diluting equity stakes for those who do not contribute more)?

As you could imagine, many good businesses have failed to fully launch because they ran out of money while the partners argued over who would keep it afloat.

Case Study D – Kevin and the Floating Equity Pool

Kevin launched a financial planning business with 5 of his industry colleagues. While all the partners contributed the same money upfront to start the business, they identified that the success – or otherwise – would depend on rapid sales growth.

So rather than solidify the shareholding at startup, they established a Floating Equity Pool. 30% of the company’s shares were put into this pool, with the agreement that after 3 years that equity would be divided among the partners based on the amount of revenue each individual had brought to the firm in that time.

In this way, those who made the largest contributions while the businesses was most in need were rewarded. The Shareholders Agreement included a provision where Shareholders would, if required, contribute more capital directly (and which would impact the Floating Pool’s calculations). But because all partners were incentivised to keep contributing clients and revenue, this extra capital was not required.

7. What are the expectations for Salaries and Dividends?

  • What does each partner Need?
  • What does each partner Want?

Money is energy. And that applies to business partners as much as the business itself.

It’s not a good idea to assume or decide that all partners are paid the same salary. Indeed, this is part of the common mistake of equating Income, Equity and Control – “if we’re both partners, we should both earn the same amount“.

Incomes work best when they reflect the specific contribution of each partner to the business and pay them market rates. Take senior and junior technicians, for example – if they are partners paid the same salary, then either: one is underpaid, or one is overpaid. Neither result is energising.

But in business negotiations, especially involving a startup venture that may not be able to pay market rates, the salary conversation can be difficult. Nobody wants to be greedy; nor do they want to be taken advantage of.

The first question to ask then is ‘What do you need to earn?’ In other words, what do you need to be taking home to your family so that money isn’t a major stress. This may not be market rate, and the shortfall is part of your investment in the company (either specifically through the Shareholders agreement, or just energetically). Don’t create a situation where one of the partners needs to do work on the side to pay the school fees. You’ll also need to trust each others’ responses, especially if they vary wildly – trust, after all, is critical to a partnership.

The second question is ‘What do you want to earn?’ This can be a massive number, by which point it usually includes dividends (share of company profits) as well as Salary. It will inform the Commercial Vision (if you want to earn $500,000pa but only build a $500,000 company, you have a problem) and also allow you to set some milestones for partner payrises as the business grows.

In this way, nobody feels stressed from day one, and all partners know that their income will grow with the business.

Note that Shareholders who only contribute capital are generally not rewarded with a Salary. Their cash returns come from Dividends, which are linked to Equity.

Business-Coaching-Team

Boys from the Thames Valley – my coaching team when I lived in the UK

8. Who has what Functional Responsibilities?

In a one person business, this is easy. Who sets the vision, defines the culture, negotiates contracts, delivers great customer service, and cleans the kitchen each night? You do!

But in a partnership, whether a two-person venture or overseeing a growing enterprise, these specific responsibilities need to be defined. The alternative is inefficiencies, with both partners giving conflicting instructions to staff while neither of you remember to process payroll.

At a top level for operational responsibilities, I use the Shirlaws Red Blue Black framework. This breaks a business down into functional areas across the 3 colours of Red (Business Support), Blue (Business Operations), and Black (Business Strategy). Briefly, those areas are:

RED: Accounting, Administration, HR, IT, Legal, Compliance, Premises and Equipment
BLUE: Operations, Sales, Production, Delivery, Client Service, Marketing, Training
BLACK: Vision, Capacity Planning, Product RND, Brand Positioning, Distribution Channels, Capability, Joint Ventures, Succession Planning, Culture

Only 1 person can be responsible for each function. And it may not even be a partner. Responsibility does not mean having to do all of it, however – tasks can be delegated.

This may mean Partner A reports to Partner B when it comes to Sales, but the roles are reversed when it comes to Culture. A one-page Functionality Chart, at least, makes these responsibilities clear BEFORE you get into business together.

Download these Business Partnership Questions

To make your life easier, I have compiled these 8 business partnership questions and the one page functionality chart into a single document for you to download by clicking here.

Your feedback in the comments below will help me revise and improve this article over time.

(And if you want an editable version of the document, please email me on jacob.aldridge@shirlawsgroup.com)

Now you’re ready

Answers to all of the above questions can be recorded in a short-but-sweet document. You now have a very specific brief for your Legal and Accounting support when they structure and document the specifics of your partnership.

Expect them to ask additional questions (one of the lawyers I recommend, for example, has a lengthy Shareholder Agreement Preparation Questionnaire) but answering those questions will be much faster and easier as a result of the discussions outlined in this article.

 

Having discussed and answered all these new Partnership questions ensures your new venture will hit the ground running. All Partners will be clear on what their responsibilities are, what context they are operating under, and what vision and values they are building along the way.

While it doesn’t guarantee that your new enterprise will be a success, this process will ensure the frantic startup stage is spent creating value for clients and partners not developing frustration and resentment among partners. Good luck!

You can learn more about me and Shirlaws here. Wherever you are based in the world, our team of experienced business coaches and consultants can help you grow, fund, or exit your business. If you’d like to learn more, let’s chat.

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