In today’s blog post I want to share with you 7 very important tips when it comes to intelligently forming partnerships.

The spark for this topic was a consulting client of ours—we’ll call her Mary. Mary is a bright, energetic, focused, young entrepreneur with one thriving online business and a second business (a physical location to her web store) she was about to open.

She had a “partner” picked out to run the store which was intended to be a passive business for Mary with her friend running it once it got up to speed.

First, Mary’s business is a home run. The location is a proven winner that extends the reach of your health business to San Diego. Based on other locations and the demographics in the area, the store will net over $200,000 her first year in operation, and likely over $300,000 in year two and beyond.

This is the point when Mary sent me an email with her proposed partnership terms with her friend. Now Mary is a consulting client of ours and has been for about 7 months now. She is a dream to work with because she’s the kind of client that not only asks for input, but actually USES the input to create amazing results.

I looked at what she proposed to give up to her partner (30-50% equity from day one plus a base salary to run the location) and told her to fly out to meet me at an event I was teaching.

She did and we sat down and asked her a series of questions:

Question One: Who is putting up the capital to launch the business (approximately 100k)? Answer: Mary.

Question Two: Who is going to be liable on the lease of the store and for any negative cash flow the business needs to ride out? Answer: Mary.

Question Three: Who is bringing the expertise to get this business launched right? Answer: Mary.

Question Four: Who found the opportunity and made the deal possible? Answer: Mary. (Noticing a pattern yet?)

By this point Mary was feeling sick to her stomach, mostly because she saw that the deal as laid out just wasn’t equitable. But she felt like she had committed to the arrangement.

After we went through more of the specifics I coached Mary on how to be up front and approach her friend.

The bottom line is that her friend agreed and was thrilled with a base salary and a 10% of NET proceeds bonus with NO equity stake.

And Mary? I got a relieved and energized email from her describing how grateful she was for the advice.

How valuable was the 30 minutes we sat down together? Even if she only gave her friend a 30% stake in the business (her low figure) that’s going to mean a six figure savings in cash flow and equity for Mary.

Alright, now that I have your attention here are those 7 tips of how to intelligently partner.

7 Tips to More Intelligently Enter Into a Business Partnership

1. Clearly lay out on paper what each party is contributing to the business. This could be capital, credit, financial statement, experience, time, ability, contacts, or even symbolic capital (reputation).

2. Assign impartial relative values to each contribution. What would you have to pay a third party to get that piece?

3. If you’re adding a partner to an existing business, or one partner has a disproportionately greater investment to do the business where the other could just walk away from the business leaving the remaining partner on the hook, make sure to create a vesting period before any ownership is earned… Profits can be split immediately, but ownership should vest over a minimum of 2 years, and likely 4 years.

4. Talk through the expectations about roles, responsibilities, and process. How will you each do the business? How will you communicate as you do the business?

5. Create a checkpoint to revisit the partnership to make sure it’s a good fit (if at all possible). Agree up front what it looks like to gracefully part ways if you need to at that point. Agree on what this looks like up front. (Did I mention that it’s important to agree on this up front?)

6. Get an outside perspective on the deal. It must be equitable to BOTH parties or it will not work long term.

7. Get your attorney to formalize all your business points into a comprehensive written partnership agreement.

Sound like a lot of work? It is. But a partnership is a business marriage. It is serious stuff. So do it the SMART way.

I hope these ideas spark your thoughts.