Most people go into business and ask “Do I need a business partner?”. I wouldn’t go so far as to tell you if you need one or not. Although I am able to give you my experience so that you can make a more informed decision.
*This post does not deal with company structure or tax advantages.
My first business was started in 2004 with a friend whom I had known for several years. I have to say, he helped to fast tracked my Entrepreneurial career because I was intending to work for a couple of years before starting up. He said to me you learn to run a business by starting a business. I guess for many of you, the question of do I need a business partner won’t even come up because the business “evolved” from a business idea discussion with a friend. The “partnership” happened naturally. This is a typical scenario for people starting their first business. However, it is still good to note the points here and discuss them with your friend so that everyone is on the same page.
For most people, starting your first business is stressful enough and it helps to have another compadre in the trenches with you. Someone who is a stakeholder in the business with whom you can share plans, excitement, strategies, fears, and successes. It is especially effective to have a business partner to play the “boss”. Ever used the “boss” to help you say no to a client’s outrageous demand? The benefits outweigh the costs in the early years of a business. For some people, your first business might be your only business. So you’re kind of stuck with your business partner for “life”. From my own experience and observation of many old time businessmen, most start out with partners, but in the later years, they all go at it alone.
Benefits of Having a Business Partner
- Shared risk and more capital.
- Business efforts are increased. 2 people working on it.
- Shared problem solving.
- Helps build confidence.
- More diversified ideas.
- Wider scope of skills and knowledge.
- Morale booster.
Potential Issues of Having a Business Partner
- You have to share the mistakes. Even the costly ones made by the other.
- Caliber mismatch can lead to dissatisfaction.
- Breakups are messy.
- Screwing you over. Legally or not. Premeditated or not. Sometimes, they just feel they worked harder or contributed more with their “talent”.
- One partner is lazy and you are a not.
- If both were single when the business started and later both get married, get ready for 2 more “new silent partners”.
- Fraud if you don’t know the person well. Fraud sometimes even if you know the person well.
- Profit problems. Differing ideas about company expense and/or profit sharing or business reinvestments.
For myself, the problems I faced in my second business (my first sold for a nice 600% profit) was a business partner who put on too many things on his plate. He was doing his PhD, helping out in his father’s business, and starting a business with me at the same time. When the company was new and we had 4 employees excluding ourselves, he would only come in at 3-4pm, shuffle some papers in his office, then leave after an hour. His concept was, we should be results oriented and he was more productive at home. Mine was that the business owners were the leaders in the company, whatever example set by the bosses, the employees follow. We, as the bosses, should be in the office and running the show. It came to a point where one employee asked me if my partner was a small shareholder.
Now, after years of experience, I usually don’t take on a business partner unless it is strategically beneficial to do so. And if I do have a partner, I never go into 50/50 partnerships unless both were fully committed in the daily operations.
It’s natural for many not to discuss the heavy stuff when going into business with friends. I highly recommend you do and follow the tips below for the sake of longevity and to save a friendship.
Tips for Entering into a Partnership
- Discuss beforehand all scenarios: who is bringing what to the table, workload allocation, work hours, commitment level.
- Have a lawyer draft a partnership agreement (not the corporate structure but between you and your business partner).
- Have a shotgun clause. One unsatisfied partner can initiate a clause for mandatory buyout of the other parties share. Either you sell all your shares or you buy all the shares of your partner. To prevent a deadlock, discuss with your lawyer about the mechanisms.
- Everything is a give and take. Don’t calculate who does what more or better. As long as it’s not severely skewed (like him working 1 hour a day and you 10 hours).
by Dan Tan