Setting the ground rules, and sticking to them, can make all the difference when embarking on a new business venture.
Business partnerships are the cornerstone of many successful enterprises, providing the ability to share the financial and operational burden of owning a business or group of businesses.
In order to be productive, mutually beneficial, enjoyable and profitable, a few ground rules should be set before embarking on such a relationship.
Understanding the dynamics of your particular partnership and setting up a partnership correctly can potentially prevent or minimise issues down the track.
The first step in any partnership is to document the basis on which the partnership is based. Who is contributing what equity and how are profits and losses to be distributed? Do all partners work in the business or are there to be silent partners?
While some of the points are obvious, you must also prepare for the breakdown of the partnership and any potential change to ownership. How is mediation dealt with, what are the exit strategies for the partners and how are disagreements to be handled? All of these matters must be documented well before you start your venture.
As with any good relationship, trust is key – it must be unreserved and unequivocal.
Trust issues are magnified when your business partner is a friend or family member. It can be tempting to assume this level of trust in these situations, but business is a very different type of relationship. It is amazing how family loyalty can fly out the window when substantial sums of money are involved.
Conflict can occur if one partner likes to talk out issues and the other prefers to act first, discuss later. Deciding upfront how you will communicate is vital to avoid small problems becoming large ones.
Decide if you prefer regular face-to-face meetings, or emails to discuss the business. Will you have a third party to ‘chair’ or can you be more informal.
Each partner will bring a certain skill set to the business. Sometimes it can be as simple as different personality types. Try to allocate tasks that make the most of your skills. For example, the more assertive partner should head negotiations and conflict resolution. Does one partner have a flair for marketing or presentation? Does one have a financial brain or a flair for balancing the books? Play to each other’s strengths, minimise weak areas.
Whether the starting capital of the business is injected from personal savings, debt sourced privately or from a bank, there will be a commitment created. In many cases the sums can be quite large but often parties prefer to keep arrangements fluid or not discussed at all.
It is important that all partners are involved in the financing of the business so that there can be no surprises down the track. All loans from a bank will be documented and each partner should hold a copy of the documents, understand what they are signing and their financial responsibilities.
Private loans or the provision of capital is no different and should be well documented.
Death, disability and divorce
Like taxes, the three Ds are a reality and can have devastating effects on any business partnership. Succession planning and the taking of life insurances that provide for cross cover against the partners can be a proactive way to mitigate many of these situations.
When it comes to divorce the Family Law Court has far reaching powers that can materially impact on the day-to-day operations of any business. Understanding the repercussions of any divorce can assist in preparing and reducing the impact to your partnership.
Lastly, and perhaps most importantly, a good business relationship is about communication. If you have concerns or issues speak up.
Generally people shy away from conflict but in life it is just part of doing business, and the earlier you deal with issues the smaller they will be. It will also minimise misunderstandings and be a foundation for growth and prosperity.