Text: Françoise Gallet. Article from the Septmber 2014 issue of Bona Magazine.
Thinking of venturing into a business partnership? Make sure it’s the right fit.
If you run a small business, forming a strategic partnership could be the boost your business needs. But before you seal the deal on this business move, make sure you and your partner share the same goals and ideals from the onset. A partnership that turns sour can be as costly and as damaging as a nasty divorce.
Why partner?
“Partnering is about tapping into resources that allow you to punch above your weight,” explains Lionel Billings, head of consulting services at Business Partners Limited, a specialist risk finance company for small and medium businesses.
“By combining skills or resources in a mutually beneficial way, you maximise the value of your product or service so that you can run a more profitable business,” adds Yogavelli Nambiar, director of the Enterprise Development Academy at the Gordon Institute of Business Science (GIBS). This means your business could gain access to certain markets you may not have been able to supply to in the past. A strategic partnership could also help you gain a new competitive advantage, enable you to respond and adapt more quickly to changes in the marketplace or boost your credibility and enhance your image.
For just these reasons, partnerships have been vital to Mpande Technologies, an information and communications technology (ICT) business. “ICT is broad, innovation is key and technology is constantly evolving. I engage in as-and-when type partnerships, depending on the contracts I’m engaged in,” says Cecilia Montle, the managing director of Mpande.
Cecilia also partners with her husband, Sir Montle, because he brings business insight and experience in project management to the table.
Finding a partner
“The starting point for any partnership is recognising that there is some skill or resource that you lack. Thereafter, finding a partner can often be a very easy process,” explains Nambiar, who found one of her business partners through chatting to a friend. “Attending conferences, workshops or industry events and talking to people about what you do, could open doors.
Reading entrepreneurial or industry-focused publications could also help you identify a suitable partner,” she suggests. “You can also consult the various business chambers, industry associations and professional bodies, depending on what it is that you are looking for in a partner,” advises Billings. “And then of course there is Google and social networks,” Cecilia, who’s done her fair share of hunting down partners, points out.
Ensuring a good fit
Although the basis for forming a partnership often boils down to whether you like each other and if you can work together, there is a host of criteria that need consideration to ensure a good fit. It is important to be clear about the reason for the partnership. Billings suggests you work through these match-making essentials:
- Shared vision: Agree on a strategic direction that meets the needs of both partners.
- Roles: Determine each partner’s strengths and divide the roles accordingly. A successful partnership builds on the competence of each partner.
- Responsibilities: Clarify commitment levels and expectations.
- Ownership split and authority: It may seem fair to split ownership into equal 50 percent shares. However, this can harm decision-making. Instead, consider a 49 percent to 51 percent split or a clear agreement on how decisions are to be made when there is a problem. “Also, check that you hold similar business ethics and morals,” suggests Cecilia.
Avoiding the pitfalls
“It’s easy to set up a partnership because a verbal agreement is all that’s needed and many partner with people they know, such as family, friends, and intimate partners on the unspoken assumption that everything will be fine,” says Nambiar.
But partnerships can be tough and egos and emotions can get in the way. With any partnership, whether it’s with your spouse, friend, or family member, drawing up a written agreement- preferably with the support of an accountant or legal advisor – is crucial to avoid potential pitfalls.
When things go sour
The agreement should detail expectations, roles and responsibilities, and the terms of the agreement. Without it, disagreements and termination can be a messy affair.
For instance, the dispute resolution process, as specified in a partnership agreement, is the first port of call when partners can’t reach a consensus. In hindsight, agreeing on how to agree – without a written agreement in place – is much more difficult when parties are already embroiled in an argument over issues about the business. This is especially true of dissolving a partnership when the relationship is ruined. “If a partnership agreement is in place, this will specify the division of assets on dissolution,” explains attorney Nanika Prinsloo of Prinsloo Associates Attorneys.
But when there are different opinions about how the assets should be divided, and there’s no written agreement in place, a partner may have to approach the court with their proposed division of assets and an application to end the partnership. “However, with no written agreement to reflect the terms of the partnership, it comes down to one partner’s word against the other, which makes it difficult for any court to make a decision,” explains Prinsloo. If the court grants the order, the partnership will be dissolved and assets divided as per the court order – and this may not be in line with either party’s wishes.
Partnership
Pros & Cons
Pros:
- Shared cost of the start-up.
- Shared responsibilities and work.
- Shared business risks and expenses.
- Complementary skills and additional contacts.
- Mutual support and motivation.
Cons:
- Partners in a general partnership are jointly and individually liable – if your partner skips town, you’ll be liable for all the debts, not just half of them.
- Shared profits.
- You do not have total control over the business.
- Personal relationships may not survive business partnerships.
Agreement Essentials
Billings suggests these essentials for partnership agreements:
- Amount of capital injected by each partner.
- Type of business.
- Roles and responsibilities of partners.
- How profits and losses will be shared.
- Pay and compensation.
- How and when meetings will be held.
- Voting power of partners.
- Distribution of assets on dissolution.
- Provisions for changes or dissolving the partnership.
- Dispute settlement clause.
- Settlement in case of death or incapacitation.
- Restrictions of authority and expenditures.
- Length of partnership.
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