Business Partnerships Are Disasters Waiting To Happen

partnership in business

What to do when it’s lonely at the top

partnership business

The 4 things to consider before you team up with someone else

Business partnerships are a disaster.

If you’re considering partnering up with someone:

STOP RIGHT NOW
DON’T DO IT
RUN FOR THE HILLS

I hope I’ve got your attention. I’m serious; before you jump to the conclusion that you should invite someone into your business as a partner, or offer a partnership to an employee, there’s a bunch of questions and alternatives to consider.

I know I know, you’ve probably come across examples of partnerships that work. Most law and accountancy practices operate as partnerships after all, and they can’t all be wrong. True enough I suppose, and some might say that my opening paragraphs are a bit extreme.

But consider this: Business partnerships are by definition intense affairs, you spend more time with each other than you do with your spouses, they can last for the whole of your working life, all the while having to work together towards a common set of objectives and you don’t actually love each other like you do your spouses.

People change

In my experience, ultimately many business partnerships fail because people change. When you get into the partnership you may well be at a similar stage in life and for a while it all goes smoothly, but over time, lives change, priorities change. There is no guarantee that 5 or 10 years down the track you still want to pull in the same direction. You might have young kids and your business partner has decided not have kids. Your children need a lot more of your attention than your partner’s; Your spouse has decided to stay at home with the family, but your partner’s spouse is going back to a full time career. These changes in life’s circumstances can have an enormous impact on the functioning of the partnership.

A client of mine, Chris, was a fifty percent partner in a 3 year old business based in Sydney, when he and his wife had a baby. 2 years later, Chris’s wife decided to pick up her university career again. The perfect job was offered to her at a university in Singapore, and Chris and his wife decided she needed to accept the offer and move the family to Singapore.

The decision caused a rift in Chris’ partnership. Now, a year later, Chris and his business partner only speak through their respective lawyers, the break-up of the partnership has cost buckets of money, the business has suffered and Chris wishes he’d never got into a partnership to begin with.

Many business partnerships are ill-fated from the start:

  • They’re started for the wrong reasons.
  • Alternative options aren’t considered enough.
  • The likelihood of changing circumstances of the partners is not acknowledged from the start.
  • There are no clear agreements about how to go about dissolving the partnership.

Each of these 4 issues are worthy of an article in their own right, and I might very well decide to write those articles, but let me try and sum up the essence of each of the 4 points:

1) Partnerships start for the wrong reasons:

Many small business owners feel alone and overwhelmed, everything is down to them and no one else “Gets It”. Often they fantasise, that having a partner will address the loneliness.

WRONG

There are many wrong reasons to start a partnership, but this is the big one in my experience. The only reason to consider a business partnership is to bring certain skills and experience into the business, that you yourself lack and can’t obtain through other means.

2) Alternative options not considered:

Many business owners have one or more favourite employees who they are afraid will walk out one day, leaving the business high and dry. The temptation is to offer such employees a partnership. I also often see that people offer partnerships to others in the same industry, because it might lead to less competition and cost improvements because of economies of scale.

WRONG

There are many other ways to skin such cats. Offering employees increased engagement in the business through a system of structured bonuses and involvement at the strategy level of the business (see Open Book Management) for example. Joint Ventures are another effective way to join forces, for a specific purpose and a defined period of time.

Partnerships should only be considered as a last option and then, ideally in a separate vehicle (e.g. your business and the other party form a separate partnership company, turning your main business into the mothership that has interests in one or more satellite businesses)

3) Consideration of changing circumstances down the track:

Many partnerships start between two people who want the same things out of life and business. There is a connection and shared dreams and goals and life stages. When the question of longevity comes up, both partners commit to open and honest communication and shake hands trusting each other to be able to deal with whatever hurdles might appear down the track.

WRONG

As they say the only certainties in life are Death and Taxes, but I’d like to add Change to the list. There will be Change in your life as well as in your partner’s. You can count on it. At this moment you may have the same dreams and goals, but down the track that’s much more likely to change than remain the same.

If at all possible, negotiate your partnership agreements in 5 year blocks: “You and I are about to enter into a partnership for 5 years. At the end of these 5 years we will dissolve the partnership and divide the business exactly and definitively. Once the split is completed, we may decide to commence another 5 year partnership and negotiate from scratch, if we both want to”.

4) No clear agreements about how to dissolve the partnership:

Many partnerships are started without a formal partnership agreement and those that do have an agreement have ill-defined and unrealistic clauses about how (and when) to break the partnership up (also see the previous point above). The belief is that because you are both people of good will, and commit to open and honest communication at all times that you’ll work it out when push comes to shove.

WRONG

As long as the partnership operates as intended and the partners are working together happily, they will generally not need a partnership agreement to operate the business happily. But at the point of dissolution, the agreement becomes the roadmap for the partners. The agreement needs to be absolute and watertight, no confusions. It needs to spell out in plain English what the steps are that are to be taken when, for whatever reason, either or both of the partners wants out. It must be clearly stated that the partner who decides he or she wants out does not owe the remaining partner(s) an explanation or justification of any kind. All that is required is that one or both of the partners says: “I am stepping out”.

The document must detail each of the steps that are to be taken at that point, by whom and by which time frames, including the steps that come into play if one of the partners does not meet his or her obligations as laid out in the roadmap.

THAT’S IT

If you must have a partnership, take the time to consider all 5 of these points seriously, very seriously.

It’s time well spent… I promise you.

#businesspassion #businessowners #FunInBusiness #BusinessPartnerships #JointVentures #OpenBookManagement

 

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