The 4 Operational Questions to Ask When Forming a Business Partnership. In this Blackboard Fridays Episode 45, Jacob talks about Operational Structure, Business Financials, and Leadership. Need this implemented into your business? Talk to the international business advisor who can do exactly that – Contact Jacob, Learn More, or Subscribe for Updates.
In last week’s Episode we asked – with some case studies – the 4 strategic questions potential business partners need to ask each other.
As promised, there are also 4 operational questions. And many a great idea in business has failed because some of these expectations weren’t set right from the beginning.
If you have a great idea – for a new, or your existing business – and a potential partner lined up, asking and debating these questions can feel unproductive. Trust me when I tell you – it’s better to have a partnership fall over because you couldn’t answer these questions, than to discover your incompatibility at a crucial and expensive juncture down the road.
If you’d like all 8 questions in a simple to follow document, just press reply on this email and I will send it out to you.
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Welcome back to Blackboard Fridays. This is part two of our conversation about the 8 key questions to ask when you’re forming a business partnership. A reminder that the business partnership might be for a new business, a business extension, and might be bringing somebody up through your team and can even be an important set of questions to have with your spouse when going out into business on your own.
This week we’re focusing on the operational questions to balance last week’s 4 strategy questions. The first of these is getting very clear on what each potential partner is contributing upfront. Now that’s going to be some combination of dollars that are being put in to help set up the business, time that they’re contributing, and then other factors such as things like bringing clients, reputation, or a database.
Now how you value those different upfront contributions may have an impact on the structure of your equity and the elements of your shareholders’ agreement. You want to make sure that all of those expectations are very clear. There’s nothing worse than having a business partner who believes that they’re just about putting money in and all of a sudden they’re asked to come and dedicate some time and energy in the business that they may not have available given their other interests. So again, have the hard conversations upfront to prevent having hard conversations or failure further down the track.
It’s not just the upfront contributions you need to discuss. What are the expectations for contributions are overtime? Are you expecting all of the partners to be full-time within this business? Is it part-time? Is it more about contributing other elements? Worked with one business recently where they had a commitment that they would put in overtime money to a business up to a maximum amount and that was the limit that they were going sit.
The responsibility to actually drive that business and make it successful sat on the other partner and because they were successful in having that conversation, everybody knew where they stood and the other partner knew that he had a time limit and a budget to make that happen.
Question 7 is around setting salary and dividend expectations. When it comes to salary, the two questions I love are what do you need and what do you want? Far too often, when we’re forming a partnership and all of the excitement of a new business, we dive straight into the water you want. What do you want to earn out of this? If this works, we could be making 150 grand a year, 300 grand a year, or a million bucks each.
The first question you’ve got to answer though is what do you need? Because from day one, the business is not going to be paying you a million dollars each. It’s going to take time to get there and if your needs aren’t being met from a salary perspective, your energy is going to flag. Your energy is going to go elsewhere. I’ve seen businesses that have been growing towards great success but one of the business partners has either pulled out or otherwise sabotaged the business just because they felt they weren’t getting paid enough.
Now having the pressure at home or from their mates about only making 60 or 80 grand a year in this business when they were worth so much more. You may be able to earn more in your corporate career or your previous job but this is a business and this is all of the opportunities that come with business and that starts with just taking what you need to get by so that you can breathe life into the business with the extra revenue.
With dividends, setting some of those expectations up front is also critical. If and when the business does make a million dollars profit, it’s the expectation of all the shareholders that that will be returned to them as dividends and that they can then go and splash or is the expectation that all of that is going to be reinvested in the business. Is it somewhere in between, in which case, what’s the balance?
In the early years of a business, reinvesting in the business is often the best ROI you’re going to get. If you’ve got a potential business partner who hasn’t owned a business before, who has a bit more of that employee income first mindset, you need to go deep into that conversation so that those expectations are really clear. Otherwise, they will freak out in a couple of years when the money is there and it’s not going to their pocket.
The final question starts diving into even more of the data is once this business is launched, who is going to be responsible for what roles and what area of the business? Where I’ve seen business partnerships really work, they’ve brought complementary skills and been very clear on the individual roles and responsibilities.
Often, one person is responsible for the branding, the marketing, and the sales while the other person is responsible for product development, delivery, and the back-office administrative functions. Those two skills can complement each other really well. I
‘ve actually worked with one business where one of the business owners retired and they actually flipped so that the new business owner came in with the other focus so it’s not necessarily that you are skilled in the administrative, it’s more around making sure you’ve got balanced responsibilities. Otherwise, you create a situation where all of the partners want to go and do sales, none of the partners want to send invoices, and no business can survive in that.
Ultimately, a business partnership is like playing doubles tennis. You need to cover the whole court, you need to be clear about who is going to do what, you need to be very clear on some of these expectations and contributions, and if you can do that, you’ll smash it out of the park.
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