What do I need to know about partnering?

Question

Hello BP! As a newbie with little capital, one option is to find a partner. What are qualities you look for (or would look for) in a partner? What are some important questions to ask? I know that any partnership arrangement should be thoroughly documented, but what are some other things I could do to ensure a successful partnership?

Jason Hirko · Answer

@Nicole Heasley Be able to clearly define what each of you bring to the partnership and what everyone's responsibilities are - without that, it's a recipe for disaster

Everett Fujii · Answer

@Nicole Heasley

Keep in mind that the answer/solution to some of the issues I brought up boil down to you just have to trust the person(s) you are partnering with.

But by bringing those potential issues up, I'm hoping that I can help you see and vet your potential partners in a different light.

Nicole Heasley Beitenman · Answer

@Joe Villeneuve Thanks for clarifying. That makes perfect sense.

@Everett Fujii This is incredibly insightful. You've given me a lot to think about. Thanks for taking the time to respond!

Everett Fujii · Answer

I unfortunately have more experience (and therefore lessons learned) to give on this subject than I care to admit.  But here's my recommendations, suggestions, and opinion.

It's pretty standard that whoever you partner with should have the same qualities you have.  Honesty, dependability, and respect.  Someone who is constantly late to meetings with you or others does not have the same level of respect for time (yours and others) that I would be comfortable with.

The next one is to make sure that your goals and your partner(s) goals are the same.  Do not partner with someone looking to build a rental portfolio if you are looking to do flips.  Or you need to have a very clear understanding of how much time and money will be spent on each type of deal.

Have very clear dispute resolution procedures.  Every partnership has a honeymoon period and it usually lasts from when you begin discussing the partnership until the first major problem.  No one thinks things will go wrong.  But the simple fact is that things will go wrong.  Addressing this fact head on will make working through the problems that come up significantly easier.

My mentor told me that partnerships blow up when the company is either losing money or making a lot of money.  I never understood the latter part.  Why would there be issues if everyones making money?!  Well, I can say that the answer is it's because people get greedy.  I had a partnership blow up because I wanted to sell some properties that we had legitimate offers on and would have resulted in a 130%+ return in less than 12 months.  It was a development deal where we had bought the land and got lucky.  I ran the numbers and figured that for us to make more money the finished product was going to have to be sold at a price that I didn't think was realistic, at least not for another 5+ years easy.  Got into an argument with my partners because I wanted to take that profit and move on.  This is just anecdotal to the dispute resolution procedures paragraph above.

Each partner needs to have an equivalent amount of risk in the company.  This is much more difficult when one partner is basically the money guy.  But the question that must be asked is.  What keeps each partner from just walking away and leaving the remaining partner(s) holding the bag?  Related question is if you bring investors in the deal.  If one partner brings in an investor using their reputation and relationship what stops the other partner(s) from walking away and leaving you with egg on your face?

The  biggest lesson I've learned with partnerships is to be courageous enough to ask the hard questions up front.  To address the hurdles that are almost guaranteed to come up head on.

Joe Villeneuve · Answer

You're time is the most important contribution you can put into a partnership...or anything for that matter.  The best way to describe #3 is to maximize the use of your time.  It means paying for something you can do, but by doing so it frees up your time to do other things, and even more things, where the net result means more time is saved, and money is made

Nicole Heasley Beitenman · Answer

@Joe Villeneuve Can you elaborate more on #3?

Joe Villeneuve · Answer

This is something that is greatly misunderstood, and therefore many REI choose not to use partnerships.  Many REI go into partnerships because they use, what I refer to a, "the fear of the dark" syndrome.  They can't see what's out there so they "buddy up".  Here's the mistake they end up making:  They partner with friends and family...because they know them, and their new partner takes the "I always wanted to get into REI...so let's do it together" approach...too.

There are three reasons, and ONLY 3 reasons to form a partnership, and any one of the three will do:

1 - The partners each do what the other partners CAN'T do.

2 - The partners each do what the other partners DON'T WANT to do.

...and the most important, and least understood, and I believe the #1 reason why partnerships fail,...

3 - The partners each do what the other partners SHOULDN'T do. Just because you can, doesn't mean you should.  This falls under the category of "stepping over a dollar to pick up a dime.

What do I need to know about partnering?

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