E22: 10 Questions to Answer Before Starting A Business Partnership

EPISODE 22

[INTRODUCTION]

“What is this partner actually bringing to the table? That’s a really, really good question. The flip side of that is, what are you bringing to the table? You don’t want a clone or a carbon copy of yourself. You want to expand the skill set of the ownership, not duplicate the skill set of the ownership. If both of you are really good graphic designers, who’s going to do the business forecast and projections?”

[00:01:51] AW: You’re listening to the Transcend Podcast. I’m your host, Asha Wilkerson, an attorney by training and an educator at heart. This podcast is all about empowering you to build a business and leave a legacy. Here’s the thing, the wealth gap in America is consistently increasing and while full time entrepreneurship is not for everyone, even a side hustle can change your financial landscape if you’re intentional about using your business to build wealth. I’ve run my own law firm for over 10 years, and in that time, I’ve helped countless California businesses go from idea to six figures. On this podcast, we talk about what it truly takes to build a sustainable business and find financial freedom. Let’s dive in.

[EPISODE]

[00:02:36] AW: Hi there and welcome back to another episode of Transcend the Podcast. I’m really excited to have you here, because today, we’re going to talk about one of my favorite topics and I have 10 questions that you should ask yourself before you bring on a business partner. People ask me these things all the time and these are the same questions that I ask folks when they have already decided to partner with somebody, and I have to draft their operating agreement or the bylaws for their corporation. These are questions that are super important that I want you to consider before you even think about having the conversation with a potential business partner. If you’ve already had the conversation, then make these questions a part of your conversation. If you’ve already started the business, formed an LLC or a corporation, or just started doing the work, go back and revisit these questions and put the answers into your operating agreement for your LLC or into the bylaws for your corporation.

Okay. Question number one I want you to ask is, do you really need a business partner? Do you actually need a business partner? What I find is that a number of people choose business partners because they lack the confidence to do it on their own, or because they lack the financial resources to start the business on their own. But I’m here to tell you, most people do not actually need a business partner. Now, there can be some value in having a business partner, someone to share the work with, someone to bounce ideas off of, all that kind of stuff. But there’s also some real consequences of having a business partner. It’s like a marriage. I want you to actually think about this relationship with your business partner as diligently as you do think about who you are going to marry or do life with. Because business is a big part of your life. You’re probably going to end up seeing your business partner more than you actually see the other people in your life, right? We spend more time at work than we do at home with our families in America.

It’s a really important decision to make, to think about who do you want to bring on, and what is the role that they’re going to play? If you can do this by yourself, or with partnerships that don’t result in ownership partnerships, I would encourage you to really think about that because then you can make decisions in the way that you want to go and you don’t have to bounce them off of anybody else. But if you and your friend, or you and your spouse, or you and whoever ever have come up with this really great business idea and you want to do it together, then by all means, have at it, but keep listening to the next few questions on the list.

Okay. Number two is what is this partner actually bringing to the table? That’s a really, really good question. The flip side of that is, what are you bringing to the table? You don’t want a clone or a carbon copy of yourself. You want to expand the skill set of the ownership, not duplicate the skill set of the ownership. If both of you are really good graphic designers, who’s going to do the business forecasts and projections, right? I am good at the legal stuff. I’m not great at the marketing stuff. So, if I’m going to bring on a business partner, I want somebody who can add to my skill set, and not duplicate my skill set. You want as many diverse skills as possible. So, one, you can cover more of the things that need to get done, but also two, you’re not stepping over each other and trying to do the same thing and disagreeing about how it should be done.

Ideally, both partners can work in their zone of genius, the things that they’re really good at, and the things that they love to do, and the other partner trusts them to do that. So, what are you bringing to the table? What’s your skill set? Are you bringing money to the table? Are you bringing sweat equity? So, are you going to be the one that’s actually doing the work to get the business off the ground? Maybe you’re popular, maybe people like you and so that new restaurant that you’re trying to start, you’re pretty convinced that you can get a number of people as patrons to come into the business because of your stature in the community.

Those same questions go for the potential business partner. What do they bring to the table? Do you need money from them? Do you need them to actually do the work? What about their sphere of influence? Also, there are many different ways to get money, you don’t have to make everybody a part owner of your business just because you were asking them for money and hoping to get money from them. Think about that.

Number three, what are the expectations? Now this one is huge. Again, think about relationships. Think about this, just like you’re getting ready to get married to somebody. One of the things that people don’t do very often is we don’t discuss what our expectations are. We have them, but we don’t often communicate them clearly to the people that we are working with, or that we are in relationship with. I heard a while ago that resentment is really just unmet expectations and I think that is so true. You have to get really clear on communicating your expectations, which means you have to know what the expectations are.

Do you expect the person to work just as hard as you? How do you measure just as hard? Do you expect them to be there from sunup to sundown? Do you expect them to work remotely or while they’re traveling? Or do they need to work right next to you in the office? What happens if you need money? Do you expect them to work just as hard as you or to take over the fundraising responsibilities? Are you going to split those 50:50? Are you not going to split them 50:50? What do you want from this person? How are they going to show up for you in this business? How are you going to show up in this business? This is a huge thing, and it is a communication skill, really, to be able to communicate the expectations.

I have a business that I have worked with for a number of years, where the expectations are being unmet in the business. Because of the way that their operating agreement was written, it was hard to work around that because this owner, one owner, wasn’t living up to the expectations of the other owner. The other owner felt like this other guy was hurting the business and they didn’t know what to do, because they didn’t have that spelled out in their operating agreement. What are the expectations? Do you want someone there when you’re there or can they work from afar? What is it that you want? There’s no right or wrong answer. But think about that before you bring somebody in. If you’re the one that’s making the offer, then you can say, “This is what I expect from you to be part owner of my business,” and then you would codify that. You’d write it down and put it in your operating agreement or in your partnership agreement.

[ANNOUNCEMENT] [00:09:12] AW: Hey, excuse me. Pardon the interruption. I know you were listening intently to the podcast, but I just want to tell you that I’ve got this great checklist for you to download if you are a new business owner, or even if you’re thinking about starting a new business. It’s called the New Business Checklist. It’s got 12 things that you need to know as a new business owner to help grow your business and make it ready for the wealth infusion that you’re going to have, so that you can leave a financial legacy for your kids and your kids’ kids and your kids’ kids’ kids. If you’re ready for that checklist, head on over to transcendthemembership.com/checklist and get it for free.

[00:09:50] AW: Okay. Number four, what happens if we don’t meet these expectations? Ha! This is another big question. What are the expectations, but then what happens if your partner doesn’t meet them? Do you get to remove them from ownership? Do you take away some of those responsibilities and they remain an owner? How do you plan to communicate? How do you plan to move forward? I know at the beginning everybody is really excited about their idea as absolutely as you should be. But I want you to think about, “Great, if everything goes right, this is what we want to do. But if things start to go south, then what are we going to do?” Think about that ahead of time, so that you can have it clearly laid out.

If you have to call somebody on the carpet and say, “Hey! You’re not meeting the expectations that are written in this agreement, these are my options for dealing with it,” or, “This is how we’ll deal with it,” then there’s no surprise there. What do you want to do if the expectations are not met? Are you going to call it a third party like a counselor to help you work them out? Do you have more voting power? Do you have less voting power? Can you remove them? All of those things that you need to think about that don’t have a right or wrong answer, but they’re certainly something that you want to pay attention to.

Okay. In that same vein, will ownership be tied to the work that is performed? That is number five. Will ownership be tied to the work that’s performed? I think a lot of times when people start up, not I think I know, a lot of times when people start up, and they have partners, and they say, “I’m going to be responsible for marketing and my ownership is 55% of the business. I’m going to be responsible for training the employees and my ownership is 25% of the business.” Third person is, “I’m going to be responsible for financing and I have the remaining ownership of the business.”

Now, what happens when financing is secured and that remaining 25%, if I did my math, right, have the business, that person owns 20%, but their role as securing funding is no longer necessary? Is their ownership going to disappear because they no longer work in the business or not? Doesn’t seem like it should, but that is something to consider, right? What happens if marketing kind of ebbs and flows? Maybe in the beginning, it’s a lot of work. In the end, it’s not that much work, whereas training the employees is consistent work, because you always have employees? What happens if someone really sucks at doing the marketing and they’re an owner and you want to take that responsibility out of their hands? Does that mean that they are no longer an owner with you or are you separating the ownership from the work that you’re going to do initially?

Again, no right or wrong answer, but certainly think about it so that you have a response if there is some kind of dispute or discrepancy, and so that everybody’s on the same page. These things can be updated. You definitely want your operating agreement to be updated regularly and your bylaws to be updated regularly, like annually, so that it reflects what’s actually going on in the business. These assignments of roles, you can also do on a separate piece of paper as well, and they don’t have to be in the operating agreement, but you definitely want to refer to them. So that if there’s a dispute, if someone says, “I’ve been doing all this work, this other person isn’t doing it. I’m going to go to court and have the judge declare them removed,” then you have some documents that say, “This is a no go,” or, “Yes, this is a go. This is what we agreed to.” Will the ownership be tied to the work performed?

Number six, how will we resolve disagreements? Again, think about it like your prenup to your marriage, you hope everything goes right. But in the event that it doesn’t all go right, how are you going to resolve these disagreements? If there’s just two owners, do you own everything 50:50? Then you probably want to have a contingency of agreeing to bring in a third party, whether it’s a formal mediation, or someone that both of you all trust that knows about your business to help you resolve and talk through things.

I was talking to a friend of mine the other day, and he was so put out because one of his business partners said to him, “I feel like you don’t value my feelings,” or something like that. My friend was so upset, he was like, “I’m not talking about your feelings. We’re trying to build a business, right?” I’m talking to my friend, like the feelings are important, even though you may feel like they don’t help you get to your bottom line. But come on, let’s be real, we are humans. If we start to be resentful or feel resentment, because our expectations are not met, if you are going to work in tandem with somebody, you have to think about how the other people around you feel and you have to hold space for that. Because if you become angry or they become angry and shut down, how are you going to work together? Doesn’t matter what the end goal is if you cannot get on the same page to work together. If someone feels disrespected, who wants to take any instructions from anybody when they feel like they’ve been disrespected, right?

How are you going to resolve those disagreements with each other? Is it a mediator? Are you going straight to Court? Does someone have veto power? Do you agree to have weekly meetings until it’s resolved? What is it? Think about those things so that in the event that you come across a disagreement, then you refer to your operating agreement or your bylaws as to how to handle that. Super, super important.

Number seven, what happens if I want out? Meaning, what is your exit strategy? What happens if you met someone in, I don’t know, Peru, and you decide that you want to leave and move to Peru, and you’re done with this business, you don’t care anymore, and that ultimately means that you are going to leave your business partner hanging? How do you get out of this business? Do you have to offer them your share or your ownership interest in the business first? Can you find someone else to buy it? Do they have to approve who you’re selling it to? Because that is effectively going to become their new business partner. What are you going to do if you want out? And conversely, what are you going to do if the other person wants out? How do you handle that?

Now, a lot of this stuff you can handle in the moment, you can decide maybe you want out, but you’re willing to accept monthly payments until your piece of the company, or your ownership interest is paid for the company. That kind of stuff you can work out, but you should have in there, if you want the first right of refusal, meaning if your partner leaves or they want out, they have to come to you first. If you want that first right of refusal, put that in your operating agreement. Another little bonus tip in there is that you need to decide ahead of time how you are going to value the company.

Again, work with another business that one of the business partners wanted out, didn’t want anything to do with the company anymore, but wanted to be paid out his value of the ownership. They did not agree ahead of time how they were going to value the company. On the books, the business was still in the red, because they had just started up a couple years earlier and had loans that were outstanding. In person, the business looked like it was great, because it’s packed every Thursday, Friday and Saturday. It’s become a popular staple. The food is good, people enjoy going there to hang out. There’s a discrepancy. It looks valuable in the community. On paper, it’s not valuable.

In order to resolve that, they were going to have to agree to have an independent business evaluation done that cost between $5,000 and $15,000 depending on where you go. If they would have resolved that issue ahead of time, we wouldn’t have had to spend the three or four hours in mediation agreeing on how we were going to value the business that fit for both sides. That is something to think about. What happens if you want out? Can you walk away? Can you sell? To whom can you sell? How are you going to determine the value, especially if things like restaurants, things like that, right? Where the items within the restaurant, the furniture have a value, but that might not have anything to do with the value that’s on the books.

Okay. Number eight, can I remove my business partner, and can my business partner remove me? If so, how? What happens if they just stopped showing up? If they disappear for 30 days? What about three months? What if they don’t disappear, but I feel like they’re hurting the business? What can I do? How do I get them out? Can I get them out? It’s a good question. Think about that. Again, can you remove your business partner? Can your business partner remove you? That’s question number eight.

Two more to go. Number nine is, what is my vision? What do you want to do with your business and is your partner in line with that business? Are you trying to go to the same place or are you already at the beginning thinking that you want different things for the business? If you want different things, can you divide the business so that you’re both working towards those goals, or does that actually mean you’re not compatible as business partner, because you don’t want the same things? Where are you going, and how do you plan to get there? Business is hard, it is a challenge. It can be a lot of fun and it has lots of rewards, but the last thing you want to do, again, like being in a marriage. If you don’t have the same goals for partnership and success or if you disagree about what partnership and success looks like between the two of you, then you’re not going to be on the same page. It’s going to be really, really hard to be in a business relationship with that business partner.

Number ten, last one is, are you willing to work through the tough stuff? Are you willing to work through the tough stuff? Again, entrepreneurship is a challenge. It is the biggest emotional roller coaster that I have ever been on. Lots of highs, lots of lows, especially in the beginning, right? Sometimes you can experience the range of highs and lows all within the same day or within the same hour. If you were doing that with somebody, you are going to be tested. You’re going to have to work together just like any other relationship. So, are you willing to take the time that it takes to make sure that your business relationships are top notch so that you can reach your business goals?

A lot of people don’t have what it takes and don’t have the desire to work through things. I think in our instance, society these days, overnight sensations, being flooded with images and thoughts about getting something easier or getting something better and that we should all be catered to, we are not as equipped as we used to be as a society at working through the tough stuff. We’re just not. But are you willing to stick it out and work through the tough stuff to find success with your business partner? If yes, great. If not, do business by yourself. Because most of you all don’t actually need a business partner. A lot of you want one for comfort, because you’re not yet confident in your skills. But you can do this by yourself. Even if you build a team, build a team, you need a team, but it doesn’t mean you need a team of owners. It could be the right move for you, but you also might be able to do it yourself.

As I recap real quick, one through ten. Number one, do you really need a business partner? Two, what is the partner bringing to the table and what are you bringing to the table? Three, what are the expectations? Four, what happens if we don’t meet these expectations? Five, will our ownership be tied to the work performed? Six, how will we resolve disagreements? Seven, what happens if I want out? What’s my exit strategy? Eight, can I remove my business partner, and can they remove me? Nine, what is my vision? Is it shared or is it different? Number 10, are you willing to work through the tough stuff? Ask yourself these questions before you decide to bring on a partner and write down your answers and then see where you go from there. All right, until next time.

[OUTRO]

[00:21:53] AW: Hey, there. Thanks for listening. I really hope that you enjoyed the episode this week. I am so grateful to have you here and I hope that you are ready and feeling empowered to build your own business. You are needed, you are important, and I want to support you. So, if you have just started a new business and you’re not sure what to do next, I’ve got a great checklist for you to download called the New Business Checklist. Head on over to transcendthemembership.com/checklist and put your name and your email into the box and you’ll get the checklist instantly.

Also, I want to ask you one more favor, if you want to interact with me on a daily basis, head on over to Instagram and follow my account @ashawilkersonesq on IG. I post on there daily. Can’t wait to answer your questions and begin the conversation. Talk to you soon.

[END]