How to Choose A Business Partner

Written by Wesley Henderson

May 4, 2021

First and foremost, make sure you truly need a business partner. Life can be simpler if you are the one in charge and just hire people to perform other services that are needed. At our law firm, we, unfortunately, see that business partners who failed to have the discussions that we recommend in the operating agreement process (or otherwise not a great personality fit) devolve into very expensive disputes.

That said, having a good business partner is essential to operating a successful business – conversely, it can also be the company’s Achilles heel. There are four crucial elements to keep in mind as you consider business partners.

Trustworthiness

Lack of trust or dishonesty will tank any good business. It’s impossible to make decisions, large or small, if you cannot trust the person you rely on the most. The contract partners sign is just a reminder of their understandings between each other. But, to be clear, this person needs to be able to be trusted on a handshake. We recommend the agreement to make sure a) you’re agreeing to the same things and b) there is a written document if the relationship breaks down. This document should keep things cordial.

Trust, however, does not mean your business partner will be perfect. He or she will make mistakes, but they need to be honest, which creates dependability. Mistakes happen, but they are mistakes. Intentionally misleading someone is an entirely different problem and one that is impossible to workaround.

Proficiency

Business proficiencies come in many varieties. Silent investors, experts, and managers are just a few examples of the types of skills people can bring to the business. A surfboard engineer, for instance, has a very tangible skill set. It’s easy to see how he or she will aid the business. Other types of skill are less obvious.

Often, there are silent investors – people with financial backing. If someone is tossing money at the business but doesn’t intend on serving as a sounding board or offering advice, then you might be better off with a bank if what you are looking for is a mentor. People with business acumen who want to invest silently will usually have tangible business knowledge – accounting, legal, marketing, or know people in the industry. Look for a partner who will help make the hard decisions and want to analyze the numbers. That person will be more than a bank, he or she will be an intellectual asset as well.

A business has no room for wasted space. Don’t make the mistake of partnering with someone who does not bring something real to the table.

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Transparency

Business partners have to be transparent. Don’t start a business with someone who is unwilling to share details about his or her business life.

For starters, each party should be willing to reduce the agreement between them to writing. While you hope a partnership contract is never needed, the willingness to sign it signals a willingness to commit fully to the business – and the partnership. Handshake deals are great but remove the ambiguity by putting the details in writing.

Additionally, sharing financials is necessary most of the time. Full financial disclosures usually are not needed, but a snapshot will help. Loans may require details, but more than that is the financial stability of the individual partners. If one person has significant financial resources and the other is not, financial interest may not naturally align. A capital call, for instance, may be no big deal for one person but an enormous burden on the other. Also, distributions, taxes, and time may all be impacted by an imbalance with partners individual wealth. Misunderstandings can certainly be sidestepped by simply understanding the financial stability of your partner.

Transparency is also necessary when analyzing data, crunching numbers, calculating taxes, and many other areas. You might not need to know the toothbrush brand of your new business partner, but you should know a lot about your business partner before getting into business.

Values

Values are important. Selecting a business partner who shares those values is essential. The goals and ethics of the business must be set from the top down. One useful way of understanding a person’s values is by working with them in the past. Two Certified Public Accountants, for instance, may work together for several years at a large accounting firm before striking out on their own.

Another way of establishing values is by setting out a mission statement. If two partners, or several, can hammer out a mission statement for the company, then it could be a good omen for a successful partnership.

Reference and recommendations can be useful if you need to understand someone’s values that you have not known for a very long time. Candid conversations with people who have dealt with a business partner in the past will help you understand the aims, aspirations, and dependability of your new partner.

Additional Thoughts:

What to do once you have a business partner

1. Discuss the topics above.

2. Set up an LLC

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3. Follow our operating agreement process.

It is more than just signing percentages. It includes a workbook and video that walks you through in layman’s terms the decisions you need to make and how to make them. It’s the most painless way to make sure you’re on the same page with your business partner.

Or, take care of it all in one fell swoop with Startup Legally

Wesley Henderson

Hi, I'm Wesley! A business attorney turned entrepreneur devoted to simplifying how you protect your business and your assets. Like you, I'm an business owner so I get it and I started Drafted Legal to help you put in place simple and sound legal strategies so you can focus on your business and not worry about getting lost in legal nuances.

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