The 4 Operational Questions to Ask When Forming a Business Partnership

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, let me know.

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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:

  • starting a new business,
  • extending an existing business,
  • bringing somebody up through your team,
  • or even be an important set of questions to have with your spouse when going out into business on your own.

Partnership Question #5: What are our expected upfront Contributions?

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.

Each person’s contribution is going to be some combination of:

  1. Money, which is being put in to help set up the business;
  2. Time that they are contributing;
  3. Business Assets, things like bringing clients, reputation, or a database;
  4. Skills, like being the Technical Co-Founder or amazing salesperson.

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 all of those expectations are very clear.

There’s nothing worse than having a business partner who believes they’re only needed for silent money, 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.

Partnership Question #6: What are our expected Contributions over time?

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?

I worked with one business recently where one of the two co-founders made a commitment: they would put in, over time, money but only up to a maximum amount. The responsibility to actually drive that business and make it successful sat on the other co-founder, and because they were successful in having that conversation, everybody knew where they stood. The partner doing the work knew that he had a time limit and a budget to make profitability happen.

Partnership Question #7: What are the expectations for Salaries and Dividends?

Question 7 is around setting Salary and Dividend expectations.

When it comes to salary, the two questions I love are:

  1. What do you need to earn? and
  2. What do you want to earn?

Far too often, when we’re forming a partnership and in all of the excitement of a new business, we dive straight into the “what 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. Cool – let’s agree that we’ll pay each other a million bucks each!

The first question you’ve have to answer with realism, however, is “what do you need?”

Because on 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.

You also need to be aware of the potential pressure, from a spouse at home or even just your social circles, about earning less money than you could in a job. 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. Part of your investment in the Start-up phase is just taking what you need to get by, so that you can breathe life into the business with the extra revenue.

If the Partners pay themselves all of the available spare cash, the business will have no working capital to fund its growth. You may as well have a job.

Dividends are treated differently, and setting those expectations up front is also critical.

Let’s fantasise ahead to if and when the business does make a million dollars profit. Do the shareholders expect that profit will all be returned to them as dividends, so they can then go and splash the cash? 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 this conversation so that those expectations are really clear. Otherwise, they will freak out in a couple of years when the money is sitting in the business bank account … and it’s not going to their pocket like they expected.

Partnership Question #8: Who has what Functional Responsibilities?

The final question starts diving into even more of the detail. Once this business is launched, who is going to be responsible for what roles and what area of the business?

When I’ve seen business partnerships really work, it’s because the partners have:

  1. Brought complementary skills, and
  2. 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.

A business I worked with saw one of the original partners retire – his co-founder flipped from sales to management, and recruited a new partner to take on the sales! So it’s not necessarily that you are skilled in one area, 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.

My list of the 28 Core Functions of a Business can be found in Blackboard Fridays Episode 7. Some areas of your business are more important than others, and some won’t take priority until you move from Start-up to Scale-up – so this final Partnership question is not about “sharing the list equally”, it’s about being clear who, does what, and when for your new enterprise.

I wish you every success in your new Partnership!

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