7 Tough Things to Do Before You Start a Partnership

Before Starting a Business Partnership
Before Starting a Business Partnership. Bill Truslow/Getty Images

You have found a person you think would make a great business partner. You have asked all the right questions and you think this person shares your commitment to the partnership. 

But before you start a partnership with this person, there are some really tough things you must do, if you want the partnership to succeed. You will need the cooperation of the person you want as a partner, but if the potential partner balks, you might want to ask why and re-consider the offer.

Even if this potential partner has been your best friend since 4th grade, you may not know all you need to know to risk your business on this personal relationship.

The underlying principle for these tasks is to look at your potential business partner like a potential employee or loan applicant, and to get the information needed to be sure this person is who he or she claims to be — before you go into business together.

Stage 1: Before you make a final commitment to this partner

1. Do a credit check.

Yep. You must know the person's financial situation and his or her potential to harm your business with bad credit. (I said these were tough, remember?) To do this, you can do a credit check as a potential employer. Or, if the person wants to avoid having an inquiry on the report, he or she can get a free credit report and share it with you. 

If the potential partner is currently in business, get a business credit report too.

 

You want to look at the credit report as if you were a lender — would you lend money to this person? Your partnership can be sunk before it starts if one of the partners has a poor credit rating. 

2. Check references.

Ask for a short list of people who can provide references for your potential partner, then call and talk to them.

You are looking for less-than-stellar reports from these people, or something that might be an issue later, like bad feelings after a previous failed business.

Talk to former employers, co-workers. The question to ask is, " Would you be willing to form a business partnership with this person?"

3. Look at the person's online presence. 

Look at both the personal and business websites. Check out the person's interactions on social media, both business and personal... Is there anything questionable or something that makes you uncomfortable? Is there something you wouldn't want clients or customers to see? 

4. Consider asking for a personality test.

In fact, both of you might want to take this test. There are various types of pre-employment tests that might serve your purpose, including personality tests like the Meyers-Briggs Type Indicator, that can give you both valuable information on how your personalities fit together and how well you will be able to work together. 

Stage 2: After you make a final commitment to this partner

You and your business partner have decided to go ahead with the partnership. But before you register your partnership legally, you have 3 documents you must prepare and sign.

For all of these documents, and for the legal steps in forming the partnership, you will need the help of an attorney. Forming a partnership is not a DIY situation. 

5. Decide on your partnership organizational structure.

For this, you will need to prepare and agree on an organization chart and job descriptions. Yes, I know this is two documents, but it's all part of the same task. Getting the structure of the organization set and agreeing on who does what are crucial to the success of any business partnership. These documents will avoid disagreements and misunderstandings.  

6. Write a partnership agreement.

A partnership agreement puts in writing your agreement on all the "what if" questions that will come up in the partnership, including who gets what share.

You should both also sign a non-compete agreement, non-disclosure agreement, and non-solicitation agreement or fold them into the partnership agreement.

7. Create an exit strategy

Finally, create an agreement that describes specifically what happens if the partnership must be dissolved or changed due to changes in the life situation of one of the partners. Sometimes called a buy-sell agreement, an exit strategy gives you something to work within what might be a difficult situation, like the death of a partner. 

Going into business with a partner is similar to buying a business: you must do your due diligence to avoid issues and financial loss later. 

Disclaimer: The information in this article and on this site is not intended to be tax or legal advice, but is intended to be general in nature. Before you go into a business partnership, consult both an attorney and a tax professional.