Starting a business takes a combined effort of planning, research, and execution. Some people prefer to walk this journey alone, while others choose to go with partners. This can be for several reasons, including financial capability and synergy of skills. For instance, a tech business may involve a partnership between a software developer and a business analyst.
Choosing the right partner plays a significant role in the success of a business in the long term. So, what should you be looking for when choosing a business partner?
Pitfalls to Avoid When Choosing a Business Partner
Here are some pitfalls many entrepreneurs fall into when selecting a business partner.
1. Selecting the Wrong Partner
A clear vision of your organization’s future and how to get there is critical to its success. Most business owners only discover later, when it’s too late, that they cannot get along with their business partners. This is primarily due to differences in work ethic and decision-making on financing, long-term strategy, and expansion.
At times, differences in values make it challenging to undertake certain actions based on mutual agreement. Before choosing to partner with any random person, take time to verify their real identity on Nuwber and determine whether they are who they say they are.
2. Overlooking the importance of a Limited Liability Company
A limited partnership is a business setup where each partner is exposed to certain risks such as business failure only to the extent they have a stake in the business. An LLC is designed to clearly outline each partner’s duties and responsibilities and potential exposure if the business fails.
Most business owners fail to define their business in these terms, which increases their risk even through the actions of their business partners. The LLC is legally binding and can be used to protect a founding part if their business partner does something that may be detrimental to the company.
3. Failure to Get into a Partnership Agreement in Writing
Every facet of a partnership must be defined and signed by all partners. Not having everything in writing is a typical error while seeking a business partner. Such cases are prevalent among friends or family members who choose to start a business together. A business is a legal entity and should be treated as such regardless of the relationship between the founders. There needs to be a business plan, ownership structure, and clearly defined roles.
4. Non-Compliance with State Legislation and Procedures, As Well as Not Vetting Your Partners
State law dictates that forming a partnership must include some specific documentation. Complete and re-examine all forms as needed and with due diligence. Decide on a long-term commitment with your partner. Stock option vesting schedules should be agreed upon in advance so that you can keep out unscrupulous investors and safeguard your company. Some venture capitalists and seed investors try to take advantage of the inexperience of budding entrepreneurs. Newbie partners always make the mistake of over-trusting their investors.
5. Creating an Agreement Without Involving a Lawyer
A business lawyer can help you plan your company’s structure and define the partnership agreement. Before hiring a lawyer, make sure you feel confident and reassured that they are skilled enough.
With a legal agreement describing the parameters of your company partnership, you can maximize your combined cash and experience. If you and your partner wish to seek funding, create your business agreement before starting.
6. Omitting an Exit Strategy
Every entrepreneur must eventually relinquish control of their business. Company partnerships that end in legal fights and dissolution are significantly more difficult to deal with.
A partnership must have an exit strategy that allows one partner to depart or buy out the other without the enterprise failing. Your written contract should specify what happens if one of the partners leaves the business. For example, what happens if a partner becomes incapacitated? Or who can a partner sell their firm share to?
7. Not Leveraging Your Particular Strengths
Many partners don’t spend time identifying their strengths and weaknesses at the start of a partnership. You may not find the perfect partner, but they should satisfy most of your needs. A partnership enables each partner to utilize their unique strengths and talents.
However, it’s not a bad idea to pick a partner who has complementary but unique talents and flaws. Your talents in marketing and communication may be combined with a colleague’s capabilities in finance and other technical components of the organization. Besides bringing together diverse talents, it serves both the organization and its clients.
8. Ignoring Potential Legal Ramifications
Like any other relationship, disagreements among the partners are inevitable. This can be differences in which prospects to pursue or what assets to acquire.
Consider establishing the company as a limited partnership, an S Corporation, or an LLC where the general partnership itself is an LLC or corporation. A limited partnership can shield its members from the consequences of the conduct or financial dealings of the general partners.
9. A Hasty Entry
Time is money. Forming a partnership takes effort, and cutting corners may lead to blunders. Too many partners do this hastily, without any regard for the venture’s long-term repercussions.
Each partner’s time commitment should be established beforehand. Consider the benefits and drawbacks before committing. It’s not uncommon for cash-strapped businesses to settle for the first person who can write a check. Make no promises until you’ve signed a contract with your future partner.
10. Lack of Synergy or Common Goals
A clear vision of where you want your organization to go and how you want to get there is essential to its success. Make sure that you and your associate are on the same page regarding your strategy and how company choices will be handled in the long run.
Different aspects come into play when selecting a business partner. The above are the most typical blunders company owners make in their hunt for a new partner. Other factors to consider are more interpersonal such as business acumen, communication, marketing, and leadership. The capacity to lead motivates colleagues to come up with new ideas and concepts, which in turn fuels corporate growth.