What is the best option for entering into a partnership with an existing business?
I have been running a consultancy business for the last two years. To increase volume, I am associating with a business development partner who would subsequently need some stake in the business. What is the best option to build a partnership, a separate company or a joint venture? Any guidance or pros and cons of each would be greatly appreciated.
A joint venture is a common approach for new investors in a company. For such purposes, you would require to enter into a shareholders agreement to provide the rights and obligations of the parties for such purposes. In such scenario the investor would enter into the existing company.
Although you can incorporate a new company, from a business perspective it would be necessary to consider if incurring in additional costs for incorporating a new entity would be necessary if you already have a company running such business.
You should consider joint ventures the way to go unless your potential gain is many times your current value as a business. If you find a joint venture going sour you can end it and nobody loses anything. A separate company might be less lucrative due to the lack of visibility involved and a partnership can ruin your business if it goes badly. Of course none of this should be considered legal advice and you should decide such things with a contract lawyer.
If you've already started a business I do not think you need a partner, especially if it is unclear what will be his contribution to your company. If you need more customers, you better have a system of attractive rewards for everybody who likes to collaborate with you. On the other hand, I suggest to associate with other companies to jointly participate in projects (in which individually is not possible).
I would avoid a partnership if it is at all possible. Partnerships are the most difficult form of business to find success and the most likely to fail. In your case it looks like you would have different responsibilities and different segments of the business that are your respective strengths which is a plus but still you would be better off keeping full ownership and control and rewarding his efforts monetarily.
Have you thought about a strategic alliance? This allows you both to remain independent, keep your equity and lowers the risk.
You should always be wary of partnerships and the reasons for entering one. Does the partner in question have a proven record or any pre-existing knowledge in your industry? If not then I would agree with Donna that you should think about simply outsourcing that part out.
I will share my experiences in regards to partnerships especially in a startup or small business environment.
1) Assuming that the business development partner has some knowledge of your industry you are able to get more things done, you will have another person/company with perhaps a different speciality or expertise to you which will compliment your business
2) Assuming that you are both in the same industry you can effectively double your database of potential customers as well as your professional networks.
3) A partner can bring a fresh perspective into the mix and allow you to see opportunities or dangers where you did not even think to look.
4) Gives you more time to do what you're good at instead of forcing yourself into doing something you have no expertise in (Complimentary Skills - as discussed above)
5) mutual support and motivation
1) Less freedom to do what you want to do and the direction you want to take the company - there are bound to be disagreements.
2) Depending on the structure you may have to share up to 50% of your profits (depends on your agreement)
3) Things may get ugly if you do not have guidelines from the beginning for the partnership, be very careful what you agree to or more importantly what you did not think of - always cover yourself. Always think about the worst case scenario.
4) A failed partnership could kill the business.
My recommendation Wilma is to enter a tentative agreement with this partner almost like dating someone before you marry them. Suggest that you work together for a period of 3 months in that time set some goals for your partner to achieve that you both agree on and perhaps pay him.her a commission of 10-15% for each deal the partner closes for you.
After this period if all things go well you can discuss the possibility of taking it further or you can simply stay with the existing agreement if it works. I mean why change something if it aint broke right?
Anyway Wilma hope my essay helped you :)
Wilma, Please advise me about some more details regarding the role of the business development partner in order to draw an assumption. Based on the details yo provided, it appears that you have not firmly established a business structure. If this is true, you may want to establish your own business and contract out the business development services of the individual in lieu of establishing a partnership as it would have more risk. The contract should be based on performance to ensure that flow of business development is met to your expected outcome to achieve income goals and conversion of new business. Let me know if you have more questions.