Five tips to set up a business partnership and secure funding

Five tips to set up a business partnership and secure funding

CEO of Paragon Lending Solutions Gary Palmer

The Scottish poet, Robert Burns knew a thing or two about business partnerships when he wrote, “The best-laid plans of mice and men often go awry”. Assuming your business partners want the same things from a potential deal is a sure fire way to significantly increase your risk and expose yourself, and others, to lengthy litigation and eventual failure. Our experience as alternate funders, especially in the property space, has shown us the value of ensuring everyone is on the same page right from the start of a business relationship. It also means we are far more likely to finance your investment.

Every deal is different

It’s important to remember that every deal is different. It’s not just the details of the deal that vary, but also the people involved in the deal.

In the property market we define three roles, referred to as Find, Bind and Grind. There will be a person who finds the opportunity; someone who will get the deal done – find the investors, structure the deal and ensure all the admin is done; and the person who does the actual day-to-day work of running the project and managing the investment. Each role comes with very different responsibilities and involvement. It’s here that the potential for misunderstanding can creep in.

Sometimes partnerships are formed, not because of past relationships, but out of necessity and circumstance. People of different age groups, different backgrounds and different worldviews are often thrown into a partnership that could hold significant bearing on their futures. Most importantly, the visions, values and morals of the partners involved in a deal may also vary.

When deals go south

In many situations you are forced into a relationship where you don’t have a solid level of commonality and understanding. Moreover, many investment opportunities are time-based and require partners to move quickly in order to secure the deal. This leads to the parties brushing over the finer points in their rush to close.

In our experience, the biggest problems that have arisen in partnerships have not been at all related to the specifics of the property transaction. We’ve seen fantastic transactions, with excellent prospects. However, there wasn’t a common set of values and no common goal between the partners. As a result there was infighting and eventually the property was sold at zero profit. On the other hand, we’ve seen fairly pedestrian deals work exceptionally well. It all boils down to agreeing and managing all parties’ roles, responsibilities and expectations.

People involved in investment partnerships each see the value that they bring to the deal differently. For example, a private equity partner may put up the initial finance for a 70 percent stake in the investment. After five years, the investment may be doing very well, but the person who brought the idea to the table and who has worked on the investment on a daily basis may question their stake in the deal – particularly if the investors have not offered any strategic or operational support over the intervening years. This resentment, as a result of misaligned perceptions, can be the cause of disputes that eventually scuttle the partnership entirely.

How to prevent fallouts

Any successful partnership, whether in business or life requires all the people involved to share a common vision for the future. Here are a few non-negotiables that should be in place before taking the next step:

  1.     Do your homework on who you will be working with. Spend time understanding the partners’ visions, values, morals. It’s imperative that the fundamentals are aligned before you begin.
  2.     It doesn’t matter how friendly you might be, partnerships are setting themselves up for failure if they don’t have the basics in place. At the outset you need to understand the structure of the deal. Partnership agreements are key, if it’s a company that you are setting up then have a solid Memorandum of Agreement.
  3.     Document everything! Document all your expectation up front. Everyone must have their roles and responsibilities clearly defined. When an investment is reviewed down the line, you can revert back to that document and, if need be, the partnership can be dissolved without any emotion or heartache.
  4.     Plan for the worst and hope for the best. Make sure you have exit mechanisms in place in case the deal doesn’t work out. Know exactly what returns will be paid out, to whom and when.
  5.     Don’t think you can do it all yourself. Bring in your accountant and auditor to structure the deal and ensure you have a lawyer who can draft the necessary shareholder and valuation agreements.

A business partnership is exactly like entering into a marriage. You know your partner, you realise you have common values, you agree where the relationship is going, but you still have an antenuptial agreement in place.

Just like when marriages fall apart, there are often more than just the partners who get hurt. When business partners enter into a dispute it puts the entire operation at risk. Protracted legal battles often result in the business operations or property investment becoming collateral damage as all the focus is placed on the battle at hand. This benefits no-one. By doing the work before a deal is finalised will significantly reduce the risk and will also show potential investors that you have an investment that can be taken seriously.