Steps to take when receiving advice from an advisor about entering into a partnership

Written By Steps To Faculty Published July 15th, 2010

Are you interesting in joining a partnership? If so, there are a lot of questions to ask and issues to consider. How can you be sure that the partnership will have a going concern a year from now? Will the business be solvent? Are you going to lose your capital contribution in six months? These and many other factors must be taken into account when getting advice from an advisor prior to legally entering a partnership. But did you know that there are five signs to look out for when reviewing a partnership? Let’s take a look.

Step 1 Perform a debt check

The recent economic downturn has left many businesses in debt. As a result, the partnership that you may want to enter is not owned just by the partners, but by creditors also. Ask for their debt to assets ratio, which is the total amount owed divided by the total assets held. If the debt to assets ratio is higher than other partnerships in the industry, you may want to consider going elsewhere and do not invest there because when partnerships owe a lot of debt, it takes yearas to be repaid and the partnership can dissolve by then. Make sure that the partnership generates greater amount so profits relative to the debt load.

Step 2 Check the books

Naturally you will want to review the current financial statements of the partnship you wish to be a part of. But also consider their forward-looking financial statements, or a financial statement that predicts future partnership prospects. You want to know that you will recoup your capital contribution in the years to come. Right now the partnership may be stalled, but will generate more business in two years. THese figures are important when considering to enter a partnership.

Step 3 Determine the free cash flow

High levels of free cash flow, which is the difference between operating cash flow and capital expenditures, is good for business and for the partnership. Insufficient free cash flow is the root cause of roughly 75% of partnership insolvency according to the The National Association of Partnerships and Small Business Association. The ability of the partnership to generate cash after spending for mandatory operations is essential for you if you want your money back and some return.

Step 4 Examine the competitive advantage

Does teh partnership have a unqiue product or service that differs from anyone else in the industry? Can the partnership keep more customers than others as a result of this product or service? If so, then invest in the partnership right away because it has a competitive advantage, which will yield great returns for you.

Step 5 Listen

What do customers say about the particular partnership you are interested in? Word of mouth is the quickest way to make or break a partnership. Also, liten to the partners. What do they say about each other behind closed doors and about the partnership in general? Do they feel good about it? If so, then you will be safe. If not, better look elsewhere.

Remember,it is better to look before you leap into partnerships. Please visit stepsto.com for more great business advice.


Roger Due

Investing in Your Destiny® & Coaching Program - Wealth Building Summit Dallas, Texas

My name is Roger Due and I am from Albuquerque, New Mexico and I am the owner of the Monsano software company. This has been an absolutely fantastic conference. This is the best I have ever been to.