Are Business Partnerships in small business worth the risk?

in Growing by Anthony Fensom
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business partnerships

What are the pros and cons of getting a business partner? Advisers say getting it right from the start is key, but sometimes even the best of friendships can suffer from the stress of running a business.


FOR: Strategic alliances and ownership interests


Small businesses can engage a business partner through a strategic alliance or ownership interest, often providing the small business owner with the added benefit of more time and resources.


“A strategic alliance could be formed where there are complementary businesses operating in different markets or providing different services,” says Richard Wheeler, Principal at Moore Stephens Queensland.


“In such cases, the benefits come from increasing your exposure to your partner’s client base and market, and bringing their expertise to add value to your clients and strengthen your relationships.”


An example of a strategic alliance might be a design firm partnering with a digital marketing company to provide an expanded service offering, or an accounting firm becoming part of an overseas group to service its clients overseas or gain potential access to international clients.


For established businesses, silent partners can provide funding without the constraints of an ownership interest, according to Michael Cameron, Director at Williams Hall Chadwick.


“The benefit of having silent partners is that the current management team remains in place,” Cameron says. “However, owners may need to institute a dividend policy to ensure the silent partners get rewarded for their investment.”


Bringing a partner into a business through an ownership stake can help align their interests to the goals of the firm by giving them a financial stake in its future.


The benefits of adding a partner include access to greater resources and different skill sets, along with an ability to enter new markets or industries. Financial benefits can include greater access to capital, increased buying power with suppliers and reduced risk for the business owner.


“Usually the new partner brings something to the table, whether it provides funds to help the business grow or just different skills and contacts.”


However, regardless of whether your business partner is a friend, family member or a stranger, it is essential to draw up a written agreement describing the rights and responsibilities of each party and including how a partner could exit the business.


“Make sure you have an agreement in place from the outset,” Wheeler says. “It needs to be continually examined and discussed so everyone is aware of what they should be doing.”


AGAINST : Loss of control and unnecessary conflict


Bringing a partner into a business can mean a loss of control for the founder and the potential for conflict if there is a personality mismatch.


“One of the consequences might be a change in business morale or culture because the new person might have a different way of doing things, and that can be both a positive and a negative,” Cameron says. “If everything was going well beforehand, it’s not necessarily a good thing to change.”


“Far too often people go into business together without doing due diligence. They may be a friend outside business, but once it becomes a business relationship it doesn’t always work out and I’ve seen profitable businesses break down due to disagreements between the partners.”


The injection of outside funds can be beneficial for a business, but ultimately it will mean a lower return for the owner on their investment.


“The earlier you seek outside funding and the less refined the idea, the greater the loss of control. It’s in the interests of the entrepreneur to fund the idea for as long as possible to maximise the value at the end because you can retain greater ownership as it moves through the stages to development.”


Wheeler says strategic partnerships could also become difficult to manage, despite the potential benefits:


“They can become one-sided, where one party is putting in more effort than the other. You’re also exposing your reputation that you’ve built with your clients to another party, who may or may not deliver.”


Are business partnerships worth the risk for small business owners? It often depends on an individual’s circumstances. But if the association boasts complementary skill sets and a shared vision, then the relationship – and the business – can flourish.

Find this helpful? You might also like:

Advantages of Strategic Alliances: How one plus one can equal growth

How to devise a business exit strategy

This article represents the views of the author only and not those of American Express.

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Anthony Fensom

Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.

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