The truth about business partnerships

There are a lot of entrepreneurs who like to start a business with a partner with thoughts that it will be easier, less risky, and that you will have someone to lean on.  What is a clear fact based on statistics, a partnership that is formed without a thorough due diligence and clarity of responsibilities & roles is likely to fail.  Trust me...I know first hand!  So what makes successful partnerships work?  I am going to share my experiences and opinions.

​According to the United States Small Business Administration (SBA), businesses with multiple owners are more likely to survive longer than those who go out on their own.  The basic new start-up stat everyone uses regarding 66% of new businesses fail within the first year or two is a motivating factor to cover up this statistic the best you can.  Some think going into a partnership arrangement helps reduce the probability of being a part of this stat...and I agree under the right circumstances.  It is a fact that partnerships are the simplest and least expensive of co-owned business arrangements. 
 
Forming a partnership can either be a good or bad thing, depending on the parties and circumstances involved.
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​To Consider

• ​​Your partner needs to be more smarter than you.
• Friends or family as partners can increase stress, forces decisions that wouldn't be made if the friend or family factor was not in the picture, and creates a level of sensitivity that crosses into the personal side of things vs. staying all business.
• If a partnership is the direction you plan to go, make sure your operating agreement, articles, and partnership agreement covers you under all circumstances.
• Are you the partnering type?  Some entrepreneurs simply want to be on their own, are not good with sharing ideas, or even sharing the spotlight.  A lot of pride has to be pulled back under a partnership knowing everything is split one way or another.  Making decisions with compromises at every turn is much more challenging than just making the call and going with it if you are running solo.
• Work ethic, values, and experience is CRITICAL when deciding if you can partner with someone.  If you find yourself consistently outworking your partner, questioning your partners decisions or actions, or find out they are not even experienced enough in all or certain areas, frustration, stress, and disappointment WILL build over time and ultimately hurt the business and your health.

Some pros

• Partners share the cost of a start-up.
• They share responsibilities and work.
• They share business risks and expenses.
• The complementary skills and additional contacts of each partner can lead to the achievement of greater financial results together, faster, and with more diversity.
• Partners can offer mutual support and motivation.

Some cons

• Partners in a general partnership are jointly and individually liable for the business activities of the other. If your partner skips town, you’ll be liable for all the debts, not just half of them.
• You will share the profits.  In the beginning, this makes it more of a challenge with a higher burn rate, longer time to build up operating cash, and overall more expenses to cover both partners and their families.
• You do not have total control over the business. In most cases, decisions are shared, and differences of opinion can lead to disagreements, one partner buying out the other one, or even a dissolution of the company.
• The wrong partner can negatively affect your reputation.
• A friendship may not survive a partnership. Keep in mind John D. Rockefeller’s famous words: “A friendship founded on business is a good deal better than a business founded on friendship.”

​Before entering into a partnership, it would be best to first determine whether or not you are suitable for this type of arrangement and, if so, to thoroughly investigate possible business partners.

Is your prospective business partner a good match?  A business match is much like a marriage. Just as one would normally take great care in the selection of a mate, you must be careful with a prospective business partner. Here are some questions to ask yourself to find out if you’re compatible:

• Do we have a similar vision, ideas and objectives about how to run the business?
• Is each of our strong points and skills complementary to one another?
• Are we both able to communicate well with one another in a pleasant, respectful and comfortable manner?
• In your gut, do you trust this individual?

You will also need to do some research about your prospective partner. Check out the individual’s background thoroughly by, for example, talking to former employers or business partners.
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Avoid any potential problems by making sure duties and responsibilities of each partner are detailed in a legal agreement. This agreement should include how much capital each will contribute; who owns what; how decisions will be made, profits will be shared, disputes will be resolved; a buy-sell agreement; and who will be entitled to what if the partnership doesn’t work out. Be sure to involve a lawyer and an accountant from the outset to help form your partnership and to draw up legal agreement to avoid unexpected circumstances.

​No doubt, deciding whether or not to work under a partnership arrangement is a major decisions for you, your family, and your career.  A lot rides on how the partners handle everything that is involved with the business and what decisions are made.