The Do's and Dont's of finding business partners
by Richard A. Chapo, https://www.socalinternetlawyer.com/blog/
Gathering a talented collection of partners to run the business is a time-tested strategy for priming the pump. One problem exists. How exactly does one distinguish between individuals who can take a company to the next level and those who will be anchors? Picking partners is very much an art, but following the Dos and Don’ts can improve your chances of success significantly.
Entering into a business partnership is the equivalent of getting married. It is not uncommon to spend more waking hours with a business partner than with a spouse. I’m going to assume that you would find the notion of walking into a bar and marrying the first person you see as laughable. Unfortunately, many partnerships are formed in this manner. Picking partners on a wing and prayer is asking for trouble. Following a process gives you a much better chance of identifying reliable and competent talent.
Here are the Dos of finding business partners.
1. Match Personality conflicts kill business partnerships at roughly the same rate as romances. The corporate buzzword often used is values, but what does this term really mean when considering potential candidates? As the original founder, you are looking for partners who share your position on taking risk, employee relations, and crisis management, among other areas. The optimal method for evaluating the values of another person is to ask questions that produce indirect evidence of those values.
While there are serious legal limits regarding questions you can ask an employee, few limits exist when considering a co-founder who is not your employee. Questions could include:
What interests you about this business idea?
Have you ever failed at anything?
A company programmer publishes pictures on their Instagram account where they are clearly drunk. Fire them, warn them, or none of our business?
What are your expectations regarding the time commitment for this business?
How do you see the decision-making process working?
What does this business look like in five years?
Legal counsel indicates we are conducting business in a grey area. Proceed or not?
What are your expectations of me?
Should the company contribute to political causes and, if so, what types?
Engaging with the person in as relaxed an environment as possible is likely to produce more insightful answers. Being questioned in an office screams “job interview,” and puts the candidate on the defensive. Being asked the same questions at happy hour or a casual dinner as part of a general conversation tends to mitigate any defensive mental posture.
2. Look for Complementary Skills A person should only be added to a partnership if they bring one of two things: a complementary skill or capital.
For example, I once was approached by a corporate client that comprised three founders, all of whom were programmers. The gentlemen had launched a company providing marketing and programming services. The programming side of the business was doing rather well, which made up-selling the marketing services a breeze. Any goodwill established with the programming services was quickly squandered when it became apparent the marketing department was borderline incompetent. The company ultimately failed. The outcome likely would have been different if one of the partners was a qualified marketing professional.
While there are exceptions to every rule, try to find partners who complement the skill sets of the founders already in the business.
3. Have an Exit Strategy When considering partners, make sure the person understands your exit strategy and agrees to it. No exceptions. An exit strategy is a plan the partners settle on for cashing out of the business.
Three options are to sell the business to a third party (e.g. Amazon purchases Zappos), take the company public (e.g. Facebook), or pass ownership to younger family members in exchange for a significant buyout.
Settling on an exit strategy is critical because that decision shapes all other important decisions for the business. Let’s assume we create a company selling lampshade hats online as party accessories. If the exit strategy is to sell the site to a third party within three to five years, then all management decisions will focus on producing short-term results while long-term investment is ignored. For example, we might pump every spare dollar into advertising one-off sales while ignoring developing a mailing list that could give the company a significant advantage over competitors in five to ten years.
4. Conduct Due Diligence Due diligence is critical when evaluating a potential partner. Don’t think so? These postings on co-founder nightmares will change your mind. Due diligence is the process of evaluating a partnership candidate based on independent resources. The focus should be on:
Does the candidate have a history of business ownership, and what is it?
Is there anything alarming in the candidate’s history (criminal conviction, etc.)?
What is the candidate’s reputation?
Does the candidate have a history of filing lawsuits or being a defendant in litigation?
Is the candidate a job hopper, and does it indicate a problem with commitment?
Has the candidate filed bankruptcy or had other financial issues?
Before we continue, let’s be clear about something. There are few limits on due diligence when the target is a potential business partner. The same is not true when evaluating an employee.
Due diligence begins with online research, and social media accounts are your first destination. PeekYou.com is an excellent tool for identifying a person’s social media accounts. Just perform a search for the candidate’s name on the home page, and the site will generate a list.
Read through all the social accounts, but pay particular attention to Twitter. While browsing through original tweets can be illuminating, pay particular attention to their disagreements on Twitter. If the candidate loses their composure or explodes at another person, it may be a preview to how the individual will react during partner disagreements.
Next, conduct a Google search using the following commands:
“Person’s name” + lawsuit
“Person’s name” + arrested
“Person’s name” + accused
“Person’s name” + judgment
“Person’s name” + settlement
Obtaining background and credit checks is also advisable. However, you should only ask for consent to obtain the information from the potential partner if you are willing to provide the same information to that person. Obtaining a background check on the sly, for example, could come back to haunt you in the future if the partner learns of the report a few years down the line.
Ask for referrals from every business the candidate has listed in their employment history. Contact those companies to verify position and dates of employment. You’ll be surprised by how many people lie about where they have worked.
5. Attempt to Conduct a Trial Run Most people would agree that buying a vehicle without first going on a test drive would be unwise. We can say the same thing about a partnership. Instead of “marrying” your potential partner right away, why not date for a bit by pursuing a single project to determine if you are a match? Matching skill sets and personalities will take you a long way in establishing a successful partnership, but the outcome will always be in doubt until tested in a real world environment.
All potential partners talk a good game because all entrepreneurs are optimists at heart. Running a trial campaign reveals whether those talking the talk can deliver on a daily basis.
Now let’s get into the Don’ts to finding business partners.
1. Seek a Partner for the Wrong Reasons If you are contemplating adding a partner, stop and ask yourself a simple question: why? The answer may have merit, but many partnerships are created because the original partner lacks confidence and is looking for a security blanket. Here is a little secret—every person starting their first business lacks confidence and is fearful.
As a general rule, avoid giving away equity in your company if at all possible. If you can’t program, pay a programmer instead of taking on a programmer as a partner. I’m not suggesting you shouldn't pursue a partner, but just make sure you have an objective reason for seeking one.
2. Settle for Unequal Commitment Nothing sinks a business partnership faster than bitterness. Nothing breeds bitterness more quickly than partners with different commitments to the company. If the partners are splitting profits equally, but one is working twenty hours a week and the other seventy—Mount Partnership is going to erupt spectacularly sooner or later.
When evaluating a partner, make sure the candidate is prepared to make an equal time and effort commitment to the business. A good way to ascertain whether this is the case is to ask the candidate very specific questions about what they foresee as their role and daily activities. Do not tip them off and do not make suggestions. Let them talk. If the person describes a list of tasks that could not possibly take more than four hours a day to complete, there may be a problem if you are expecting a forty-hour commitment each week.
Although an equal commitment is not a legal requirement, you should consider it a practical one. With the exception of partners solely making financial contributions, all partners should have similar commitment levels.
3. Agree To Handshake Deals Here’s a typical co-founder scenario. You have a smashing business idea. You need a partner who has mastered Facebook advertising, and you identify the perfect person. A 50/50 ownership split is agreed upon, the partners kick in an agreed upon capital, you form an P/L but never get around to an operating agreement, and off the two of you go to launch the business. A year passes, and the perfect partner starts missing days.
Can you fire them?
Can you just revoke their ownership interest or do you have to buy them out?
Do you even have the right to buy them out?
A staggering number of businesses carry one or more “zombie” partners that siphon profits off like leeches because the founders never stopped to put their founders' agreement in writing. With no written contract in place, there is no mechanism for dealing with problem partners. The only option is to pursue a solution in court—a process that is so expensive and aggravating that the functioning partners resign themselves to keeping the zombie partner.
Always retain a professional to draft the partnership agreement for you. The agreement should cover:
The contribution to the company of each party
The obligations of each party
How long a party must be with the company to vest in percentages of their promised ownership
Whether partners can be fired and under what conditions
Whether partners can be bought out and under what terms
What voting percentages are required to validate any of these actions
Any other issues unique to the business
Finally, avoid partners who are hesitant to put your agreement in writing. There is no valid reason for refusing. The fact that a candidate is reluctant to do so is a major red flag.
4. Don’t Avoid Friends “You should never go into business with friends.”
Steve Jobs and Steve Wozniak met while working for the same business in 1970 and became good friends. Jobs eventually discovered “Woz” was playing around building computers and thought he could sell the devices. The rest is history. And did it kill their friendship? According to Woz, the two remained friends until Jobs passed, and despite Jobs’ brutally frank nature, “We've never had an argument.”
Of course, there are horror stories concerning friends launching companies. In my experience, there are three rules one needs to comply with when considering friends as partners:
Never go into business with a friend solely because they are a friend. There must be some other asset they bring to the partnership.
You must be willing to lose the person as your friend here and now. If the business fails, it is highly likely the friendship will as well. Blame will be assigned. It is human nature.
Recognise that both of your “work personalities” are likely different than your “friend personas,” and determine if it still makes sense to move forward.
Still unsure if you should proceed? Conduct a trial run. If you annoy each other to no end, the business can be put to bed before you ruin the friendship.
So, where does one find potential partners in the real world? The good news is you likely already know the person. Co-workers are an ideal place to find partners. The beauty of co-workers is that you’ve had a chance to observe each candidate in action and should have a pretty good idea of who is talented and reliable versus who gossips and avoids responsibility like the plague.
Other possible sources for partners include:
Employees of competitors who have impressed you
Individuals who you communicate with online in other niches
Individuals suggested by a mentor
Freelancers who you have hired in the past
Don’t speak with just one candidate. Play the field until you find the optimal choice.
The addition of valuable partners can be a galvanizing event for a business. This guide should assist you in identifying those individuals who can be invaluable as well as those who should be avoided.
To your success!
(This article was summarised by Bramon 2020, full version is available here )