For small and one-person businesses, a great way to pursue bigger projects and expand your business is to partner with another business, often another solo operator but sometimes a larger firm. Say, a graphic designer could partner with a web developer on a project to produce a local directory funded by advertising dollars. Or, an insurance consultant could partner with an accountant to put on an special event on health insurance options for small businesses.
The possibilities are endless — and so is the potential for the relationship to go awry.
Here’s a quick rundown of some of the more important legal and practical realities to consider.
Who should consider partnering? I’m putting this first because I meet a lot of fresh entrepreneurs who find it intimidating to partner up with anyone. So, first off, let me say you should not be intimidated to consider arrangements like these, even if you’re a solo operator allergic to contracts. Yes, you do need to execute a contract with your partner(s) in order to do it properly, but it’s not that hard to do. Anyone in business for themselves needs to be comfortable with contracts and agreements anyway. Look for quality templates (Nolo has tons) and use them, customizing them for your specific situation. Ideally, you’ll also have an ongoing relationship with a lawyer who can review work you’ve done and answer the more detailed questions you’ll sometimes run across.
Bottom line: Don’t let your aversion to anything “legal” put you off of partnering.
What is partnering? By “partnering” I mean your business (yes, solo operators and freelancers included) joins forces with another business for a short- or long-term project, where you both “own” and are invested in the project in certain essential ways, in particular:
- splitting profits (with whatever distributions you decide)
- splitting costs (again, how you divvy those up is up to you), and
- sharing control.
Legally speaking, the typical way this is done is for the two companies to execute a joint venture agreement that covers all the necessary details. Basically this is just a specific type of contract that outlines the important terms of the agreement between the partners (again, the most important of these have to do with profits, costs and control, but other critical issues include termination provisions, intellectual property, etc.).
There are templates out there for joint ventures, but in my opinion this is usually going to fall into the “important contracts to have a lawyer review and/or draft” category.
Note that I’m not talking about situations where you and another company want to merge completely; in that case you’d form a whole new business entity. If you’re thinking about joining forces with other partner(s) on a more permanent basis, here’s a good article from Entrepreneur (I’m even quoted in it!): Bringing on a Business Partner? Avoid this Common Mistake.
How does sharing profits and losses work? In my experience, people joining forces often don’t talk enough about their plans for expenses and costs at the outset of their relationship. It’s fun and easy to talk about how you’ll split all the glorious profits — but it’s even more important to have a clear idea of what kind of costs you’re going to get into, as this forms the basis for potential losses.
Make sure you and your partner are on the same page about what you will be spending. If one partner wants to spend a lot on marketing, for example, and the other wants a more frugal, networking-based approach (which is my preference, generally), there’s likely to be some head-butting about this.
Ideally, you and your partner(s) will agree on a line-item budget (use Excel, people) before you spend any money or sign any joint venture agreements. Even if the budget is just best guesses, it at least helps make sure everyone understands where everyone else is coming from.
Costs basically represent risk. In business-speak, sharing costs is sometimes expressed as “sharing risk” and I think that’s a good way to look at and understand what it means to “partner” with another business in any sort of venture. If your prospective partner envisions a lot of expenses that you don’t, it’s basically a reflection of differing ideas of risk. A partner who wants to raise and spend a lot of money to get the project off the ground is willing to accept more risk; one who wants to keep costs low is essentially trying to limit risk.
Make sure you and your partners have compatible tolerances before getting involved with each other.
Who gets to call the shots? When businesses partner up, the usual understanding is that they’re both decision-makers in the project. Voting power usually reflects each partner’s share of profits/losses. If you don’t take care to outline specifically what each partner’s roles and responsibilities are, you can get into big trouble.
It’s also smart to specify some sort of method you’ll use to manage the business and make decisions — for example, you could establish a basic meeting schedule (say, once a week at the beginning, maybe tapering to once a month once things are well-established) where you jointly review financial reports, discuss the status of marketing efforts, and generally move the business forward by identifying goals and next steps.
How do I find a good partner? This is the hardest part. Meeting people who have business interests, skills and temperaments that are compatible with yours doesn’t happen every day. People can be jerks, poor communicators, or both, and it’s sometimes hard to tell right away. Don’t feel pressured to partner with anyone, and don’t be afraid to be choosy. Trust your instincts (unless you know your instincts are wack). Your partner can be a key reason for success or failure, so make sure to choose wisely.