New business are failing at an alarming rate, for instance, according to the US Bureau of Labor Statistics, small business failure rate is somewhere around 34% during the first 24 months.
And the failure rates have increased in the last couple of years, according to the SBA, firms with two or more owners are far more likely to succeed and they tend to last longer than singular proprietorships.As a matter of fact, according to Small Business Trends, the average revenues for partnerships have increased by almost 160% since the 1980’s while revenues sole proprietorships have decreased 50%.
This seems to make a great case for business partnerships, however a vast majority of small business are owned by a sole entrepreneur. Of course, partnerships have their good and bad side, but do the pros overshadow the cons? A bad partnership can make you wish you had never gone in to business with a stranger in the first place.
Entering a partnership can be tricky, but if you want to do it right and increase your chances of success, you need to a couple of things before you officially join a partnership.
Three Things You Need to Do Before Forming a Partnership
1. Run a Quick Credit Check
This may seem a little bit awkward and even intrusive, but you simply have to do it. you see, a partner with a bad credit can potentially harm your business beyond repair. You can run a check as a potential employer, or if they want to avoid a report inquiry, they can get a free report and share it with you.
Furthermore, if he is currently in business, you also get a business credit report as well. Basically, you need to look at this situation as if you’re a money lender. Just ask yourself – would you lend any money to this person?
2. Decide on Your Organizational Structure
For this step, you’ll need to a little bit of homework. First, you need to decide on simple things such as job descriptions and an organization chart. And while these look like two separate documents, they are actually a part of the same task.
And no matter how small your company is, setting the structure of the organization and agreeing who does what (even if you two are the sole employees) is crucial to the success of your potential partnership. These two simple documents will help you avoid any misunderstandings in the future.
3. Prepare Your Exit Strategy in Advance
Shareholders often try to sell their shares and exit when the company is doing particularly well or badly. So in order to prevent any possible disputes down the line, you and your partner should sign a shareholders agreement to regulate your buying and selling shares and your exit strategies in advance.
Thankfully, you don’t actually need a lawyer for this; you can easily download a shareholders agreement template. Fill it out yourself and sign it without any legal guidance. You’ll never know when your partnership might end, so it’s better to have an exit strategy set in stone.
As we mentioned in the beginning, having a good partner can do wonders for your business. There are countless examples of great, successful partnerships.
For instance, Charlie Munger and Warren Buffet’s partnership has spanned for decades at this point, generating billions of dollars in the process. You also have Imagine Entertainment, which has grossed around $13 billion since being founded by Brain Grazer and Ron Howard more than 30 years ago.
There are many, many more examples, but you get the point. And there’s a reason all of them worked out so well – complimentary skills.
If your partner allows you to focus on your strengths, makes you improve your weaknesses and brings his own set of unique skills to the table, he will allow you to take a break from time to time, and take a lot of weight from your shoulders.