Wednesday, May 25, 2022

6 Due Diligence Goals When Vetting Business Partners

due-diligence-resultsBusiness partners can be co-founders in a startup, multiple owners of an existing business, or a joint venture. In every case, a partner can be an asset, bringing new skills and perspectives to the business; or a burden, making every decision more difficult, and taxing your lifestyle satisfaction. You need to do the due diligence to make that decision before you sign away your equity.

As a former startup investor, I was often involved with due diligence on founders, and I felt that founders should do the same on co-founders, as well as investors. Differences you find after the deal is consummated can be painful and expensive, just as in any marriage. I was pleased to see this approach highlighted as well in a new book for startups, “Zero to IPO,” by Frederick Kerrest.

Kerrest also brings years of experience starting and growing his own businesses from a startup through taking them public, so he has much real live experience with choosing and working with partners. I support his summary of recommendations for what to look for in every candidate:

  1. Being around this person is a positive experience. If you don’t like this person now, the feelings will only get stronger when facing tough joint business issues. Beware of signs of a negative attitude or depression, as these can affect your business results, as well as your personal satisfaction. Always make sure you can enjoy some fun together.

    I have found that happy people are the most positive, and also make the best business partners. A recent study shows that happy people in business are also the most successful. Be aware that happiness brings success, and not the other way around.

  2. Their skills and interests complement yours. A business partner or co-founder needs to be supportive in style and form, and fill the gaps in your strengths with their experience and expertise. Also you need to understand how roles will be divided to maximum advantage, so that both of you are not sparring over every task and every solution.

    In my experience, most technical entrepreneurs have little interest or expertise in the financials, or marketing. Thus they benefit hugely from finding a partner who has skills and interest in the these domains. The same benefits also apply to a joint venture.

  3. They are excited about your business objectives. A co-founder who has different motivations, for example maximum profit versus great customer service, will likely undermine you, take a minimal role, or leave the business quickly. You need someone who can easily step into your shoes when a crisis arises, or you need time off work.

    These days, many entrepreneurs are motivated to help the disadvantaged, such as TOMS shoes founder Blake Mycoskie, who differentiated his brand by donating a pair to the needy for every pair sold. Obviously a partner maximizing profits would not be happy.

  4. Trust is evident from his/her constituents. Here you need to seek the perspective of three or more people, not recommended by your prospective partner, who have worked closely with this partner in the past. Don’t worry about coming across as sneaky, as the candidate should be doing the same thing on you too. Don’t ignore any big red flags.

    In today’s economy, with more and more employees working remotely, assessing trust may seem especially difficult. In fact, many say trust is easier to assess now, with the clear reliance on regular and effective communication, and results from relevant leaders.

  5. Negotiation proceeds maturely, including emotions. Having healthy disagreements on strategy or any specific problem is good for bringing new options to the table, as long as differences can be quickly resolved without emotional outbursts or lasting grudges. If you see emotional immaturity in early discussions, count on a rocky relationship at best.

    In fact, many business advisors, including myself, now agree that emotional intelligence is more critical in business than IQ, or logical intelligence. We all understand that partners, employees, and customers are people with emotions, rather than machines.

  6. Your gut-check finds this to be a good fit. Don’t get caught trying to talk yourself into this partnership, based on some external forces, such as access to money or future business connections. Remember business partnerships are a lot like marriages, which need to survive and thrive for the long term, at the gut level as well as the logical level.

In my experience, poor collaboration between business partners, including co-founders, is one of the top reasons for business and startup failures. It’s definitely worth your time to complete real due diligence before it is too late to back out. With the right effort, you can make one-plus-one equal three or more, rather than a zero. Start now, and you won’t have to look back later.

Marty Zwilling

*** First published on on 5/11/2022 ***



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