Should my business partner and I bring in more partners?

[beep1976]

I have a small business that is 3 years old that I co-created with my business partner. Our business is constantly evolving and as a result we have doubled in size (staff/clients/income) each year since starting. We are nearing the point where we are going to fill our business to capacity (we are a service based business vs. product) and will either need to look at a larger location or a second location.

We are considering bringing our two most talented staff members in as equal partners in our business with the intention of having them open a second location. These are smart, motivated, hard-working, creative and trustworthy individuals.

My question is: Is there a better way to grow our business than bringing in these individuals as partners?

Important piece of this is that our profits are not at a place where we could support a full time manager. Opening a second location would require a lot of work and needs to be done by someone who is okay with the benefit of that work being a long term investment.

I'm happy to answer any questions that would help you answer the question or give insights.

Thank you!!

[Freelancier]

I would focus on why your profits aren't high enough to support a full-time manager now that you have a bunch of employees.

I wouldn't bring on more partners unless they can grow sales in a way that no one else can. Otherwise, they're just redundant.

If you go with a second location, you need to nail down your processes so that people can work in either place and be under the same level of control and interaction with other members of the team. A slightly larger space may be more appropriate at this point.

[beep1976]

Thank you for your response!

I believe we have done an excellent job of creating processes and policies that can easily be replicated in another location. We built our systems based on the teachings of Michael Gerber in the book E-Myth Revisited. I believe we could get another location up and running pretty quickly from a systems perspective. This would especially be true if one or both of these current staff members were to implement these systems in a new location (since they are both very clear on our vision and policies).

I don't feel like my business partner and I have the collective time and energy to run two locations on our own.

We work in healthcare and the two staff members we are considering to propose partnership to are both talented/smart enough to have private practices of their own someday. I don't believe managing a location for us would be of interest to them however, partnership may be. Considering our desire to expand but limitations on how available we could be to a second location we would need more high level staff or partners. In our industry the business leaders need to also be practitioners but great practitioners will move to private practice after a period of success as an employee. This is the conundrum we face.

I would hate to miss out on an opportunity to bring such talent to our leadership but am struggling with whether or not adding partners could potentially harm the good thing we have going.

[Harold Mansfield]

This may not be the same thing, but when I've worked for companies that expanded to more locations they didn't bring in more owners. They hired more managers. I too question how you've doubled profits every year and still can't afford a manager.

How much equity do you want to keep giving up?
If partnership is the only way to expand, cause you can't afford a salaried manager, can you really afford to expand or do you just want to?
Why do they have to be full partners? Are they also investing?
Why can't you structure their partnership based on performance of the location they are opening?

If you still retain 51%, maybe it is a good idea. If not, I'd seriously rethink if you are growing too fast. Especially if it's not reflected in you making more money.

[Freelancier]

I believe we have done an excellent job of creating processes and policies that can easily be replicated in another location.

Just because someone else could follow the policies/processes at the second location does NOT make that second location an integrated part of your growing company. To be integrated, someone should be able to work freely at either location without an issue. It takes a coordinated effort of technology, processes and people to make that work.

Just because you don't feel you have time to run a second location, I think you haven't yet embraced the right role in your organization in order to continue to grow in that direction. People who are at the top need to learn how to spend all their time running the business instead of doing whatever else they're doing. If your one location has you so busy as a manager that you can't manage a second location, then your processes are likely a problem. If you aren't 100% working as a manager, then you aren't going to be able to focus on your business' growth in a way that's healthy, so maybe you need to hire another person at your existing location so that you can spend more time managing things. Or you need to increase your profit margins, which might be too low.

And I wouldn't adjust the number of partners until you figure out the optimal structure for your next phase of growth and attempt to make that work first. Adding more people into the mix just complicates things.

On the other hand, if you really really really want to have them work toward sweat equity at some low level, feel free, but consult with an attorney to make sure that your business structure is properly configured to make that work (so, for example, they can't sell their accrued partnership shares on the open market without first offering them to the business or to the other partners).

[Twhansbury]

In a way you want to let your two employees leave start the same business as you have now and you want to be partners with them.....
I am a firm believer in any structure you need to know what you want and what you need to gain from each new direction.
Are you looking for partners so they will one day buy you out?

[The SBRL]

Beep1976, are you and your current partner, both practitioners, spending a significant portion of each day filling administrative responsibilities? If the answer is yes, you might want to ask yourselves how much more you'd be able to do from a revenue generating perspective if you could each practice your skills an additional 1-2 hours a day.

In terms of the value of bringing on your two key employees as equal partners there are many considerations; not least of which is the challenge presented by two extra decision makers.

The discussion so far has been around a second location. That in itself presents a whole other fixed overhead you'll have to cover every month. If you're in a market where you just have to have a second location to pick up a greater share, than it might make sense. If on the other hand, you can increase business by moving into a somewhat larger space you won't have as big a nut to cover. You'll also have the added benefit of having your finger on the pulse of day to day operations - not an insignificant advantage.

Another consideration as yet untouched is the impact of a loss of your two key employees if they decide to open their own business. Maybe you can achieve your goal by bringing them in and effectively motivate them with a preferred share option - guarantee them a part of the profits, motivate their butts off, but don't give up your control of the business.

[D-Dave]

I would hate to miss out on an opportunity to bring such talent to our leadership but am struggling with whether or not adding partners could potentially harm the good thing we have going.

I think based on the series of concerns you've laid out that it might be wiser to just move to a larger location until such a time where you can afford to give those valuable employees a more high-paying management position.