Taking on a new partner is not just about the cheque
You’ve gone into business on your own. You’ve spent many hours building your dream into reality, perhaps even risking the family home to raise the funds needed to start your business.
You’ve spent every last penny, including digging a giant hole in Junior’s college fund to make sure you can pay staff in rough times. At some stage you might even have gone through every adult’s nightmare and moved back in with your parents when your house was sold to raise enough capital, all in the name of following your dream.
And your commitment wasn’t just financial! You missed your kid’s school choir performance because you had a meeting with a major client, and your marriage was very rocky for a few years because you did not spend enough time with your partner. You have seen it all when it comes to the tough reality of starting a new business.
But it was all worth it. Today things are good, you have bought a dream house for your family and your kids do not want for anything.
However, the business continues to grow and you need committed people to help you take it to the next level. You have to make a call on which route to go. Should you hire employees who are well qualified to run the business for you, or bring in new partners who will not only help you realise some of the equity in the business, but bring in the management expertise to manage a bigger operation?
If the option that is most attractive to you is to bring in new partners, there are several issues to consider. Your life will undoubtedly be different once your business changes hands, even partially. Your new partners might even insist on appointing a properly constituted board of directors to ensure that the business adheres to international best practice when it comes to corporate governance.
A business managed and owned by a single proprietor is run differently to one owned by more than one person with a board of directors. You may wake up one morning only to realise that you too, as an employee of the business, need to fill in leave days, something completely alien to a one man/woman show run from the back office at home.
I know of an entrepreneur, who was also the only shareholder in his business, who fired his entire board of directors because they could not in good conscience let him buy a Porsche in the company’s name.
His point was that the board is supposed to act in the interest of the shareholders and, as he was the only shareholder and the shareholder wanted a Porsche, his wish should have been granted. He saw nothing wrong with the idea of realising the fruits of his labour.
The board’s argument was that they needed to act in the long-term interest of the company as a going concern, not just the shareholder’s short-term needs.
The idea of bringing in new partners has a number of consequences; it affects your freedom and the company’s intellectual pool, allows for exposure to a new and sometimes better network of potential clients, and changes how the business is perceived by the outside world.
Companies that rely on a particular service provider like to be certain that their supplier will be around for a few years, and they make their production plans taking into account the uninterrupted supply of goods and services at a certain price level. So they do tend to shy away from “unproved” start-ups without a track record. A new partner might just bring in the level of credibility that allows a business to overcome such challenges.
Your decision to bring in new partners must take into account the long-term survival and growth of the business. It is not a matter of simply looking at the cheque they dangle in front of you. For instance, Groupon, the US-based start-up turned online collective buying empire, turned down an offer of a few billion dollars from Google. Although Google is an established international brand with a proven cash generation model, for the Groupon founders it was not enough to persuade them to get into bed with Google.
Choosing business partners can be a life-changing decision, so you should have a clear idea why you have chosen that path. Below are some of the issues you need to consider to help you make the right choices for you and your business.
It is important to understand why someone wants to be your business partner as much as it is important to understand why you want them to be your partner. Some investors get involved in a certain business because they see it as an undervalued asset and their motive will be to “sweat the asset” and prime it for a takeover and walk away to the next target.
Al Dunlap earned the nickname Chainsaw Al and became famous for “his well-worn image as the mercenary chief executive who storms into ailing companies, hacks at costs, fires thousands, and walks away really rich – he reaped $100 million (R811m at Friday’s exchange rate) restructuring Scott Paper – and totally guiltless”, according to Fortune magazine.
This is probably not your idea of how to grow or save the business you built up with blood, sweat and tears. In fact, you may have developed close personal ties with your employees and feel very strongly about firing them. You probably prefer to employ such measures only as a last resort and rather deal with cost-cutting by looking at different inputs.
You may want business partners who complement your skills, whether in business development, finance or at leadership level. Many entrepreneurs are not necessarily the best managers. They are great at spotting an opportunity or a gap in the market, commercialising it and then “handing it over” to experienced managers.
The Google founders did exactly that when they hired Eric Schmidt, an experienced and well respected manager with a track record of managing big companies in the information technology sector.
You may decide that you want partners because you want to consolidate your position in the market by either vertical or horizontal integration, that is by acquiring businesses either below, above or complementary to your current business offering.
Whoever writes the cheque should share your vision, and must also subscribe to the organisational culture and values you have inculcated in the business. It takes years to build a reputation in a business, and much of the organisation’s reputation also hinges on its culture. Your business’s reputation goes beyond reassuring your stakeholders, but it is also a significant part of the company’s equity.
Companies such as Coca-Cola are valued far above their net asset value and the premium is attributed to their intangible assets such as brand equity, in essence the reputation of the business.
Warren Buffett is reported to have said he is willing to forgive a manager for losing millions of dollars, but destroy the company’s reputation and you will be handed your hat and coat instantly.
So, before you sign on the dotted line, make sure that you and your prospective new partner have:
n A common vision about the future of the business;
n Shared business ethics;
n A common understanding of professionalism;
n Comparable values; and
n Strengths and weaknesses that complement each other.
We all have strengths and weaknesses and the right business partners may complement our strengths and help us bridge weaknesses. They should certainly add to the value of the business and not simply benefit from your sweat, an art that some of our prolific black economic empowerment tycoons seem to have mastered.
Ezra Ndwandwe is the chief executive of Dual Point Holdings and the creator of soon-to-be-aired reality television show, The Big Break Legacy. Business Report is the print media partner for The Big Break Legacy.