Don't Wait for An Impending Divorce to Have Hard Entrepreneur Partnership Conversations

I was recently approached by a budding entrepreneur about whether a potential partnership should be defined contractually before beginning to raise money. Of greater concern to me was whether that partnership had been fully explored and the related shared expectations defined. Entering a business partnership is akin to entering a marriage; it requires trust, mutual respect, and a shared vision for the future. Just as you wouldn't rush into marriage (I hope!!!) without discussing long-term plans and objectives, financial goals, and values, you shouldn't rush into a entrepreneurial partnership without having some hard conversations upfront.

Why These Conversations Matter

In the entrepreneurship world (search fund, ETA, or start up), where uncertainties abound, having a clear, mutual understanding with your partner can mean the difference between success and failure. Misalignment can lead to conflicts and inefficiencies, which can ultimately derail even the most promising ventures. The concepts below are framed for the ETA world, but can be easily adapted to any partnered entrepreneurial project. And, by the way, I offer this advice based on my own failures to complete these suggested discussions.

Key Conversations to Have Before Starting a Partnership

Alignment of Goals and Vision

Ensure that both partners share a common vision for the business’s goals and your long-term objectives. Ask yourselves: why are we pursuing this venture? What is the end goal and how do we plan to achieve it? Is this about the experience, the challenge, the money? This conversation will help you determine if your visions align and if you have similar motivations for starting this process. This area warrants it's own post. In general, people just don't invest enough time exploring this aspect of their work together.

Division of Roles and Responsibilities

Successful partnerships thrive when there is a clear division of roles and responsibilities. Before entering into a partnership, discuss who will be responsible for what tasks, decision-making processes, and authority levels. This includes defining who will handle specific aspects of the search, acquisition, and management of the target business. This clarity can prevent conflicts arising from unclear expectations or overlapping roles. In the search world I see a lot of "Co-CEO" concepts. This suggests a failure to make a decision about where "the buck stops," so to speak. Partnership and 50/50 decision ownership are not necessarily the same thing.

Financial Considerations

Money can often be a sensitive topic, but it's crucial to have an open and honest conversation about financial considerations before forming a partnership. Discussing each partner's financial situation, needs (now and anticipated), contributions, opportunity costs, monthly burn, etc. Ideally you want some parity here, and at least a recognition of the respective costs, contributions and sacrifices.

Complementary Skills and Expertise

Assess each partner's strengths, weaknesses, behaviors, and areas of expertise. The idea is to ensure they complement one another, bringing diverse skills to the table rather than duplicating them.

Equity and Compensation Structure

Agree on how equity will be distributed among partners and employees and establish clear cash compensation structure expectations. This includes discussing how profits will be shared and what happens if one partner quits or is fired before an exit.

Decision-Making Processes

Define how decisions will be made within the partnership and ultimate acquired company. This includes major strategic choices and day-to-day operations. Establishing a decision-making framework can prevent conflicts and streamline the process. Remember, "Co-CEOs" can often lead to confusion among the team and conflict.

Conflict Resolution Mechanisms

Develop a plan for resolving conflicts or disagreements that may arise. Having a pre-agreed mechanism for conflict resolution can save you both a lot of headaches down the road.

Time Commitment and Availability

Ensure both partners are committed to the time and effort required for the business, including the search phase and post-acquisition management. Discuss and agree on expectations regarding time commitment and availability. If one of you works 100 hours a week while the other works 40, it’s a recipe for problems. Will this change based on family circumstances? How will you deal with that?

Edge Behaviors

Initiate a conversation about what stress looks like for each of you: how do you typically respond emotionally and physically when under pressure, and what are the most common sources of stress. Explore how each partner personally manages stress. Talk about how partners can best support each other amid stress.

Legal Considerations

Discuss how you will handle eventually memorializing your agreements in a partnership contract. For example, will you use the same lawyer or opt for "adversarial" representation?

Cultural Fit and Working Dynamics

Evaluate values, working styles, and communication preferences to plan for how you'll reform the acquired culture together. What do you want in an operating culture at the place you acquire?

Exit Strategy

Not the good one you're hoping for... agree on an exit strategy for the partnership, including conditions under which partners might leave the business or how the partnership will be dissolved if necessary.

Conclusion

Having these hard conversations upfront may be uncomfortable, but they are crucial for achieving alignment and ensuring the long-term success of your partnership. By addressing these key areas, entrepreneurs can enter partnerships with a clear understanding of each other's expectations, strengths, and weaknesses, making it easier to work together towards a common goal.

For more on this topic, check out the following:

Exploring Entrepreneur Partnerships in the Search Fund Ecosystem

Choosing a Search Partner – or Not!