Your business is flourishing and has outgrown your ability (or willingness) to finance it on your own. You’ve grown the company as far as you’d like to take it, and to get to the next level, you need a partner. Or maybe you’re
missing a piece of expertise. Whatever situation you find yourself in as a business owner, you may be wondering if now is the time to take on a partner.
Taking on a partner is a big decision. It means giving up a piece of the company; it means giving up some control; it means explaining your decisions to someone else. But taking on a partner can also mean opportunity. A capital infusion can allow you to launch a new product or service, increase your sales, build a new facility, bring in new expertise, or all of the above.
PARTNERSHIP ISN’T EVER WORTHWHILE IF THE WHOLE ISN’T GREATER THAN THE SUM OF THE PARTS.
DO YOU NEED A PARTNER?
First and foremost, partnership isn’t ever worthwhile if the whole isn’t greater than the sum of the parts. If you’re bringing in a partner for growth (as opposed to succession or exit), here is an easy exercise: Find out the value of your company today. You don’t necessarily need to spend a bunch of money on this, just get a ballpark estimate from someone who knows what they’re doing. Then compare that value to the expected value of your company after you’ve executed the strategy for which you need a partner. After taking on the partner and executing, your share of the business should be worth more than it is today. Most plans take about three years to come to fruition, so if you are going to take an injection of capital make sure that your ownership in the company in three years is going to be worth more than it is today.
Think of it like this:
VALUE OF MY COMPANY TODAY + CAPITAL + THREE YEARS OF HARD WORK = VALUE OF MY COMPANY IN THREE YEARS
Any number of variables can derail your three-year plan, but before you decide to enter a partnership, the following equation should hold true:
VALUE OF MY COMPANY IN THREE YEARS × MY OWNERSHIP OF THE COMPANY IN THREE YEARS > VALUE OF MY COMPANY TODAY × MY OWNERSHIP OF THE COMPANY TODAY
If your plan makes sense and you execute on it successfully, your ownership in your company (whatever that amount is after the capital injection) should be worth more after execution of the plan than it was before you took on the partner. If this equation holds true for you, and you decide to go ahead with a partner, there are many things a partner can bring to your business, depending on what you’re looking for.
WHAT TYPE OF PARTNER IS BEST FOR YOUR COMPANY?
There are three basic types of partners: silent, strategic, and professional. Depending on your goals you may prefer one over the others.
1. Silent partner: Many business owners will bring in a silent partner to help spread out the financial risk of the business. These partners typically don’t get involved in the day-to-day operation of the business but may be a solid sounding board for operational or strategic decisions. Silent partners are more common when the need for capital is smaller and in the earlier stages of a business’s life.
2. Strategic partner: A strategic partner may be the best fit for a growing company. A strategic partner should be able to provide a number of benefits that a strictly financial partner cannot: for example, a new distribution network, access to technology, or even exclusivity or right-of-first-refusal agreements across products, customers, or projects. Strategic partnerships can form when companies are scaling quickly – the partnership can allow a company to outsource a challenging aspect of its growth plan. Strategic partners have the additional bonus of being a potential acquirer of the business down the road.
Although strategic partners provide many benefits, they are less common than silent or professional partners because most potential strategic partners are also competitors. It can be very hard for a company to be fully transparent and allow a competitor to look under the hood to carry out the due diligence that is necessary prior to finalizing an investment. For this reason, it is very challenging to consummate a strategic partnership and it is rare to find a complementary fit between two different entities if they are at all competitive.
3. Professional partner: Professional partners include fund managers and individuals that have enough capital under management to be in the business of investing. They see many different investment opportunities every year and work with their portfolio companies to execute on growth.
Unlike silent investors, professional partners tend to be very active and interested in the performance of the business. They may not be as likely to bring industry-specific strategic value as a strategic investor is, but a professional partner can bring a variety of other positives to a business:
i. Capital markets experience: If you are bringing on a professional partner, your company is likely at a stage or growing to a size and scale that will require more and more financing to keep growing. Professional partners tend to have extensive experience helping their companies to raise capital from other professional partners, so they would be able to assist in the same way for your company.
ii. Strategic oversight: If you’re running a business, it is likely that you’ve been fully engaged in that endeavour for years with little time to come up for air, much less to take enough of a breather to look around at what everyone else is doing. Professional partners see the strategic decisions being made by many companies over a long period and can bring that depth of experience into your company.
iii. Exit strategy experience: Many business owners are lucky enough to exit more than one company, and many would admit that the second time was easier because they understood the process and what the potential purchasers were looking for. Professional partners are constantly helping their portfolio companies’ principals to prepare themselves for an exit. They may have the added benefit of knowing what brokers or consultants to
engage to help sell the business when the time is right.
Professional partners are the most common type for a company that is growing aggressively or is of a medium to large scale and has owners who would like to exit. Many times, a professional partner is the only interested group that is not competing with your business and has enough capital to effect a transition of ownership or to help with growth.
If you are ready to grow your company, understand and examine your needs and determine what type of partner would be a benefit for the direction you want to take your company. Taking on any partner is a big decision, but if you can make the math work, it can also lead to big opportunities. Expect nothing less.
First published in the September 2019 edition of The Business Advisor.