Considerations for Adding a Partner to Your BusinessAtlanta CPA Asks...Should You Expand Your Business by Adding a Partner?
If you are thinking about adding a partner you do indeed have a lot to contemplate. In fact, other than initially going into business, this might be the single most important decision you make in the history and life of your business. If you do your homework and make a wise and judicious decision you may very well ensure the viability of the business and its continued success. However if you fail and choose poorly you may dramatically shorten the very lifespan of your business, limit its competitive edge in the marketplace, and even reduce the overall profitability of the business and most importantly, your ability to produce an income and provide for your family. As initial owners of the business we have the most vested interest in the business not just in terms of our past cash infusions and sweat equity, but also the very ability to provide an income stream for our livelihood.
"Running a business is tough enough without deadly miscues. As a Duluth CPA for decades this is perhaps one of the biggest “deal killers” a business can try to struggle through. Giving power, control and influence to those who are not ready and not well suited to be your partner is akin to playing with a loaded weapon. Get to know potential partners for at least a year using an aggressive well-documented and considered agreement with key personnel they have to achieve before any consideration of ownership is granted. It is far easier to give away ownership than it will ever by to take it back."
— John Dillard CPA
Many times business owners will jump ahead of themselves offering an equity or ownership interest in their business without considering all of the variables critical to ensure that you have chosen wisely. Judicious evaluation of all the facts are critical as you will now have someone else to consider, consult, and make decisions with whose temperament and business style may not be compatible to that of your own. If you are able to work through the basic personality differences and consider making someone a partner then you will want to begin to evaluate many other variables that will impact the future success and each and every decision you reach.
Before I would consider adding a shareholder I would want to get an excellent understanding of their overall business style, demeanor, and decision-making aptitude. I would suggest, at a minimum, you have a working relationship with a prospective partner for at least a year and see that potential co-owner in a host of ordinary work as well as stressful situations. By doing so, you will get a broader, more accurate account of whether or not they exude a relatively predictable pattern of decision making and if your styles afford you the ability to effectively work together in owning and managing a business.
Don’t Take on a Partner Just for the Money
One of the most important rules to remember when considering taking on a new partner is that money is a commodity. Though it is rarely free and most often comes with restrictions—rules, ratios, guidelines, interest charges, as well as the responsibility of repayment—money is still something that is tangible unlike the intangible characteristics of a service or an individual themselves.
In prior years your business has reflected your individual characteristics and style and now, by adding a partner, you are exposing yourself to a myriad of decision-making options and considerations. These options and considerations were primarily dictated and decided by you exclusively and to this end, this is the most frequently committed mistake entrepreneurs make in reaching out too fast for cash when offered in exchange for ownership. There are times when money alone will be the difference between a business going to the next level but it is most often a small cash infusion relative to the large rate of return that giving up partial ownership of a business will bring to a new owner. Especially when you think in terms of combining a rate of return, distributions, dividends, and perhaps the biggest pay day of all when a business is sold.
Often there are many other sources of funds available that do not involve taking on a new owner and they are a far less expensive option than selling the business’s equity. The best test of whether or not money is a critical component or just a commodity is the preparation and review of a well-crafted business plan. This will often tell a story and reveal whether a cash infusion via equity ownership will result in a rate of return well in excess of what is lost as a result of equity ownership.
Evaluating Prospective Partners
After you have watched and reviewed potential partners viability in your business it is time to consider some of the more quantifiable aspects of your potential new partner. I would set a trial period in which goals would be set for the potential partner to achieve consisting of several tangible as well as intangible goals. These should be well documented and shared in advance so that you both might have an active dialog and written record of what your prospective partner is to achieve within the allotted period. This will give you added information on which to measure an individual and their ability to perform as expected and agreed upon.
You will also want to give careful consideration to whether adding a partner will actually contribute or detract from an initial owner’s value of his investment. If, for example, the business grows slightly but now there are more owners to consider, then you will be assured that most often the originating partner’s income will fall. If, however, bringing on a new owner brings to the table talent and resources that were otherwise unavailable and might enable the business’s growth model to catapult, an entirely different answer might result.
After carefully evaluating you still opt to take on a new partner then it is time to begin the process of actually doing so. I would suggest that all partners be required to sign a shareholder/partnership agreement detailing their responsibilities, rights, and obligations before the stock/ownership is actually granted. A well drafted shareholder agreement will cover such things as what happens if one partner wants to sell, retire, becomes disabled, or even dies. It would also include the methodology for determining the purchase price of an owner’s interest and include how the monies would be paid out-whether in lump sum or not. This gives both the company and the owners protection as well as rights under the agreement.
We frequently work with business owners in this most critical planning aspect of their business. We can help you evaluate whether your workers unique skills are critical to your operation and mandate becoming a partner or if they are better suited to remain an employee. By utilizing our services we can help provide you with the techniques and knowledge, which will allow you to better evaluate as to whether to add a partner.
Contact His CPA PC (A Christian CPA Firm) today.