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I started my first business long after I began my career as an author and speaker. Aside from a brief, but very successful, stint as a delivery boy for a pharmacy, I was accustomed to working alone. I had editors and bookers, but the product and delivery was mostly up to me. So when I started my first enterprise, a publishing company, being the sole owner was a natural consequence of my experience.
According to author Patrick Burke in his book, “There Is No Us in Business,” many entrepreneurs, unlike myself, start a business like they do a golf game — looking for partners. Burke, who is a volunteer co-chair with me at a nonprofit, points out that new entrepreneurs’ failure to place a high value on the ownership of their businesses can result in poor partner decisions — decisions that will prove costly later. Remember, the equity in your enterprise will be your most valuable asset someday.
Admittedly, there are times when an entrepreneur must partner. My advice has always remained the same — when the business requires a skill not possessed by the owner, and that skill cannot be acquired by money alone. I can’t think of a higher standard.
In my role as a business consultant, it’s been my experience that most businesses are the idea of one entrepreneur who fills the most vital roles in the company, usually sales or production (or often both). For that reason, to grant equity to a role player is creating unnecessary dilution.
We are in an era of mega-mergers and strong private-equity presence in many industries, from self-driving cars to healthcare. In my opinion, this has caused an overemphasis on transactions over loans. As a result of this environment, many entrepreneurs believe the vehicle of choice for startup capital is selling an interest to a partner. Wrong.
The new business owner should exhaust all sources of capital before selling equity. Those include: their own money, customer money (boot-strapping), the bank’s money and, finally, loans from FFF (family, friends and fools). Finding the correct financial partner is difficult, but this challenge pales in comparison to the difficulty of buying them out later.
Burke’s book also explains the flip side: how to be a successful investor in someone else’s business. However, from what I’ve seen, this type of investing has resulted in more dry holes than startups. The mere fact that a business owner is looking for capital often indicates the business is lacking some essential element that is preventing profitability. In my experience, rarely is capital the only ingredient necessary to turn a company around. If you think the risk is worth only a small investment, no investment is likely the better choice.
As you would expect, and something I can attest to, there are times when you should take on a partner. I am often asked the same series of questions, and I am glad to share my answers here with you:
What are the characteristics of a good partner?
As previously stated, one who has a skill that you don’t. One who shares your risk profile. One who understands the financial commitment, and whose financial goals are aligned with yours. And lastly, one who shares your values.
What are the best indicators that a partnership will actually work out?
The best indicator is that the partners think through what issues might arise, and address those issues in their partnership agreement.
Why is the equity split in a partnership so critical? And what’s the best way to determine the split?
The equity split is important because of the value of the equity. Although most entrepreneurs would probably agree that the value of their enterprise will be their most valuable asset one day, they tend not to treat it that way during the startup phase. As to what’s the best way to determine the equity split? That would be each partner’s relative contribution to the success of the enterprise. This is obviously a very tough decision, especially before the enterprise is up and running.
What are some non-traditional partnership ideas that have real value?
They really aren’t partnership ideas — they’re just opportunities to provide key employees with a wealth-building opportunity other than actual equity in the company. An example of this is a stock appreciation right, which allows an employee to share in the increase in the value of the company that they help create without actually owning part of the company.
It’s hard to understand why entrepreneurs, who are often lone wolves, choose to hunt in packs when embarking on a new venture. It may be that partnering is an emotional decision and starting a business is a highly emotional undertaking. Running a business, on the other hand, is a highly logical undertaking. With that said, I agree with Burke’s sentiment: Applying logic to the partnering question from the outset will result in the entrepreneur having a smooth, enjoyable journey to a far better destination.
July 1, 2019 at 08:37AM
Forbes – Entrepreneurs