5 Questions to Ask When Considering an Investment Partner
Both new and experienced investors alike will eventually find themselves in a position where they either seek out a partnership or are approached by someone looking to partner. Whether it’s partnering on a single deal, a bunch of deals, or an entire business, partnerships can provide immense benefits—but they can also pose substantial risk.
I’ve seen partnerships that have allowed the individual partners to garner greater success than either of them could have attained individually. And I’ve seen partnerships that have blossomed into successful long-term ventures that have lasted decades and made the partners both very wealthy. On the other hand, I’ve also seen partnerships tear apart friendships. I’ve seen partnerships lead to legal disputes. And I’ve seen partnerships that have led to family feuds and large sums of lost money.
So, what determines whether a partnership is the panacea that will bring success and riches—or the curse that will bring hurt feelings and financial ruin?
I’ve done a decent amount of partnering in my career, both within real estate and in other business ventures. My experience has helped me to develop an intuitiveness around whether potential partners will be good or not so good for my venture. Beneath that intuitiveness, there are some concrete questions that I like to ask myself before considering working with any partner, and it is the answers to those questions that will lead me towards or away from that partnership.
Here are the five big questions I like to ask myself before considering working with a new partner.
1. Do we have a history together?
While not all partners are the best of friends, a partnership does mean spending a ridiculous amount of time with another person. As I’m sure most of us agree, finding a person that we’re comfortable spending inordinate amounts of time with isn’t always easy. As my wife will tell you, even our closest friends can be difficult to be around sometimes.
Spending lots of time with someone requires that each party has respect for one another, that each party recognizes the other’s boundaries, and that each partner has an intuitive sense of when the other person is swimming along confidently or starting to drown. This type of relationship isn’t common and can’t generally be forced.
Related: Search partner 5 Serious Questions to Ask Yourself Before Partnering With Family Members
Not all of my partners are lifelong friends. Still, having a history with someone is a good barometer for whether we’ll be able to get along when tough decisions need to be debated and when tensions rise. If you haven’t seen someone at their worst—when they’ve been faced with a major setback, dealt with disappointment, or been frustrated at an uncontrollable event—you may find yourself regretting the partnership when things aren’t going so well.
2. Do we agree on the vision?
Let’s assume your partnership makes a million dollars in year one. What would you do with that money? Pay out the partners $500,000 each? Invest that money into income-producing assets and generate passive cash flow for the rest of your life? Put the money back into the business and attempt to make five million the following year?
While deciding what to do with the millions of dollars you’re generating is a good problem to have, if you and partner don’t have the same vision, it can actually be a very bad problem.
I can’t tell you the number of times I’ve seen partners achieve short-term success, only to start fighting over what to do next. One partner wants to scale the business up; the other person wants to work less and put things on autopilot. Sometimes it’s longer-term success that’s the issue—one partner wants to build a legacy to pass down to his kids, while the other partner wants to sell the company and cash out.
Sometimes the disagreement is over how to handle a failing company. I’ve seen partners lose hundreds of thousands of dollars in a company and then argue whether to sink more money into the venture or shut it down.
And sometimes the disagreement in vision is simply over whether to sell the most recent flip property for $250,000 or $255,000. Yes, I’ve seen partnerships struggle over trivial issues like this.
If you want to create a successful partnership, the partners must share a common vision—not just for the first year or the first project, but for the second, fifth, and tenth as well. Without a common vision, the partnership will eventually fail. Before working on any venture together, here are some things you’ll want to discuss:
- How long do we expect this partnership to last?
- What is the end-goal for the partnership?
- How much money do we expect this to cost, and how much are we willing to contribute?
- How much time do we each want to and expect to work on a weekly basis?
- What should happen if plan A gets derailed?
3. Who is in charge?
Too often, I see partners who try to create a completely democratic business structure—every detail is discussed and every decision is voting upon. While this may be optimal from a partnership standpoint—equal partners having equal say in every aspect of the partnership—this is not optimal from a business standpoint.
In any venture, someone must ultimately step up as the leader. Imagine two captains on a boat vying to control the wheel. Even with a shared vision and common goals, multiple captains trying to drive the ship will ultimately be unsuccessful. Best case, it will take much longer to achieve the vision; worst case, the partnership will hit an iceberg and sink.
If the partnership can’t agree upfront which of the partners will be driving the ship, this isn’t a partnership ready to be launched. And while you might assume that the most common issue is that both partners want to lead the charge, in my experience, the more common issue is that neither partner wants the responsibility of taking control.
4. Would I work for him? Would I hire her?
We like to think of our partners as our equals in the company. And when it comes to some things –-like split of equity, benefits, etc.—that may be the case. But, as mentioned above, one of the partners must be ready to take control. And even with one of the partners taking control, there are going to be plenty of situations where the other partner is driving a specific part of the business and making the bulk of the decisions.
That means you will often be taking direction from your partner, no different than if he or she were your boss. And your partner will ultimately be taking direction from you, no different than if you were his or her manager.
With this in mind, you need to ask yourself whether your potential partner is someone you’d be willing to work for. If the answer is no, you should rethink the partnership. Likewise, you need to ask whether your potential partner is someone you’d want to work for you. And again, if the answer is no, it may be time to reconsider the relationship.
5. Do we have a similar skillset?
I see it all the time—two novice investors, best friends, same background, same vision, looking to partner up to build the next big real estate empire. It would seem that they check all the boxes we’ve previously discussed: They have a long-standing relationship, they have common goals and vision, and perhaps they are in complete agreement on how all work and responsibilities are divided up.
But there’s a big problem. The partners are too much alike. They have common experience, common skills, a common network of support people, etc. While working with someone exactly like you has some benefits (from a relationship standpoint), it also has its drawbacks. Two partners with the same skills still lack a whole bunch of skills. Two partners with little experience still lack experience. And two partners with a similar rolodex are still lacking a whole lot of connections.
The best partnerships are built between partners with complementary (i.e. different) sets of skills, experience, and networks. Look at Steve Jobs and Steve Wozniak, the co-founders of Apple. One was the master marketer; the other a quintessential engineer. Or look at any comedy duo—one the partners the serious straight man, the other the “funny guy.”
Great partnerships are successful because each partner has the ability to round out the weaknesses of the other partner.
Next time you’re considering partnering, ask yourself these five questions, and I have a feeling you’ll know what to do.
Any tips you’d add to this list?