Partnering to Diversify Your Services

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Let’s be honest, there are only three ways to grow your small business. There are tons of variants to those basic three themes, but when it comes right down to it, three is the number. We’re going to dive into that in a few minutes, but right now, let’s talk about your business.

Most importantly, are you an entrepreneur or self-employed? That in itself is a critical distinction. An entrepreneur wants to grow, somebody who is self-employed generally has merely built themselves a job. That’s not to say that one is not the other based on circumstance, but at some point, a small business owner has to decide for growth or mere sustainability.

If he or she decides to grow, that is where the big decisions need to be made – one of those three growth paths needs to be chosen and those decisions have far-reaching implications. What are they? Buy, build, or partner. Pretty simple, I know, but that really is the decision to be made.

Buying? You can grow your business by consuming another business and their assets. Franchising is another version of this technique, and if the company you buy has great systems and assets, this could truly be a money making machine. The downside? A service business may not have the systems in place to grow, so you might only be buying somebody else’s headache.

Building? Guess what? You’re doing it now! Just like buying another business, though, the most critical thing you can do to expand is to design and implement systems for your small business that will continue to run it even if you are not involved in daily operations.

That leaves partnering, which we really like. No matter if it is through a joint venture agreement, a limited partnership, or by an equity sharing agreement using stock certificates, partnering offers huge rewards because you can double a business’ value at the same time that you diversify that business.

Obviously, two lawyers partnering to build a new firm is nothing new, but by choosing attorneys that are specialists in other areas of law, a single partner can increase the value of the firm’s services to clients by offering both tax and real estate representation. Thus, through that partnership, the firm has diversified their services and their client base (and most likely reduced overhead as well).

Another example would be a lawn service that partners with a pressure washing business. While the individual owners may have different specialties, they can serve common clients through their current book of business and in slower seasons, the focus of the company can be on pressure washing services while in the spring and summer, landscaping takes precedence.

There are plenty of ways that partnering in a business can offer more value to your clients and increase the bottom line, but a huge consideration is always going to be how is that partnership constructed? We’ll dive into that next week (or issue) when we explore how that equity stake can be shared.

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Should that Equity Post be 50/50?

[et_pb_section fb_built=”1″ _builder_version=”3.22″][et_pb_row _builder_version=”3.25″ background_size=”initial” background_position=”top_left” background_repeat=”repeat”][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” custom_padding__hover=”|||”][et_pb_text _builder_version=”3.27.4″]In our last post, we mentioned the challenge of how partners should potentially split equity in a new business – one created from two other successful ventures that the partners ran independent of one another. If two businesses are merging, after all, shouldn’t the split be 50/50? Well, that’s a complicated question and the answer is even harder.

We’re discussing service businesses, so the assets may not play into the ownership equation. After all, if a digital marketing company and an SEO company merge, the only real assets the companies may have is software directly purchased by the respective owners. Not the same as a company with a fleet of truck, tools, and equipment or a physical office building. As a rule of thumb, if both small businesses bring large amounts of assets, not intellectual property, to a merger, then the initial split may need to be based purely on the value of those assets.

There’s actually a lot of logic in not splitting any partnership 50/50 if you think about it – any action requires a 100% majority and what is important to one partner may be far down on the list for the other. The decision ends up a dead heat and no action is taken or the partnership blows up and dissolves at the first sign of trouble. Of course, the other side of the coin in this scenario is that if both partners are truly aligned in their goals, then the company can move forward quickly with the action that is necessary for growth.

Personally, 50/50 makes the most sense, because the business needs to be tested to make sure that the partners can work together. This is why due diligence in the merger process is so critical.

By taking the time to understand what a potential partner’s goals are, both parties can see if the alignment is there. Are your growth goals compatible? Is one partner looking for retirement in 5 years, at which time they would sell their half of the business to the other founder? Are they simply happy being successfully self-employed and have no desire for growth? When you understand the possible objections to growth or strategy, you can plan business growth and projections and that 50/50 ownership is not an impediment – it is actually powerful team builder.

Of course, if the partnership is not in alignment, then the business can simply turn into a bad marriage and will, ultimately, fail.

In the end, any equity split needs to be explored based on what the respective partners are bringing to the table – if one brings half a million in assets, then the other should be responsible for half a million in capital. (Of course, money seems to disappear faster than trucks and offices, so this could be a sticking point – understand who retains the ownership of the assets in this case!) In either case, ownership and stock certificates rely on an understood value for what a business is actually worth, and while the above referenced business has one million in total “value”, the true value of the business could be much more or much less when you approach the next round of funding in the life cycle of the business. Growing that number is our next subject, and we’ll look at that with a more critical eye since it involves everybody’s favorite thing – money.

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Value for My Business: How can I Grow?

[et_pb_section fb_built=”1″ _builder_version=”3.22″][et_pb_row _builder_version=”3.25″ background_size=”initial” background_position=”top_left” background_repeat=”repeat”][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” custom_padding__hover=”|||”][et_pb_text _builder_version=”3.27.4″]Welcome back – in our last article, we explored how partners should – or could – split equity in a business and the example we used was that one partner brought a half million in assets and the other brought a half million in capital. That adds up to one million, right? Yep. The business is worth one million, right?

Nope. Not so fast. The business has one million in assets and liquidity, but it may not be worth one million. There are three basic ways to value a business, and that is only one of them.

The first, of course, is the asset approach – we just used it. Assuming that those two partners ceded ownership or responsibility of those assets and capital to the business, yes, the business would have a value of one million dollars. This is a traditional corporate view of a business – simply put, what could the stakeholders sell in the event of a failure that would recoup their investment.

Next, though, is called the market approach, and that value is arrived at from what the market would actually pay for a business in that particular environment at that particular time. Our example may be worth a great deal more if they can consistently show that one million dollars in assets operates as effectively as other businesses in the same type of market that are valued at five million. This is a near constant comparison for small businesses or those that deal in the realm of services and intellectual property.

Most well-known for those who invest in small businesses at the next level would be the income approach. Here, the value of a business is based on the actual cash flow through the business, contracts, and other yearly income statistics. If our “million dollar” company can only muster 100,000 annually, then the value may be much closer to 100,000 than one million.

So how can a small business actually grow their value? There are a myriad of ways, and the first is to systematize everything. Playing fast and loose with a company is only fun for a little while, then realizing that you are only decreasing profitability usually makes entrepreneurs get smart and start to set up routines and processes to make the company more efficient. Of course, this efficiency drives profitability, so no matter the valuation method, the value of the business grows.

Ultimately, even though you may not have any reason at this point to arrive at a value for your small business, having one and understanding how your owner’s equity is growing – even if the business isn’t for sale – helps to make you a smarter owner and when the time comes for the next stage of capital funding, those habits will help to provide a real-world value of your company to investors or the next round of owners.

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How Do You Bring On New Partners?

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Now we’ve spoken a lot about building partnerships to expand the strength and value of our small business. But there is one question that must always be asked – How can you effectively bring on new partners ? While there are a number of ways, there are several questions to ask in the due-diligence phase. When you have those answered, what do you do?

Bring on new partners

For starters, you can dissolve the respective businesses and create a new business with the partners. Then, issue stock certificates for the new entity that have a distinct value and reflect the total percentage of ownership. Of course, the real downside is that you lose name recognition within the area. Although you may serve the same clients, valuable months can be lost – along with data – in the transition.

A far more plausible option is to choose the name of one of the businesses. Announcing the merger by press releases, social media, and the business that is consumed could continue as a division in an umbrella corporation. As a result, this eliminates any loss of client base in many cases and great branding can keep the client base safe.

These are great ideas, but why make it so hard? At the small capitalization level, a trip to your business attorney’s firm and a few hundred dollars can form the joint venture LLC. And the work can begin in earnest. Issuance of stock or LLC certificates can handle the founders and ownership questions as well as valuation of the business. And you can get to work together on the next Monday – no time lost, no customers lost, and no patience lost.

To tell the truth, to bring on new partners is the easy part. Vetting them is the hard part! You absolutely need to know that they are aligned with you and the goals you have set for your company. So, this can only come about by really spending the time getting to understand what value they bring to the partnership and what their goals are.

Success story on partnership

A great example of this came from Georgia a few years ago. An aging owner was looking for a younger partner to bring on in a firm. He has the expectation that the new partner would ultimately buy out the elder upon retirement. Throughout meetings, the new partner was carefully interviewed and growth expectations and beliefs were vetted and ultimately, the partnership was formed. After two years, the original owner was able to step into semi-retirement and receive a monthly payment for the sale of the business. As the new owner, now armed with more experience and two more partners, continued to grow the company with the same corporate culture as the founder.

Remember, growing is never easy, but perseverance and planning will allow you to bring on new partners and co-founders to achieve the growth that you want!

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What Are the Implications of Ownership?

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Time for a little honesty. Being a business owner can be great. Being an entrepreneur can be great. Building and growing a business from an idea to an income producing entity is one of the truly amazing things that capitalism has created, and it is hard work.

What exactly does being an owner mean? Long days, sleepless nights, weekends filled with work, realizing that you aren’t as smart as you thought, and trying to find a lot of answers in a world that sometimes guards them jealously.

And it can be the most frustrating thing in the world.

As an owner working in a business, you are ultimately in charge of every aspect of that business and how your clients perceive it. Good, bad, or otherwise, you – literally – “own” the results. How you show up in that space, or don’t, will be how you succeed or fail in business. So how should you show up or how should you expect partners to show up?

First of all, remember you are an owner, not an employee. Your own a business, and while you may still have to handle jobs that in a larger company would be handled by employees, your performance – or the performance of your partners – should be the best. Now, anybody who has read “The E-Myth” by Michael Gerber or has been in business knows that many businesses fail because the owner cannot take on the role of the owner – they continue to have an employee mindset.

Any individual with an ownership stake should find easy alignment with the other principals in the company. Lavish vacations and unreturned emails have a nasty way of becoming real problems, especially if one partner is a workaholic and the other partner loves nothing more than disappearing for the weekend. Alignment is critical, but carbon copies rarely help you to grow. If your partner is exactly like you, shares similar skillsets, and fills the same role, you merely have two owners and no employees. Make sure that each partner brings the skills necessary for the growth of the company.

Next would have to be a clear understanding of the growth trajectory of the business. If the initial partnership was for founding capital and you expect the next round of venture capital in two years and a sell out in 5, all the stakeholders have to be aligned. A holdout at the wrong time can destroy your IPO plans very quickly or force buyouts that drain cash reserves and impact your business’ market value – always at the wrong time.

Watching your startup become a viable entity is one of the most fulfilling things that a business owner can ever experience. Almost as fun as a child and even more expensive, it is an amazing legacy that you helped to create. Make sure that any owner you bring onboard is worthy of the title and enjoy the ride!

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