Entrepreneurs

4 Factors to Consider Before Inking an Equity Partnership

Steven Knight, an Entrepreneurs’ Organization (EO) member in Edmonton, Alberta, Canada, is a partner in Mosaic Home Services, a group of eight home improvement businesses. We asked Steven how he grew his business by partnering with other business owners in his industry. Here’s what he shared:

After a late night or long weekend in the office of your small business catching up on that never-ending to-do list, you’ve likely thought, “This would be so much easier if I had a business partner.”

Your business is growing, and you might not have the cash flow to support full-time staff, but a partner would have equity in the business. Yes, they still need a salary, but it could be lower while you get through the growth period you’re experiencing. Soon, you’re wondering, “How much faster could I grow if I had two of me? Someone as invested as I am and motivated to act in the company’s best interest — after all, they own it, too.”

I own and operate a group of eight home improvement businesses headquartered in Edmonton, Alberta, Canada. In our sector, it’s common for small businesses to grow through partnerships: an entrepreneur sells part of their interest to a friend or family member who becomes as ingrained in the business as they are.

My company grew in a similar way. When we started, my partners and I sought out entrepreneurs seeking growth. In return for equity, we provided capital, contacts, operational support, and mentorship. Unlike a traditional private capital firm, we worked every day with the entrepreneurs running these businesses to set and achieve growth goals. We learned the ins and outs of each industry, becoming ingrained in their day-to-day functions.

Through this journey, I’ve had 12 different business partners across nine different businesses. In the past six years, I’ve been involved in 15 equity transactions. I’ve learned, often the hard way, what works and what doesn’t in a business partnership. Much like a marriage, each partnership is different.

Here are four factors to consider before signing partnership papers.

Equity is your MVP.

First and foremost, understand that equity is absolutely the most valuable aspect of your business. Think deeply before selling equity. Don’t act like a Vegas party-goer and end up at the chapel at 2 a.m. marrying someone you’ve just met. Take a moment, cool down, think it through, and for goodness sake, talk to your lawyer. Do your personal values align? Have you seen how each other reacts to stressful situations? What evidence shows that you can trust this person?

Honesty is the best policy.

While “dating” a potential investor, speak openly and honestly about your future business vision. What do you want to accomplish? Why do you need a partner to get there? Don’t resort to puffery; be open and honest, as you would be with a potential spouse. If you don’t want eight kids, say so now.

I’ve found myself in partnerships where, after years of hard work, I discover we’ve gone in completely different directions than what they thought they wanted. I was doubling down on growth; they were ready to downsize back to where we started. It was frustrating and expensive after that discovery.

Set expectations before you sign.

Are you an expert in your field seeking a partner who has business skills that you need to grow? Tell them early what your goals are, what you expect them to do to foster growth, and what will happen if they don’t deliver. Expectations on both sides will change throughout the relationship — again, much like a marriage: Kids come along, and suddenly both partners have a whole new workload. Who’s going to do what? What does success look like? How will you support each other?

Creating space for such frank, sensitive conversations is essential. Unfortunately, in the past, I held these conversations too late, or not at all, and it caused significant issues. Resentments can fester, which can lead to the death of a deal.

Consider every other option first.

If you need help growing your business, there’s nothing wrong with seeking a partner with more skills or experience. But, just like a marriage, it’s a best practice to think through every detail possible before you give up any equity.

Before partnering, consider whether you can instead hire for the skills you need. Or can you join an entrepreneurial group to get support from fellow business owners? Can you train key staff members to backfill your responsibilities? Or do you genuinely require someone who’s just as invested in the success of your business as you are?

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The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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