Assuming you have made the commitment to pursue a business partnership, there are several steps that need to be taken before a candidate is chosen. The following is a comprehensive list of the final steps you need to consider when selecting a business partner. For reference, steps 1 – 5 can be found here.
Steps to a Successful Business Partnership (6-10)
Step 6: Discuss Business Partnership Roles & Responsibilities
If you have made it to this point with the intentions of entering into a business partnership, roles and responsibilities must be assigned. Having a clear idea of what each partners’ responsibilities will be can define your entire career. At this critical junction, investors are advised to account for all of the information they recently gathered in the business partnership evaluation process. Take note of individual characteristics, competencies, strengths and weaknesses that can be relegated to a particular role.
While it is important that each business partner is a well-rounded individual, there is no reason you can’t assign roles and responsibilities based on their current skill sets. The constant evolution of the housing sector all but ensures these roles will change in the future. However, it is always better to discuss these things in the early stages of a business partnership, as it will allow for a seamless transition from individual ownership to a dual partnership.
The following categories represent the responsibilities each partner must account for:
- Marketing: Who is going to handle marketing campaigns needed to generate leads for sellers and buyers within the business?
- Acquisitions: Who is going to handle analyzing the deals and negotiating with sellers and agents?
- Short Sale Acquisitions: Who is going to handle short sale negotiations with banks and agents on deals where the seller is over-leveraged?
- Finances: Who is going to handle raising money and the bookkeeping?
- Construction Management: Who is going to keep tabs on the contractors you hire for rehab projects?
- Property Sales: Who is going to handle working with the agent or marketing the property for sale?
- Property Management: Who is going to handle the property management of the properties you hold for cash flow purposes?
- Business Development: Who is going to develop and employ the structures within your business?
Step 7: Discuss Time Commitments
Time commitment is a particularly touchy subject amidst investors in the real estate industry. After all, the majority of individuals involved in the housing sector became an entrepreneur to free themselves from the shackles of their previous job. Creating your own schedule is one of the largest incentives of investing in realty.
Having said that, time commitments are a key component to any business partnership. While it may be difficult to conceive of a schedule, it is a sound strategy to have an idea of how much your partner intends to work.
More often than not, an investor’s perception of their workload is relative to their peers. More importantly, you must agree on time commitments to avoid any complications in the future. Any propensity for procrastination or unwillingness to work can cause a schism between the parties involved.
The following is a comprehensive list of the scenarios you should discuss with your partner in regards to time commitment:
- Hours per week
- Weekend work
- Family commitments
- Personal commitments
- Other business commitments
Having an understanding of each partners’ time commitment beforehand will prevent any complications from occurring in the future.
Step 8: Financial Considerations
It is important that your business partnership develops a thorough understanding of the financial aspects of your potential collaboration. Finances can, and will, singlehandedly destroy a business if they are not managed appropriately. Once again, it is better to have a comprehension of your partner’s financial checklist before you enter into a business together. Ultimately, you are looking to enter into a business partnership with someone who has demonstrated that they are financially stable. Take the time to discuss the following points with your partner:
- Personal financial statement
- Credit rating
- Initial capital contribution
- Preferred return
- Financial review
- Profit distributions
- Outside deals
- Retirement goals
- Risk tolerance
- Financial decision making ability
- Investment philosophy
Step 9: Growth Considerations
The real estate industry provides ample opportunities for growth and wealth building, as profits are only limited by the imagination. It is only reasonable to assume that your business will grow with the addition of a partner. Therefore, it is important to discuss the current trajectory in which it is headed.
Growth in the real estate industry coincides with larger profits, which investors welcome. However, growth is simultaneously associated with more responsibilities. Those prepared to take on additional responsibilities in a business partnership will likely welcome growth and the profits it brings with it.
Be sure to discuss the following topics with your partner:
- Future Office: While a formal office is not required for new investors, the progression of their business will likely call for an upgrade in the future. Working out of a bedroom can only last for so long. Partners should discuss when they intend to move into an office.
- Employees: A real estate business can be profitable without the help of additional employees. However, a real estate business that hires employees can be an extremely successful business. This is ultimately up to the individual investors.
- When To Hire: Investors tend to hire additional help after their first deal has been completed. However, this is ultimately up to the partners. Hiring time should correlate to the speed in which you want your business to grow.
- Short Term Goals: Familiarize yourself with your partner’s goals for the next two years so you can align your aspirations.
- Long Term Goals: Familiarize yourself with your partner’s goals for the next ten years so you can align your aspirations accordingly.
- Discovering Your Why: Your partnership will be much healthier and more successful if you understand each other’s true motivations.
Step 10: Protect Yourself
The decision to enter into a business partnership will reward anyone who takes the appropriate precautions. The addition of a partner includes several unpredictable variables. Accordingly, you will want to protect yourself from any legal implications that arise in the future. The nature of a business partnership dictates that there will be discrepancies. It is important that you prepare yourself accordingly, as verbal agreements are never enough to settle a dispute.
Ultimately, if you have chosen a business partner, it is likely that you share the same goals and aspirations. However, the real estate industry, in association with individual thought processes, is subjected to significant changes over a prolonged period of time. Your means to an end may change significantly over the course of your career.
It is important to consider drafting a partnership agreement. This document may include items such as: who will be responsible for which duties in running the company; details of each partner’s compensation; how to manage your financial gains and losses; and what your obligations to one another are in the ongoing business. A partnership agreement can also function as an instruction manual for dismantling the business if it should end or for continuing the business should one partner want to vacate while the other wants to continue.
While individuals should protect themselves accordingly, it is equally important for the business to maintain a degree of safety. Of course, I am referring to the designation of a corporate structure. One of the most significant decisions you and your partner should make when starting a business is deciding on a corporate entity. Your decision can have a significant impact on the way your business and partnership is executed.
The following is a list of factors that must be taken into consideration when choosing your corporate structure:
- Liability Protection – Which corporate entity provides the best liability protection for you, your family and your personal finances?
- Ease of Formation – You want to know what entities are easier to maintain in comparison to others and what the formal requirements are for each type.
- Tax Treatment – Each entity has its own tax benefits and tax requirements. You should definitely consult with a CPA when choosing an entity for your business.
- Business Trajectory – Is the entity appropriate in case you want to grow?
The basic forms of business entities are: sole proprietorship, partnership, corporation, and limited liability company (LLC). Each has its own benefits and drawbacks and is treated differently for legal and tax purposes. The most common choice for real estate entrepreneurs beginning investors is an LLC or limited partnership.
The best way to avoid a bad business partnership is by protecting yourself before it starts. Once your partnership turns bad, your options are limited. Be sure to spend the time necessary to think through all decisions beforehand and remember to create a detailed operating agreement – it may end up saving your partnership one day.