Three Tips for a Successful Partnership

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The idea to start my real estate investment business came about through several conversations with one of my best friends. We had both been individually researching the prospect of flipping houses in our home town of Buffalo, NY. He was in the process of honing his skills as a carpenter, while I was starting my career at a major consulting firm. We wanted to flip houses and a partnership seemed like a natural fit: He had knowledge of general contracting, and I had experience in marketing, finance and entrepreneurship.

I knew nothing about fixing up houses, and he seemed like the obvious choice to fill that gap of knowledge and skills. I received many pieces of advice from experienced business owners saying that I should absolutely, under no circumstances, partner with a friend. Their argument was that I could easily fill my lack of knowledge with one or several subcontractor(s). There was no need to share business ownership for the reason of filling skill gaps. Moreover, this potential partner being a good friend would almost definitely impede our ability to start and run an effective business. 

Nearly five years later, I’m very happy to say that I ignored the advice of my highly regarded colleagues and mentors. We have had a very strong partnership and our friendship is stronger than ever.

I will not try to argue that my situation is the norm.  All too often we hear horror stories of how business partnerships not only fail, but also rip apart friendships. Partnering with a friend can be fun and convenient, but it is not necessarily the best decision for a new business.

Partnerships can be a great way to accomplish your business goals… but proceed with caution! Below are three tips to help you succeed with a business partner.

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Tip #1: Understand Why You Need a Partner

As my early mentors were trying to point out, you should only take on a business partner if he or she is filling a void that can’t be filled through other means. Just because a partner fills a skill gap does not mean that they should have a stake in your business. You can certainly find the vendors and contractors to fill specific needs as they arise. You should have a high level of confidence in the unique value your prospective partner will bring to your business.

In some cases, the value contributed by one partner may be solely of a financial nature. That is, one partner puts up the starting capital and another partner runs the business. These partnerships can work very well because of the natural distinction between each partner’s responsibilities. Capital to start your business is a need that is often difficult to fill through banks and private lenders.

An arrangement that has grown in popularity in Silicon Valley is the idea of having a “Technical Co-Founder” and a Co-Founder dedicated to Business Development. While this model is typically associated with software startups, it can work well in real estate also. This model has worked well for me: My business parter has the technical knowledge of renovating houses, whereas I have the marketing knowledge to acquire leads and grow the business. 

Be honest with yourself and ask the difficult question: “Do I really need this person as a partner?”

Tip #2: Establish Clearly Defined Roles and Responsibilities

Business partners will often assume that each other knows his or her role within the company. In many cases, these assumptions will ring true; but this should not be taken for granted. It’s essential that your business establish clearly defined roles for each business partner. There should be absolutely no room for interpretation when it comes to the key responsibilities of each person. 

In a previous post, I explained the importance of physically documenting your overall business process. This practice ensures that you have consciously thought through and established a system for managing each process within your business. An important piece of your Business Process Framework is the identification of a Process Owner for each major process within your business. A process owner is a person within the organization who is solely responsible for the performance of the business within a specific process area.

You must also consider the role each partner will have in making key business decisions. Partnerships are often made up of a mix of silent and active partners. The silent partners will typically make capital contributions but will have limited or nonexistent voting rights within the business. The ability to influence major business decisions should be clearly articulated in your business’s operating agreement. 

Clear responsibilities for each business partner will aid in the overall effectiveness of your business.

Tip #3: Understand Your Partner’s Working Style

This may be the most crucial piece of advice when considering the proposition of taking on a partner. We all operate differently and the way we work can be very unique. Some of us prefer a very regimented business schedule while others enjoy a more agile workday. 

It’s very difficult to have an understanding of your potential partner’s work style if you have never in fact worked with him or her. You may understand how they act in a social setting, but a business setting is much different. How does your partner prefer to communicate? What time does their workday start? How do they deal with conflict? This is why colleagues from the same workplace could potentially make strong business partners. Each partner has already had a trial run at working with the other! 

Below are some serious considerations to make regarding your potential business partner: 

  • Preferred work start and end times
  • Feelings on working “off hours”
  • Best way to communicate: Email, text, phone, in person, etc
  • Interest in using technology within various business processes
  • What role will family play in the business?
  • Future goals: Both qualitative and quantitative

It Can be Really Fun

I will admit—there are a lot of landmines that you have to dodge when taking on a partnership (especially when your partner is one of your good friends). But when it works, it can be great! I can honestly say I love my business and I love what I do every day… but it takes work!

My partnership has succeeded because we each take responsibility for our specific role within our business. When we need to, we are able to distinguish our friendship from our business relationship. We keep lines of communication open and constantly work toward the collective goals of the partnership.

You should proceed cautiously when starting a partnership… but don’t dismiss it as a non-option!

Do you have specific experience starting a partnership? What do you find to be the key success factors within a business partnership?

About Author

Nick Baldo

Nick Baldo started investing in real estate in 2011 with a focus on flipping houses in the Buffalo, NY area. He has since expanded his business, NY Home Solutions, to focus on value-added rental investments. Nick created and manages the real estate educational site, Income Digs to help aspiring real estate investors get started.

4 Comments

  1. Roy N.

    Nick:

    I would add one more: Plan for the inevitable end of the Partnership at the beginning. All partnerships eventually end, despite what we believe during the honeymoon phase. Make certain your partnership agreement deals thoroughly with the manner in which the partnership can and will be dissolved.

  2. Daniel Eisman

    Hey Nick,
    Thanks for this info on partnerships. I am in the beginning year of my first partnership with a friend and so far we’ve had to work through all of the points you’ve made. Clearly defining roles and never just expecting something from a partner is definitely a key.
    I think Roy is absolutely correct in that one should plan for the dissolution of the partnership at the beginning. Plan for the worst hope for the best makes sense in this case.

  3. Peter Mckernan

    Hello Nick,

    I agree with you a partnership is a great way to go for capital, other technical skills, or anything else that one person lacks and the other one doesn’t. I have an investing partner that works well with me and has a ton of construction background, so that makes it nice since I am limited in that arena; which sounds like you are your partner.

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