Bringing on a partner

Yesterday I wrote about the difficulty that small businesses have today in borrowing money, and how this presents an opportunity for cost cutting and better management. Of course, even if costs are cut to the bone and the business is well managed, additional cash is often need for growth, or to fund inventory for a large order.

When the banks can’t or will not help, one temptation is to bring on a partner. While tempting, I caution owners to tread cautiously. Here are some things to consider.

1. How much equity will you need to give up in return for money invested in the business?

2. How will be business valuation be performed to determine equity percentage?

3. What else will the partner bring to the table? If the person has skills or capabilities that compliment those of the owner, the value of the partner may be much more than just the money.

4. Is the partner just interested in investing, or in being active in the business? Can the business afford an equitable salary for the partner? Will the owner’s pay and partner’s be proportional to their ownership share?

5. What are the long-term goals and expectations of the new partner? Of the owner?

6. Are the personalities of the owner and partner compatible?

7. Will the cash influx carry the business, or will more cash be required?

8. Is there a business plan with realistic financial projections?

Assuming a partnership makes sense, then an attorney should draw up papers that:

1. Spell out the terms of the partnership.

2. Include a buy/sell agreement in case the partnership does not work out.

3. Include a confidentiality agreement and a non-compete agreement in case the partnership ends.

At the end of the day a partnership might be good for the business and its owner, but should be approached with careful analysis, thought, and preparation.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com