Deciding to form a partnership in business is a giant leap of faith. Trust in the other person, as well as an ability to work well together as a team, are necessary for success. It can seem daunting because there is so much you do not know about a potential partner.
Do your due diligence before forming a partnership. The first step is for both of you to decide how the company will function. How will the responsibilities be divided? Is this someone you can see working together with to make major decisions? When you have found a potential partner, and your goals seem to be in sync, then the real work begins.
Remember, both partners should take the following steps:
- Do a background check. If your potential partner filed bankruptcy two years ago and has not disclosed that, would you consider it a red flag? What if they have tax liens against property? These are things you need to know before making any formal agreement for partnership. Thorough background checks are available online through companies like GoodHire, Checkr or IntelliCorp. They are reasonably priced and most allow you to request additional information specific to your needs.
- If the background check you purchase does not include a credit check, get this as well. Be prepared for your business partner to do the same and be willing to answer any issues or concerns that come up during the process.
- Openly discuss business and work history. Does the person have the skills and experience necessary to take on their role in this partnership? Have they invested in similar companies in the past? Have they been in a partnership, even if in another industry? If so, contact their former business partner and ask what it was like to be in collaboration with this person.
- Discuss and agree on the terms of a partnership agreement. Then work carefully with an attorney to draft the agreement. You should have a neutral third-party attorney craft the partnership agreement and then have your personal attorney review the contract before you sign.
- Determine your potential business partner's net worth. Finding someone's net worth can be complex or straightforward, depending on how the diversification of their assets. Be upfront, and ask for a net worth statement and verifying documents. They should be willing to provide tax documents, loan documents, and bank statements. Analyze this information carefully and compare it against information in their background check and credit check. Ask for an accounting of any discrepancies. Other sources to determine if your partner is disclosing everything:
- Real property records.
- Divorce proceedings. Some states do not make these proceedings public, but others do. Check the regulations for your state.
- Probate filings.
- Civil litigation-it is important to know if your partner is, or has been, involved in a civil lawsuit.
- Corporate filings.
- Nonprofits.
- Check their social media accounts. Does the person's online presence seem to be the same person you are getting to know as a potential business partner? Do you feel like your values and beliefs align in a way that makes working together feasible? Remember to invest some time in this and go back further than the last few months. What did their life look like a few years ago?
- Don't discount instinct. If everything checks out about this person, but you still feel unsure, trust your instincts.
- If you do feel comfortable moving ahead with the partnership, do not be afraid of the difficult conversations. The success of a business partnership depends on being able to communicate under pressure and being able to work through disagreements. You must discuss how these things will be handled before the partnership is final.