Who Should Be Your Partners If You Open A Business?

Starting A Business

Volume IV

 Who Should Be Your Partners If You Open A New Business?

Once you have gone through the careful thought process that led you to making the decision to open your own business, as outlined in Volume I and Volume II of these series, you need to decide if you can start this adventure on your own or if you will need to share the risk and responsibility with one or more persons. Volume III describes what you need to have before you embark on this journey, so it should be relatively easy to know whether or not you will need help. The question is simple: Do you have all that is required, all that it takes to start, as it is specified in your business plan? If your business plan is your recipe for success, can you bring all the ingredients to the table? 

The main elements required for a successful enterprise are simple to recognize. The very first one is the Product or Service that is going to be supplied. So in that regard, you need to know how you are going to produce it, how much it will cost your company to do so, to whom you should sell it and for how much. The difference between how much it cost per unit to bring that product or service to market and how much you can sell each unit will give you a gross profit margin per unit. Once you have that information, you need to know how much your company will cost to operate for one single year including all fixed and variable expenses, interest and taxes and do not forget to factor in your salary as the "Manager" of the operation. Dividing that overall cost by the unit market price of your product or service will determine how many units should be produced for that period of one year, just to break even. Factor in a percentage for unforeseen expenses (10% is a reasonable number for most sectors), add another 10%-20% to be able to have a profit, half of which should be reinvested in the company to fund its growth. You will have then a fair idea of what you must strive to accomplish that first year. These figures can be broken down on a monthly or weekly basis for easier control and tracking, depending of which industry you belong.

The above is a necessary exercise to determine a number of vital sets of Data(Information). Without that information, you will be flying in the fog without navigation instruments, you'll only know where the ground or obstacles are once you have already hit them. Again, all that information should already be included in your business plan with the figures showing that in detail in the first year projections. So we know you need Capital and how much of it, to start on the first day. Not all of it is required all at once, only access to it is necessary for the first year. The question is, can you access it on your own, either because you have saved up that much capital and have it in a bank, freely available to you, do you have any personal collateral that be put as guaranty to raise funds in the form of a loan or credit line? If yes do you wish to put all of that personal asset at risk for the company? Would you rather share the risk with a partner who could put up his financial assets to raise part of the necessary capital for an equity share (a share of the future company) proportionate to the funds that partner is able to raise.

But Capital is not the only ingredient required. Knowledge of the product or service, particularly fabrication or production Knowledge is equally as important. Do you have the overall knowledge required to bring the product or service to the market all on your own, with just specialized staff or could you again share the burden with a person that would complete you in terms of knowledge by bringing that person's expertise in a field you know but are not as knowledgeable as that person. A symbiotic relationship in terms of Know How is usually the ideal scenario, where you specialize in the Design and the partner in the actual fabrication. A complete team, without knowledge Gap is always preferable in the top management.

What about the distribution and sales of the product or service? Do you have the time, the knowledge and skills set to launch a full marketing and Sales campaign to introduce the company and the products to the market? A partner with the contacts and knowledge and the skill sets required to bring in the first customers is as valuable as if he brought to the table the capital required to survive the first year without any sales. A company, no matter which industry, is like a body without a heart beat, if it does not have any sales force. Even a Mom and Pop shop, has a sales force. It usually is just Mom and Pop but they wear the Salesperson Cap every time they face a client or customer. 

In most cases, the partners are a group of two or more people who pull their resources together to spread the financial risk among themselves as well as to add to the knowledge, skills and contacts base necessary to get the start up business off the ground. From a practical stand point, whether you decide to do it alone or partner with others, you should have the minimum resources to launch the company and survive the very first year, even if the "Worst Case Scenario" develops (i.e.: few or no sales for the very first 12 months). Many of my clients, attempt to put everything together, short of the start up capital and then come see me to help them bring the missing and most important ingredient, the life blood of the business: Money. That is always an exercise in futility, even if hundreds of thousands of dollars have been spent to come to the point where the company is ready to be launched, except for the total lack of capital. Sweat Equity, Professional fees, testing, Patenting costs...etc are necessary and have their value, but when it comes to Corporate funding, through a financial Institution or through Venture Capitalists, that point is invalid, not worthless, far from it, but invalid. That is the minimum requirement for the concept of the New Project to be proposed, the Project itself must exist, be tested and proven as a project. However, it requires funds to bring the Enterprise from Project to a bona fide Corporation. 

Going into business is a risky  endeavor at best, the biggest element of the risk is the loss of capital. A financial institution will analyze the request for funding and base its decision on two major points:

1. The merits of the Business plan and the quality of the project itself
2. The amount of risk to the Project Owners should the company fail. Project owners should have more to lose than the financial backers, should the company fail. To put it crudely, the owners must have some skin in the game so they can feel the heat if the Fire gets too close. 

 As Ziad Abdelnour of The Financial Policy Council puts it in his book*: "Angel Investors need to know that project promoters have something at risk. If they have nothing at risk, they have nothing to lose.They don't put forth their best effort, or they will walk away when things don't go as smoothly as planned" (see my review of Mr. Abdelnour's book here).
Funding is the most common reason, project promoters take on equity partners. The common mistake is to go with the investor that will offer the most funds for the smallest equity stake in the company.  Money is the life blood, but it is not the only important ingredient. If you have a choice between several partners who believe in your project and wish to be part of it by bringing you funds, choose carefully. Choose the one who will bring you something that is currently missing in the mix, besides money. If your product should be marketed through big box stores, then choose an investor with experience in dealing with such market outlet. If the investor can bring his contacts and experience to create a more symbiotic relationship, even if he requires a larger share, it would still be more valuable than an investor who brings just money but has no knowledge of your product or your market. There isn't One single Magical ingredient that will guarantee the success of your company, it is certainly not money alone. The Defunct Solar Energy Panel Manufacturing Company, Solyndra has proven that point beyond any possible doubt. Political connections, abundance of funds and privileged licensing did not save it from utter failure with the first year of it existence. No matter how they tried, they could not compete with Chinese solar panels, sold on the US Market to the consumer for less that it cost Solyndra to manufacture it here, without the shipping, delivery and installation cost. No Political magic and public money could change that fact.

So if you must take on partners, ensure that besides funding they bring, production, distribution and administration sills to complete your own set of skills. 

* Economic Warfare. Secrets of Wealth Creation in the age of Welfare Politics, by Ziad Abdelnour, president of Black-hawk partners. (Chap. "Skin in the Game", p 158)