News & Insights

Key considerations when adding a new partner or investor to your business

Posted on Tuesday, May 08, 2018 by de Mestre and Company

Bringing in a new investor or partner can help grow and transform your business. To make the most of your opportunity, it is important to factor in the following:

  • Find out what each party wants from the relationship – it may sound pedantic, but unless you talk through the expectations from new partners and investors before you start a new business relationship, you might find yourself at loggerheads some time in the future. Consider what areas of running and operating your business you want to keep doing and what areas you are happy to give up. Also, think about the fact that additional partners or investors might translate to more regular and formalised reporting. As a result, agree on what type of reporting and how often so that key personnel have the same expectations.
  • Make sure there is an alignment of interests – before you get started with a new partner or investor, it is worth reflecting on whether the new arrangement is a marriage of ideas or if it’s actually a takeover. The best arrangements are when both parties believe they are getting something out of the business – this may include financial incentives, as well as reputational and lifestyle aspects. To ensure that both parties always remain willing to negotiate and agree, it may even be necessary to include a “nuclear option” in any documentation, where the only choice is to liquidate the business when parties can’t come to a decision. This option is a strong motivator for business partners and investors to come to the negotiating table!
  • Contemplate the time horizons – for all parties to be happy with a new arrangement, it is essential to consider timeframes. Does the new partner or investor plan to be involved for a long period of time or is it going to be a short term commitment? Also, do your homework on a new partner or investor. Find out what has happened with other business ventures they have participated in and also what is their general mode of operating. This information will help to inform you about whether a new partnership or investment is going to be satisfactory for all parties.
  • Specify key roles and responsibilities – ensure that all partners and investors know what they are doing in the business and what they are expected to achieve. Also, think about the administrative and day to day financial requirements – who can sign what? Who is responsible for dealing with employees? Who is going to take the lead on the budgeting process? Who will have access to the bank accounts? All of these matters should be worked out up front. To avoid any potential problems down the track, it is recommended that job descriptions and goals are developed for key positions.
  • Think about using “golden handcuffs” – in periods of transition, it may be useful to offer financial incentives to short term partners or employees to secure use of their skill sets for a particular period of time. Therefore think about key personnel that you may wish to retain, the period of time you need their services and the financial outlay you are willing to provide in return for set achievements.
  • Put the end first – unfortunately most arrangements don’t last forever. Even the best collaborations have their use by date. The Beatles, Abba and Oasis are all examples from the music world where great partnerships eventually came to a sad, but predictable end. Given the inevitability of a finale at some point in the future, it is often a good idea to put the end first. Think about how you would like things to finish at the beginning of a new partner or investor relationship. Importantly, consider the mechanism for ending the relationship and what documentation you will need in place.

All of these factors point to having good documentation in place such as shareholder, partnership and unit holder agreements, employment contracts and governance policies. If you need assistance with developing any of these documents for your business, we can assist you. Please contact Jonathan Papalia at jonathan.papalia@demestre.com.au for more information.