How to evaluate a potential new business partner

valuation of a SaaS startup

Onboarding a new business partner is a growth hack when done correctly. Particularly for solopreneurs and bootstrapped businesses it can be a total game changer to have much-needed expertise and talent join the team. That’s also why many founders considering selling stakes in their business should think less about the price of their equity and more about finding the right fit who can contribute the most to the future value of the company. Adopting a screening process that considers the below points can greatly increase the odds of finding a partner fit for you and your business.

The “interview”

The first conversation a founder will have with a professional is different to a job interview in several ways but nevertheless having a few questions prepared in advance will help provide structure to the conversation and ensure the most important boxes are ticked. Just like a prospect partner will have questions about the business as part of their due diligence, the founder should consider who they are letting into their fold with care. This includes standard resumé-type questions about their training and vocational experience thus far. A strong track record will not always include a work portfolio or references but applying Elon Musk’s strategy of asking questions about how a specific problem was solved is a great way to ensure that the person in front of you is the expert they claim to be. Another method to ask questions is in the form of behavioural or hypothetical questions. 

Be aware that these first few conversations are a two-way street, meaning professionals will want to learn as much about the founder and their business as the founder will want to learn about them. Hence, one should try to anticipate questions the professional might have to best prepare for the “interview”.

Good rapport

This might seem obvious but good rapport is easy to underscore and forget when evaluating the hard skills and experience of a professional. You will be spending a significant amount of time working with each other so a founder should feel a good connection with the professional in order to foster a good working relationship down the road. A collegial relationship does not necessitate friendship but both parties should get along well enough to be productive and not counterproductive in their business venture.

Conversations around the business are of course the focal point of the matter, but don’t neglect discussing personal matters with promising buy-in candidates to determine whether you’ll get along. Scheduling a few video calls to accrue some face time with prospect partners is a helpful tactic to determine fit before signing the equity partnership agreement.

million dollar payout

Proof of funds

In the earlier stages of the negotiations, founders asking for a more substantial buy-in amount are prudent to inquire professionals for proof of funds to avoid wasting their time on conversations that don’t lead anywhere because the buyer can’t afford to acquire the equity listed. This can be in the form of a bank statement or some other piece of evidence proving the means are at the disposal of the partner to follow through on their intent.


Goals

The founder and the professional ought to align on goals. This includes sharing a vision for the business. That means both parties should want to see eye to eye regarding the growth plan of the venture, the broader product roadmap, expansion etc. Moreover, the professional and founder should align on how best to work together. Here, both parties need to be honest about how much time and resources they are realistically willing and capable to put into the company. A helpful exercise to do at this point is to talk through a few “what if” scenarios. For example, a conversation could be about a potential acquisition later on, fundraising vs. bootstrapping, or how to grow the business internationally. If necessary, these conversations can make their way through to the contract, for instance the equity partner agreement, to ensure that alignment on time dedication is unequivocally integrated into the written foundation of the partnership. 


“The Proof Is in the Pudding”

The best way to discover if a professional is the right fit for the business or not, is probably to go beyond talking about fit to actually working together. This can be achieved through a “partnership trial period” and be part of the letter of intent for the professional to buy in upon successful completion of whatever its duration. One way to structure such a trial period is for the founder to “hire” the buyer e.g. for a month as a consultant to see if the personal, cultural and professional fit is there. It can be pro bono or involve some sort of compensation, be it an hourly rate or a one-time fee. This compensation could then be recuperated via a discount on the equity if both agree that there is a fit. In any case, incentives are important to ensure engagement from the professional as well as to keep the founder honest in their temporary “employment” of the prospect partner.  


Further resources:
Behavioural questions, Proof of Funds (POF)