A “partnership” is defined under the Partnership Act as two or more persons carrying on business with the intention of realizing profits. A partnership, like other business relationships is just that – a relationship. A successful partnership is an arrangement that achieves both profits and longevity. As such, the adage “look before you leap” remains abundantly relevant. Before entering into a partnership, one should evaluate the potential partnership through a three-step process: analyze the feasibility of the business proposal; evaluate your potential partner; and undertake due diligence.
Analyze the Feasibility of the Partnership Business Proposal
There is little point in negotiating with a potential partner until you have done enough homework to know if there is a profitable business opportunity worth pursuing. It is critical you address a number of key questions concerning the potential business proposal. These include:
- What revenues can the partnership expect reasonably to generate over a number of years?
- What will be the costs of implementing the needed business strategy in order to generate such revenues?
- What are the expected operating expenses?
- What are the requirements of capital investments for such items as equipment, etc.?
Evaluate the Potential Partner
It is incumbent upon you to ask questions of your possible partner with a critical eye. The same holds true if the partnership involved more than one other person. Typical areas to explore include:
- Does your potential partner have similar long-term goals and interests?
- Does your potential partner have an existing business record and if so is it good or bad?
- What is your potential partner’s existing or potential financial situation?
- What advantages can your potential partner bring to the partnership? Advantages may include access to new markets; credibility with existing customers, suppliers, and financial institutions; access to new technology and equipment, management expertise and know-how; as well as expanded distribution channel(s).
You know you are ready to begin negotiations with your potential partner when you can answer positively the following:
- You understand your long-term goals and interests
- You understand the potential benefits available from the formation of such a partnership
- You know what each party can contribute to the partnership
- You have established your wish list from both an optimistic and pessimistic perspective.
You believe you are in a position to discuss and agree upon the major issues to be negotiated between each party including the following:
- How will ownership of the partnership be divided?
- Who will have authority and responsibility to manage the partnership?
- How will profits be reinvested and/or distributed among the partners?
- What financing, equipment and access to customers will each party bring to the partnership?
- What access will each of the partners have to future business opportunities?
Undertake the Requisite Due Diligence
You owe it to yourself to complete a due diligence process of your potential partner before finalizing any form of Partnership Agreement. You must be satisfied as to the authenticity and integrity of any potential partner. There are many checklists available within the market place which detail the hard questions to be asked of any potential partner.
A successful partnership involves achieving mutual trust between the partners and an agreement of a practical working arrangement for operational control of the day-to-day business enterprise. The likelihood of achieving both is greatly enhanced by embarking upon an appropriate evaluation process before entering into any form of agreement.