What makes for a great partnership in small business? Henry and David share their thoughts and opinions on how and why they have chosen to partner on their various small business ventures. Trust and respect are at the core of a successful small business partnership, and an upfront understanding of the differences between a partner and an investor are also critical. Are you best suited to work in a partnership, or by yourself? Henry Lopez and David Begin help you answer this important question as they discuss small business partnerships on this episode.

Henry Lopez and David Begin met each other while working for the same technology company in 1991. They have remained friends since then, and have partnered on various small business ventures including iTopIt (a self-serve frozen deserts restaurant they owned for 10 years and sold in 2021), and Wild Blue Car Wash (an exterior express car wash business they sold in 2019).

Learn more about the next Business Partnership Online Workshop.

Resources:

• Memo of Understanding for Business Partnership – Business Partnership Checklist
• 3 Pillars of Successful Business Partnerships

Related Episodes:

Want to learn more about business partnerships? We have released a series of episodes on this topic and you can find them on our Business Partnership Episodes archive page.

Business Partnership Episodes

You can find all previous episodes of The How of Business podcast, the podcast for small business owners and entrepreneurs, on the Archives page.

Frequently Asked Questions:

Frequently asked questions (FAQ) about small business partnerships…

• Q. Should I consider a business partner?
  A. Business partnerships can be rewarding and a great way to team with one or more people to start a small business. Ideally, each of the partners brings unique skills and experiences to the relationship to help launch and manage a successful small business.
  
• Q. Should I partner with friends or family?
  A. Before you partner with friends or family members, think long and hard about the potential issues that may arise in the future. If the business is not a success, it can lead to blame and guilt and possibly ruin a relationship. If the business is highly successful, there could be issues related to compensation and who get’s the credit. The key, as with any business partnership, is to have serious conversations upfront and to carefully detail the terms of the partnership in a legal partnership or operating agreement.
• Q. Do I need a Partnership or Operating Agreement?
  A. Yes! You definitely need to agree to and sign a legal partnership or operating agreement that details all of the terms of the agreement. It’s imperative that you review these terms before you start your business, and then have an attorney who represents the business (or individual attorneys) draft and help you finalize the agreement. You can use the Memo of Understanding for Business Partnership (now called the Business Partnership Checklist) to help you discuss and define the major terms of the partnership or operating agreement. 
• Q. What makes for a great business partnership?
  A. Successful small business partnerships are based on common trust and respect. Open and honest communication, and internal transparency with all business dealings, are also important. But what’s equally important is to have honest conversations before starting the business about the terms of the partnership – including who will be performing specific duties, how the profits will be handled, and what happens if someone exits the business.
• Q. What should be included in a Partnership Agreement or Operating Agreement?
  A. There are several important clauses that should be included in every partnership or operating agreement, including ownership, how profits (and losses) will be allocated and distributed, decision making and roles, dispute resolution, buy-out options and rules, and capital contributions. For more information on what to include in your partnership agreement, use this partnership agreement outline. 
• Q. Do I need an attorney to create a Partnership Agreement or Operating Agreement?
  A. Yes, you should definitely hire an attorney or lawyer to help you draft and execute a legally binding agreement for your partnership. While there is no legal requirement to do so, we strongly advise that you engage an attorney to help you and your partners with determining the terms of the partnership and then signing an agreement that protects each of the partners and the business.
• Q. What are the advantages and disadvantages of a small business partnership?
  A. The advantages of business partnerships can include combining complementary skills and experiences to start and run a profitable small business. For example, one partner may have extensive marketing and sales experience, and another partner may have specific industry experience. The disadvantages of business partnerships are usually related to the potential disagreements that can arise when operating a business.
• Q. Should a partnership be 50/50?
  A. We don’t recommend 50/50 partnerships (when two partners owner the business equally) because it can result in stalemates when there is a disagreement on a business decision. We recommend that one person has a majority ownership (51% or greater), or that you have more than two partners in the business.

Article: 3 Pillars of Successful Small Business Partnership

By Henry Lopez
Download the complete article: 3 Pillars of Successful Business Partnerships

My first business venture was a partnership. Working with another person with similar dreams was the only way I was able to get started as a business owner. We coupled my general business skills and money, along with my partner’s expertise and time.

We operated three units of a local pizza restaurant franchise throughout the 1990’s. I kept my day job, and my partner took care of the day-to-day operations of the business.

I’ve gone on to experience less rewarding partnerships, and fortunately, much more fruitful ones as well. I now understand more clearly why I prefer working in teams, and how I am typically more productive combining my skills and energy with my business partners.

Starting with that first successful teaming, I have come to understand and appreciate that at the foundation of a strong business partnership are the three pillars of trust, respect and alignment.

Before there can be anything meaningful and lasting in a relationship, there must be a mutual level of trust. Trust, however, takes time to develop.

I have known David Begin, one of my current business partners, since 1991. We met when we both worked for a large software company, and have remained friends over the years. Our families have traveled together, and we have developed a close bond over time.

When the opportunity first arose for us to partner on a business, we had already developed a deep trust at a personal level. This trust has been the basis of our business relationship.  We rely on the fact, as good partners must, that we have each other’s interests in mind – we have each other’s backs in any situation. We try to consider what’s best for the other person, and what makes most sense for the business overall.

If you have the advantage of considering a partnership with someone with whom you have a long-term relationship, then trust should already be established. But what if you have recently met the person you are considering going into business with? How do you develop trust in a short period of time?

In my opinion and experience, it’s difficult if not impossible to rush the development of personal trust. There are, however, techniques we can use to accelerate the development of trust in a business environment. It requires careful and calculated observation, applied techniques, and lots of intuition.

In his book “The Trusted Advisor”, author David Maister explains that in business relationships you can quickly improve your “trust factor” by increasing credibility, reliability and intimacy while reducing self-orientation. The “trust factor” is a measure of trust, from the perspective of the other person with whom you are conducting business.

When it comes to measuring the evolving trust you have in a new partner, it’s applicable to consider those same factors. If the person is potentially trustworthy, they will likely demonstrate credibility (they tend to be accurate, complete, and don’t tend to exaggerate their knowledge), reliability (they follow through on their promises and are consistent in their actions and behavior), and intimacy (they are candid, genuine, and emotionally open).

Low self-orientation (meaning that they are not always focused on themselves, they are good listeners, and don’t exhibit a need to always be right and win at all costs) is the other important clue to help you judge the character of your potential partners. It’s often most effective to watch for these indicators during the most casual of situations, like during a meal at a restaurant when the other person may reveal more of their true self.

Partnerships may not be a fit for people who do not like to seek advice from others, who do not prefer to share success or blame, and if they don’t see value in the opinions of others. As you are getting to know your potential partner, be sure to listen and observe carefully to identify these characteristics. It’s also probably not a good idea to partner just for financial reasons. Overlooking a mismatch in personalities and vision in the short-term because that person has the money you need may eventually result in a negative relationship and a failed business.

An effective business partnership also depends upon mutual respect. Ideally, your partners bring complimentary skills and abilities to the team. Combined with each partner’s perspective and experience, the group is considerably stronger and more effective than any one person could ever be by themselves. Team members must have a level of respect for each other, which fosters a positive and productive business environment.

Recognition and positive feedback are important for showing and feeling respect. We must take the time to recognize and appreciate the efforts and input that all partners bring to the collaboration. We all naturally want to be recognized and respected for our individual contributions,
even if those contributions are never implemented. You demonstrate respect for your partner when you value or simply acknowledge their input, ideas and perspectives.

Of course, to gain respect, you must be worthy of being respected. Earning respect is in large part based on being a good person and partner (are you someone who looks for the best in others and who follows through on your promises and commitments to the team?). It is about telling the truth and being transparent, and genuinely caring about your teammates. Respect the people you work with, and they should respect you in return.

You can have complete trust and honest respect in a business relationship, but it can all come tumbling down with one seemingly simple misunderstanding. “I thought you were going to do this?” “No, I assumed that you would do that!”

During the “honeymoon phase” of the business relationship, when we are caught up in the excitement of the new business, we may be quick to make assumptions and avoid difficult conversations. Dodging critical questions and assuming that things will always be great often leads to ruinous arguments later.

It’s critical that you clearly define upfront who will do what and how much time each partner will invest in the business. You also have to discuss and agree on many other points including the terms of a future buy-out – either because one of the partners wants out, or there is a significant life event.

My business partner and I benefit from, and prefer, what we refer to as “active partnerships”. These are partnerships where all members are contributing fairly equally. It provides us the financial benefit of spreading the risk, but also sharing the burden and responsibility of building and growing our small businesses. It often makes sense to bring in investors, however, who are not involved in the day-to-day operations of the business.

Legal written partnership agreements are a must for any partnership. This typically includes an Operating Agreement and a Buy-Sell Agreement which is drafted by an attorney. The legal agreement defines all of the parameters and terms of the business, including who is the Managing Member, what capital is contributed by each member, and what happens when a member of the partnership wants to exit or can no longer perform their duties.

We recommend that you start with a Memo of Understanding. This is simply an outline that documents most of the terms of the partnership. Then you consult with an attorney to finalize the details and create the legal Operating Agreement. The key is to discuss and agree upfront on the terms of the partnership, and avoid the misunderstandings and resentment that can otherwise develop later.

There are many reasons why partnering may make best sense for your business venture, including funding (one partner or a “silent partner” provides the money for start-up), expertise (one partner has the expertise in the industry or business you are starting), and the desire to build a company with friends and family (although we always caution that you be careful when partnering with your
friends and family as it may end badly).

If you are like me, you may simply prefer and be significantly more productive, when you combine your efforts with a partner. Regardless of the reasons, always consider the three pillars of trust, respect and alignment upon which successful business partnerships are usually based.

Do you need some help getting started? Are you stuck or overwhelmed and need some guidance as you prepare to start you first small business or deciding what type of business you should start?

We invite you to schedule a FREE Business Coaching Consultation with Henry Lopez. There is no cost, no credit card required, and no further obligation.

During your consultation, Henry will answer your most pressing questions and begin to help you achieve clarity as you start your journey to becoming your own boss!

Henry offers one-on-one coaching programs, group programs, and online self-paced courses to help you start, run and grow your small business.