How to Create a Winning Business to Business Partnership

business to business partnershipBusiness success hinges on many factors, from how hard you work, to what people you hire, to market opportunities and competition. But you may also find success where you least expect it – like by creating a successful business to business partnership where two or more businesses agree to team up.

I have seen a million different flavors of business to business partnerships, and I’ve seen partnerships which really help each business grow and succeed, as well as others where the partners are like oil and water and ultimately the partnership leads to both companies’ downfall.

First, before we look at what makes a good partnership, let’s examine the different types of ways two or more businesses can work together.

Types of Business to Business Partnerships

Business to business partnerships can include any kind of agreement between two businesses, from a joint venture to an agreement to sell each other’s products to an agreement to jointly manufacture certain goods.

In most cases, businesses agree to partner up only under certain circumstances, such as if they see a third competitor who is so large that the smaller companies can’t compete, or if they see the two businesses can accomplish greater sales than they could separately. After all, why team up unless there is a very strong reason for doing so?

Often the partners bring different qualities to the table, such as one partner that has deep pockets and another that has great personnel. If so, the partnership agreement needs to figure out a way to value these different contributions.

Research Your Potential Partner

You may like your potential partner. You may enjoy getting a beer together. But don’t take your own word for it. You should do due diligence, including background research on your potential partner. If they have partnered up with other businesses before, you should find out how that relationship went.

Ask for financial statements and references. Ask who they have on their team of trusted advisors for their business – you can learn a lot about a potential partner from the company they keep. You shouldn’t do any less due diligence with a potential business partner than you would with a potential employee.

During your due diligence, you should evaluate whether you are a good fit for each other. Will all of your employees get along? Are your offices too far apart? If possible, you should see if you can have a trial period for three to six months to figure out how your partnership will go.

Evaluate How Partnering Together Will Benefit You

You should have a clear understanding of why you are going into partnership together, complete with desired benchmarks. Too often businesses “team up” because the founders or owners have a preexisting relationship. By setting goals, you will know if the partnership is meeting those goals or if you should turn your attention elsewhere.

Get Your Agreement In Writing

You absolutely must get your partnership agreement in writing. You are deluding yourself if you think there will never be a disagreement between you and your new partner. You will have disagreements, but if you have thought about in advance how you will deal with those disagreements, then you will be much better off.

The process of drafting the partnership agreement will force you to face tough issues right at the outset, and to define specific roles each business will play. The partnership agreement should define the vision you both share for your working relationship.  You should also think about the worst case scenarios, such as what if a key employee left one business, or if one of the partners suddenly ran out of money.

Although the partnership agreement can cover a lot of different areas, here are some primary sections that should be included:

  • Amount of equity invested by each business.
  • How profits and losses will be allocated.
  • Distribution of assets on breakup of the partnership.
  • How to make changes or dissolve the partnership.
  • An Alternative Dispute Resolution (ADR) provision in case you and your partner have a dispute.

 

Reevaluate Your Partnership Regularly

Hopefully your partnership will go well, and the payoff will be worth the initial upfront investment of time and due diligence. However, even if the business to business partnership is going well, you should plan to reevaluate the partnership regularly, preferably once per year. You can put this into the partnership agreement.

Even if you decide each year that the partnership is going swimmingly, by reevaluating annually, you will give yourself an opportunity to address any sources of friction and to smooth them out, rather than allowing tensions to build until they boil over.

 

Do you have any other suggestions for how to forge a business to business partnership? Let us hear them in the comments below.

John Corcoran is an attorney with Plastiras & Terrizzi in San Rafael, California (Marin County).  He advises clients about real estate/land use, general civil litigation, and small business matters.  He can be reached at  (415) 250-8131  or jcorcoran@ptlegal.com.

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Photo credit: Flickr/o5com

 

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