Should You Get an Investor/Partner?

Hey everyone, this is Mike Andes and you're listening to the Business Boot Camp podcast. Today we're going to be talking about partnerships, getting a partner, and whether or not you should take an investment in your business when it's offered. Before we get into today's show though, a big thank you to today's sponsor, which is Gusto. If you haven't already, go to gusto.combootcamp and try out a 90 day free trial of their software. What it's going to allow you to do is spend less time running payroll and a lot more time making the money you need in your business, growing and developing your team.

Whether it be the simple time clock, the timesheets that Gusto offers, or whether it be the super fast payroll, or as we come up to the end of the year, running reports giving you the W2s to your employees, you'll definitely want to use Gusto to make that easy, simple and cheap. So check it out today. Go to gusto.combootcamp and try it out today. Today's question is going to come off of the Small Business Owners of America, the Facebook group that we have for listeners like yourself. So if you're a business owner and you would like to join, just go to Facebook Small Business Owners of America and in brackets you'll see Business Boot Camp. So I'm going to read a longer question, talk about that, and then answer one more quick question about when you need a CPA and whether or not you should get an accountant for your taxes this year. But first, we got a question come in from Justin Ames and he asks or I'll just read the whole question. It's a little bit lengthy. I'm really not sure where to begin or how to explain my situation. I was approached by someone about them investing in my company and I am not really sure what to do or where to go from here. Our sales are strong and we are getting more profitable each year. I've pretty much been running the company by myself and I've been working on building a team, creating processes, building, bringing in sales, et cetera, to be able to get in, et cetera, to be able to help get me out of the day to day. But it's been hard keeping people and I find myself going back to working in the day to day. I know what our weaknesses are regarding my business and what our strengths are and I believe bringing on a partner can not only help with our weaknesses, but help us scale and grow as a business. However, I don't know if we are quite ready to take on an investor. Where do I even begin to look to see if it would be beneficial to the both of us? So I'm going to read a couple of comments just to clarify because Justin offered some more information. AJ Hartman commented on the post and put I just went through a bunch of crap myself. Sold 49% of my company to a guy I sort of knew for a few years through racing it honestly could not have gone any worse. Finally got him out of the way and going and back to doing everything myself for now but learned some valuable lessons. But on the other hand the heating and AC guy across from my shop has been in business with his partner for 12 years and he says he absolutely could not have done it without his partner. So my only advice is to really think about where you want your business to go. Justin commented back said yes, I've seen firsthand having bad partners come in that happened to my wife and her business and I'm pretty afraid of that happening. However, I do also see the benefit in having a partner. It's a big and touchy decision. He's basically going to write up a proposal. I'm going into this by leading with no, but I guess I want to see what he has to offer. So alright, so basically what's happening here is Justin is getting someone coming in wanting to become a partner or investor and I think the biggest question I have is is this person or party coming in an investor or are they a partner? Most of the time when you talk about an investor you're thinking about someone that's providing capital and someone can be a little bit of both. Someone can be an investor that's also getting equity and is going to be a partner in the day to day operations and in the business and actually working at the business.

I'm going to assume this business is probably like 1, 2, 3 million somewhere in that range because super small businesses, I would give different advice, really, really large businesses, it starts getting different in terms of like are you preferred stock and can you get diluted and all these other things that become more relevant. But I'm going to assume it's kind of like a mid sized business, right? And so my first question is like is the party an investor and they're going to be providing capital because a couple times you mentioned investor there or are they actually going to be a partner where they're going to come in, they're going to work, they're going to actually fill in those shoes and those areas of deficiency that you currently have. It sounds Kind of like a little bit of a both. Like they're gonna buy in, own a piece of the business and then work in the business with you and kind of be a partner. And so a couple things that I would ask myself. Like Justin basically is saying he's gonna go into this negotiation and be basically with no as being his answer, but he's going to see what this potential partner has to offer. And so my first question is, could you hire out your deficiencies? Because it sounds like one of the biggest parts of your equation when it comes to bringing on an investor or a partner is one of the positives that you're seeing is that they can fill in some of the gaps that you might have in your skill set or experience. And that's definitely a huge, huge part of having a partner. Whether it be divide and conquer and you split up parts of the business and you're able to then be more efficient or whether it's beyond. You're strong in some areas that they're weak in and they're strong in some areas that you're weak in and you complement each other. I would say the first thing is if you're seeing a positive of or you're seeing yourself aware enough to realize the areas that you aren't doing very well in your business, maybe that's leadership, maybe that's sales, maybe that's web. Whatever industry you're in, maybe you just see those certain areas that you're not doing very well in or that you are not as experienced in. And so, so my first question is, do you really need a partner to fill those voids? Can you go higher out, someone that is going to fill those lacks? So even if it's a part time, like for example, upwork.com, freelancer.com, 99designs, all those are great avenues to fill a technical void that you might have. So I don't know what voids you might have. But upwork, for example, you can get accountants on there, you can get developers on there, you can get business strategists on there, marketing consultants, you can get a bunch of different people and you can just hire them out.

You can basically try to hire them by the hour. And you don't have to give equity away, you don't have to give stake in the business away. You don't have to have this risky proposition that you're already kind of having red flags about or questions about. You don't even have to go down that road if you can hire it out. So a Big reason why people will go into partnerships and what I've seen. I'm not saying this is Justin's case, but a lot of times I find that business owners will go into a partnership because they're insecure on the areas that they're weak in, when they just need to realize that no one is going to be great at everything and that you can hire those things out, whether it be freelancers or just like hiring an employee that's really good in a certain area. Maybe you're just not good with people or people management and your team. So maybe you hire an operations manager that's gonna be really extroverted and going to be able to connect with all your employees and have lead team meetings and you're more of a CEO level, maybe financial side, maybe introverted, whatever it is. But I'm not saying that about Justin. I'm just saying in general, my first question would be, can you hire out the deficiencies that you're seeing and get those skills without having to give equity away or. Or make a partnership where you're already kind of feeling it might not end up in a good spot down the road? Especially if you're gonna be like. If, like, equity is very expensive if you feel your company is gonna be very successful and grow. So I've had people try to invest in Augusta Lawn Care Services in its infant stage as it is now. I know that giving away 10, 15, 20% now is gonna cost millions of dollars down the road. And so I haven't taken any investment. I own 100% of it. And that's the reason is because I can hire out the deficiencies. Like, okay, I don't know how to develop. We created software called P4P System.com for the franchisees. I do not know how to build software and code that well. I did a tiny little bit of it back when I was younger, but even what I learned back then is almost old now. It's like back in the dinosaur age of code. And so I cannot launch this software by myself or else it would have taken me like a year. So what I do, I hire that out. I'm a deficient in that area. I'm not the best developer. I can hire that out. And so that's the first question I'd be asking. And something that I fully am aware of. And as I talk to so many different people who are in partnerships And I see 50% of them do amazing. And like A.J. i think it was. Yeah, A.J. was saying, people literally say I could never have Done my business without that partner. I've seen that happen 50% of the time. I've also seen 50% of the time where it ends absolutely horribly. Bankruptcies, ruined relationships between partners, between their families, tearing apart the team, taking a good business and absolutely bringing it to ashes. I've seen that too. And a 50 50. I don't like those odds. So I'm going to stick with me kind of controlling my fate. And what happens to me is my fault. And so the first question, can you hire out the deficiencies? And that would be after asking yourself, is the party an investor and they're just giving capital or they actual partner and they're giving sweat equity? I assume in this situation it's kind of a bit of both. Next question I would be asking is, why are they investing or partnering up with you? And what you should do is as that other party, you should ask, what am I getting out of this? So as this person that's coming and offering me money to buy into my business, what are they getting out of this deal? Because I promise you, they're not doing it out of goodwill. They're not doing it because they love you, unless you're family. But in this case it's not. But they have some sort of motive for doing this, whether it be they want to make money and they just see business opportunity. Those are sometimes the best ones because they're objectively looking at it. Then you have to start asking yourself other questions. Do they see a vulnerability that they think one day they can use against you?

Do they want to somehow use your. Your leadership in the market or your dominance and be able to swing that to a competitor? You just don't know. Right. And so number one question I'd be asking is, why are they investing or partnering up with you? I would be really wary of some unemployed person all of a sudden wanting to work with you, or even a retired person, because they're just looking for something to do. I'd much rather be looking for someone that's going to actually sacrifice their position elsewhere or they're going to give up, you know, another business in order to come work for me. Because it shows that they're sacrificing something and that they see value, whatever they're trying to achieve in the partnership, whether it be more money, whether that be position, whether it be impact, if you're trying to impact an industry or impact a social good, those are all things that you want, you really ask yourself. And if the question is, I have no idea, like why would they Come to me like, they're so much more experienced, they have so much more money. That would be a red flag to me. There's definitely a reason why they want to come partner up with you. If you can't clearly define that, I would run away. If it's not clear why they want to come work for you and why they're willing to move or why.

It'S clear that they want to invest their money into your business and get equity in exchange. If it's not clear why they are doing that, you should run. If it's just like.

If it's fuzzy at all, I'd be running away. Next thing is, when it comes to a partnership, when it comes to someone offering you money to join and invest in your business, you absolutely want to do your homework and go slow, don't go fast. If they rush you, if they're trying to push you through a proposal or trying to sell you on a proposal, even, I would run away, do your homework and take it slow. When I say take it slow. If you were entering into a marriage with someone, you would definitely be, Take time to date them, court them. You might do background checks. You'd see what they do financially. You would get to know them. You would get to know what they like to do, what they don't like to do. You get to know their past, all of those things. When it comes to investment, where they're taking equity, especially if you're doing a 50, 50, especially if they're taking majority ownership, you absolutely want to do background checks. You absolutely want to get to know them. You want to get to know what their values are, especially if they have voting rights. And when I say voting rights, I mean like a 50, 50 split or. Or they have a majority stakeholder where their opinion in the business is going to outweigh or match your own. You definitely want to be taking this slow. I'd get an accountant involved, I'd get a lawyer involved, and everyone gets like, oh, that's super expensive. It's not. If it's a small business, it's gonna be cheap. If it's a big business, you're willing to pay more for a law firm to get involved and make sure everything is done correctly. And in my opinion, if someone was coming in and coming in to buy Equity State in my business, which I've had three or four people over the past several years, try to buy a position in Augusta Lawn Care.

Or at least offer. I should say they've offered to invest for equity, and I would be very Worried. And to all of them I've said no because I'm not taking investment right now. But.

To anyone that would come to me and offer an investment or offer partnership, I want to get involved. If they did not bring their own level of vetting, I would be worried like if they didn't come in and be like wanting an accountant to check the books and check the deal before it was transacted. If they didn't bring a lawyer involved to actually be part of the transaction and making sure the equity was split and transferring of the funds. If they just like wanted to write up on paper what was going to happen and give it to me and give me a bunch of money in exchange for equity and just like do it all, you know, just on word of mouth basis, I'd be freaked out of my mind. Like I want them to vet me as much as I am going to vet them. Right. It'd be the same as if you went and met someone, they all of a sudden want to get married to you and you've hardly gone out with them. You don't know who they are really. You don't really know their family, you don't know their interests, you don't know if you're compatible. Like you just, you have red flags all over the place like why there's gotta be some weird motive for this person to be doing this. The same thing for business. If someone doesn't actively vet me or vet my business, make sure an accountant combs through my financials. Does it make sure that a third party comes through and makes sure that legally everything's in place? Does it make sure that tax returns are to a T and all the I's are dotted? If they don't do that, I'd be worried because it means that that level of inability to think critically and work in a deal is going to translate to my business. When they do become a partner and now I'm, they're representing me and the brand and my business and they're going to do the same thing. They're not going to vet, they're not going to look in the background checks, they're not going to get to know the individuals that they're going to make partnerships and alliances within the corporation. And so I would absolutely take it slow. If they're rushing you, I would say no. And I would also make sure that they are vetting you the same way you are vetting them. If they have any lack in me not wanting to vet them, if they're like, oh no, don't do a background check me or like they're somehow concerned about me digging into their past, I'd be freaked out. In my mind, same way I want them, I would expect and make sure that they are also doing the same thing to me. Wanting to get to know me, wanting to get to know all my businesses, wanting to get to know my legal counsel, getting to know my tax advisors, all of the. They'd want to get involved and know those things before entering a deal. Last thing is, I would absolutely, positively do references. This is huge when it comes to investors and for.

A partner because it's the same thing when you have an employee. For me, still, the biggest things are their references. If the references even have a cautionary pause before they give their reference. I already have questions. When I call for an employee check or for references for an employee, I am looking for rave reviews. I'm looking for people saying they're the best employee ever. I'm looking for people to say that I would hire them back in a flash, I could, whatever. Like that sort of linear, that sort of thought is what I'm looking for. If there's a pause, there's a question, or like they were, okay, if there's any of that, you know that there was something wrong and then you dig deeper into that. The same thing should go for a partner or for an investment. Like why not call their banker, why not call their accountant, why not call the other business that they're just leaving and talk to the manager? Why not call, dig into their past, see where they've worked, call a manager. If they had other businesses, it's public record, you can go on to your local department of licensing and get numbers and addresses and you can figure out, okay, have they sold businesses who's their partner's been in the past? I promise you, if they've had two or three partnerships that have all gone really bad, there's a really, really good chance yours isn't gonna end very well. Alright, so look back into their past, see what their business experience has been. Have they exited in a really good way in the past and now they're just looking for new opportunity? Or have they started businesses, sold them, and all those businesses are existing today? Like are they succeeding those businesses, did they fall flat in their face once that person left? Talk to the person who bought that business from them. How was their transaction? How was the business after said person left? I would also, if they had a partnership in the past, like look for LLCs, look for partnerships, look for any sort of Equity share in those proprietorships, whether it be corporations, LLCs, you know, partnerships, whatever it is, you can look on there and usually if they have their certain levels of stock, depending on your state, you will be able to see in the department of licensing who those individuals are, dig into those individuals, figure out their pass, call them, contact them, see what their experience was like. Those are some of the things I'd be recommending. It's something that's a process you got to take slow and do not allow anyone to rush you into this. And if they are doing this, it freaks me out when people give self written proposals because it very much is indicative of their inability to use professionals, to stay above board to keep it all legal. There's something that might be hiding and I'm not saying all the time, I'm not saying that all the time you need to get legal counsel involved or accountants, but if it's a deal of any size, like we're talking hundreds of plus thousands of dollars, like they should want legal advice, they should want to dig into your financials, they should want to sign paperwork about non disclosures and things like that. If there's apprehensions around that and it's a bigger deal like you absolutely there should be red flags, you know, smaller deals when you're buying tiny little businesses or you know, one or two employees or like you know, a couple hundred thousand in revenue, that's different. But like when you're trying to start, you're moving equity and you're having an investor and this is more sophisticated and lots of money is involved. I would be freaked out if someone wrote a self proposal on Word document and they told me they were doing it last night and they're showing it to me this morning. Like I'd be just freaked out in my mind. And so just any red flags along this journey of getting to know a partner, getting to know an investor, they should be dug into, they should not be ignored, they should not like anything, any little apprehension, bad, weird look, whatever it is, any sort of question on numbers or any, they should just dig into it. Just be like the worst devil's advocate ever and dig into every single thing. And only if they check all the boxes, only if there's green lights at every interaction, only if there is raving reviews and references of the people they've worked for and with and alongside in the past. That's the only way I'd move forward. So hopefully that helps you Justin and I hope all of you can join us on the Facebook group Small Business Owners of America ask your question. I'll try to answer it here on the podcast. Thank you so much for listening. You've been listening to the Business Boot Camp podcast. I'm Mike Andes. Until next time, be great because nothing else pay.