Get the people factor right first for a successful equity partnership, says Peter Flannery from Farm Plan, because collaboration is key.
Since about 2000, there has been a proliferation of investment into new equity partnerships.
Some investors rue the day they invested capital into an equity partnership. For many, though, it has been a great financial decision. So why have some succeeded where others have failed?
The first three rules in real estate are location, location, location. The first three rules in successful equity partnerships are people, people, people.
If you get all three right the probability of success increases dramatically, and the reverse is true.
How do you know if you are entering into a business arrangement with the right people? For me it all comes down to having alignment on values, purpose and vision.
Not everyone is suited to working in a partnership, particularly if there is money involved. The first step is to have a clear understanding of your own values. Can you accept that what might be the best decision for you, may not be the best decision for the group?
Can your personal needs take a back seat in favour of the partnership’s needs?
If you value independence and self-worth, and place little value on collaboration and interdependence, then an equity partnership is not for you.
‘If you are just wanting their capital to help you get “your baby” up and running, and you expect them to sit quietly in the corner, it will most likely fail.’
Regardless of how good the financial returns look on paper, if you cannot work collaboratively within a partnership for the benefit of all, the business relationships will fail, just when the pressure comes on.
Having convinced yourself that you have the appropriate “value set”, you next need to look at your business partners.
They also need to have collaborative type values. However, it goes deeper than that. You don’t all have to have the same values. In fact, having people with different values
can add synergy to the group. However, the values of the partnership’s individuals must at least be complementary and not adversarial. Beyond values, you next need to consider purpose.
What is your purpose for investing in a partnership, and furthermore, what is everyone else’s purpose.
If you are just wanting their capital to help you get “your baby” up and running, and you expect them to sit quietly in the corner, it will most likely fail.
Conversely, if you are looking for an investment with like-minded people, who can all contribute and bring different skills to create a high-returning and high performing business from which all will benefit, and you overlay that with good governance and management, the odds of success are high.
The third aspect is to have an aligned vision for the business. What will the business look like in five years?
Will it pay dividends to shareholders, or use surplus cash to strengthen the balance sheet? Will the business have a growth strategy?
Do individual shareholders have a vision of increasing their share and are there others who may wish to sell down at a particular time. All the above should form part of the due diligence before any commitment to invest is made.
Too often in the past, this has been discussed after the event, or in some cases not even discussed at all. During the heydays before the global financial crisis of 2008, time constraints of missing out got in the way of sensible and prudent due diligence. Marry in haste, repent at your leisure.
Many other influential factors will come into play which will determine the success of any equity partnership. However, if the people mix is wrong, I can almost guarantee the equity partnership will fail. Get it right, and the probability of success will be greatly enhanced.
