Vetting a Potential Business Partner

Due Diligence

  • As to see a potential partner’s credit report, and show him yours.
  • Consider exchanging financial statements, financial affidavits, etc. so that you know what sort of a financial cushion your prospective partner has, and offer to show him/yours as well.

Objectives and Expectations to Consider

  • Does your partner view the enterprise as an “all-in” 80-hour-per-week operation, or a lifestyle company that will allow more time for family and travel?
  • Does he envision a long-term commitment, or does he want to sell out in three years?
  • What sort of income does he reasonably expect to achieve?

Money Issues

  • Will each partner make an initial contribution to start the company? If so, should any portion of that contribution be treated as a loan, or will it all be a capital contribution?
  • If the company gets into a financial bind, what are the obligations of partners to put in additional capital?
  • How will partners be compensated? Will each draw a salary? If times are tough, will that salary be deferred?

Operational Issues

  • Is a certain partner going to be in charge of day-today operations? What are the limits on the authority of the partner in charge of day-to-day operations?
  • Will there be a division of responsibilities and labor between the partners?
  • How much of a time commitment is expected of each partner?

Legal Issues

  • What are the partners’ “duty of loyalty” expectations.
  • Can a partner work in competing ventures?
  • How will the partners resolve issues of deadlock?
  • Are there restrictive covenants you want to impose on the partners?
  • If the business is successful, at what point do you want to sell? If it is not profitable, at what point do you pull the plug?

Exit Strategy

  • What are the partners’ respective exit strategies?
  • Will you have the right to force a buyout if you want out? How will that work?