QUESTIONS ABOUT FINANCE
By Taylor J Kovar, CEO – Kovar Capital
–Hi Taylor – I work for a small home design company and there’s been a lot of discussion recently about partnering with another business that would help us get cheaper supplies in exchange for a percentage of profits. Based on your experiences, do you think these types of partnerships are good or bad? – Blair
–Hey Blair – Based on my experience, I think a lot of these joint ventures go well, and some of them end terribly. By and large, I think you can gain a lot from the right partnership, but I can’t emphasize strongly enough how important it is that you work with the right partner.
In your case, it sounds like this is the type of business relationship where both companies benefit and no one has to wait too long to see their cut. It’s obvious that these relationships have to address the needs of both parties; even with that understanding, it’s common that these agreements are structured in a way that favors one company too much in the early going. More often than not, this causes the partnership to sour quickly.
With regard to how the agreement is reached and a commitment is guaranteed, different companies take different approaches. You’re free to bring in lawyers and sign lengthy contracts. You can jump through a bunch of hoops to form a new business entity that ensures all your bases are covered. Based on the size of your business and the scope of your projects, I’m guessing you don’t want to deal with all those shenanigans, and I’d support that decision.
You can form a partnership without a written agreement, and if the benefits really are mutual, this makes the most sense. You’ll save money on supplies, take on more projects and hopefully get some added promotions from your new associate. The percentage you offer in exchange shouldn’t hurt your bottom line, and your partner will get capital and advertising in return. As long as everyone works hard, that relationship doesn’t require an obnoxiously detailed contract.
Avoiding too many stipulations helps you adjust the terms as necessary and keeps you from committing to something that might not end up working. As long as each party acts in good faith, you’ll likely want to update protocol for the new alliance as things progress. Drawing from personal experience again, the strongest partnerships are the ones where everyone stays open to changes as they find the best way to move forward.
If you feel good about the other company and your own provisions, I see no reason why you should be nervous about working out a deal. Make sure you keep an open, honest dialogue throughout and you should be able to work out a deal that makes everyone happy. Good luck, Blair!
