Partner choices

guest commentary by David Potts

You’re convinced you have a great business idea yet all the banks have denied your request for a commercial loan. You just don’t have enough collateral. What’s next? Does the dream die? Do you quit? That is an option, but there may be a better one. Find someone with money or the ability to borrow the money to invest in your idea.

You read a lot in business magazines and books about venture capital funds. However, I don’t know of any businesses in Fort Smith or the surrounding area funded by a venture capital fund. There may be some; I just don’t know who they are. It is common however to find businesses in Fort Smith which started where one partner had the idea and the other partner could provide access to the money required to start the business and these businesses are successful.

How do you find a partner?

Begin with a well thought out, written business plan. An investor will expect you to have a written business plan and it will demonstrate you’re serious and have considered what it will take for your business to succeed. If you don’t know how to think through and write a business plan call me or another CPA.

Next, practice presenting the business as you would to a prospective partner, out loud. If you can’t articulate the content of your business plan to your prospective partner, you might come across as not smart enough to execute the business plan even though you’re a genius. Presentation is important.

Finally, ask around to see who might have enough money to invest in your plan. Start by asking your family and friends. You might find a Daddy Warbucks in your family. There are many people in Fort Smith with money who fail to live up to their means. One of them might be your uncle or second cousin. Maybe you have great friends that believe in you and are willing to stick their necks out for you. But then again you might not. If you don’t have family or friends that have money or are willing to take a risk on your idea, ask if they know anybody who they think might be interested in investing in your business idea and ask them for an introduction. To find a partner, you have to start by asking.

One caveat: security laws require you register with the Arkansas Securities department if you present your business plan to more than a certain number of potential investors. What is that number? It would be wise to consult an attorney before you start presenting a business plan to friends and acquaintances.

People will invest in a startup business for many different reasons but the primary reason is to make money. It’s a startup business and therefore risky, so they will want a substantial portion of the business profits in return for their investment in your business. They may also require a certain amount of control over your business to protect their investment.

Hmm.

Everything was going well up to this point. Here is where your angst begins. Your emotions surface because in your opinion they are asking for too much in return for their investment in your future company. Settle down, take a deep breath and ask yourself this question, “Do you want all of nothing or part of something?” Remember, you are in this circumstance because you don’t have enough of your own money and all the banks turned down your loan requests.

As you decide whether to accept the terms required to entice a partner to invest in your business, consider this: The reason your prospective partner is in a position to help you might be because he won the lottery, but more likely than not it is because he or she is industrious, knowledgeable about business and willing to take risks. He has the personal characteristics required for success. If this is your first business, your prospective partner might be a great resource for advice on how to build your business. Experience is a valuable resource.

Also, your partner probably has no interest in running the day-to-day operations of the business. He will invest in your business idea so your labor can make him money. As far as exercising control over business decisions, if you are successfully running the company and meeting or exceeding the projections you presented in your business plan, he won’t have reason to interfere. However, if your business is going south and losing money, he should interfere and hopefully save your butt.

At this point you might need to be fired as the CEO but you still could own part of a successful business. What’s the worst thing that can happen to you? Public embarrassment? Think about your partner. He is losing his money if your business plan proves to be wrong. But then again, you wouldn’t have gone to all the effort to recruit a partner if you thought your business plan would fail (I trust).

As with any partnership, there needs to be agreement as to who does what and what happens when. The agreement needs to be written by a real flesh and blood attorney, not Legal Zoom. There are a lot of important contingent events that need to be discussed with an attorney. How will you break a tie vote? If a partner wants out of the partnership how will his exit be executed? Will the partnership buy the partner out and if so at what price? What about death or disability. The partnership agreement is not a place for a shortcut.

So what is it? Do you want part of something or all of nothing? It’s your choice.

David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts by reading his blog at ThePottsReport.com.