Partnerships make business sense. Two or more brains are better than one, and unique synergies can lead to a wealth of business opportunities. In theory, partnerships also can help to quot;share the load" of a business. However, for every successful partnership there are probably ten (or more) that go sour. Why? Is there a way to mitigate the problems before they arise? Let’s take a look at the problems and solutions to partnerships and learn ways to reduce risks for all parties involved.
First, let me describe a partnership for the purpose of this article. It is not just regarding the legal business formation of a partnership, but anytime two or more people combine to form some sort of partnership business deal, or to engage in a business endeavor.
I have read many articles about why partnerships fail, and some have talked about the 7 C’s of toxic partnerships. I have narrowed it to 6 C’s of partnerships breakdowns.
1. Competition Not Complementary Action
2. Conflict – Becoming the Norm
3. Cumulative Money Problems
4. Control Issues
5. Changing Vision
6. Communication Breakdown
Talking to a couple of my friends has recently revealed two examples of partnerships gone sour. I promised not to mention names.
Story 1) Two friends go into business together to design and manufacture solar powered signs for businesses, a great a relevant idea in today’s “going green” world. One person comes up with the name and even the lead for their first major sale. The other helps finance and claims to help “market” the company along with his other business creating logos and signs. Long story short, they almost instantly have vision and mission conflict, as well as control issues. The 50/50 original deal seems to be lopsided as one partner is putting in the majority of marketing and sales while not reaping any rewards. The other partner is focusing on his other business. The partnership dies and person who originally created the design and name decides to just cut ties and gives his old partner the name, deciding to start a different company and compete.
1) Ego and power issues
2) Lack of Communication in future Vision
3) No clearly written goals or contribution requirements
Story 2) Two friends from a former business partnership decide to start an Internet Marketing company where they both have years of expertise. They were very successful in their past partnerships. Partner A wants to focus on a different area than in the past and originally was partaking the venture alone, but partner B shows great interests and gives the impression that he too will work the business full time along with partner A, as partner B is currently in a position at another company. Partner A even agrees to move to the same city as partner B to better operate the company. They agree to put up a certain amount of money for capital and have a specific plan of action to grow their company. Unbeknownst to Partner A, partner B actually borrows money from two outsiders to fund the capital, bringing in new outside investors to the company.
As time goes on, partner A realizes that partner B is not working full-time on the venture, but is still working with another company, saying that it is a small amount of time, though his quality of work to the new venture is less than adequate. Both partners then have a conflict as to their plan to grow and build certain areas of the business. Instead of sticking to the original plan, partner B decides to employ “questionable tactics” to gain “rankings” and defends them because
they work.” Partner A does not partake in these tactics for the work that he is responsible for and advises against partner B continuing, which he does not.
Finally, the partnership starts to crumble. Partner B is way too scattered to focus and continues to employ questionable tactics. Because of this, they need to hire more employees than originally expected, projects are going way over budget, and the company begins to operate at a loss. The partners confront and partner A decides to buyout partner B. While doing due diligence to value the company, partner A discovers a large sum of money withdrawn from partner B months ago for “personal” reasons. The money was never returned. The questionable tactics also blow-up as the project that partner B led all tanked, leaving the company with even less revenue.
We can tell from the first part of this story that it’s not going to end well…but this is easy to see as readers after the fact, in reality there are many dynamics that skew are thoughts and actions.
1) No written contribution requirements, lying about work contribution
2) Using questionable business practices and not being truthful with your partner
3) Lack of proper due diligence in the beginning
4) Too much personal trust, not getting business agreements in writing
1. Create a partnership agreement and have a lawyer look it over. Clearly detail ownership, how decisions are made, how disputes are settled, and other “laws of the land” so to speak. This will lay down how the business will operate. It won’t prevent personal disputes, but it will be able to resolve them in a legal manner. All issues will have to defer to this agreement.
2. Have an “out” clause. How do partners get out of the agreement, buy/sell agreements, and clearly indicate how the business will operate in a personal dispute or fallout. Having this written in the initial agreement will prevent ugly disputes later on if things fall apart.
3. Set the vision, mission, and goals of the company, as well as the goals for each individual. Many disputes occur because the individual goals aren’t aligned or the business goals were not clearly defined.
4. Set the Authority and Responsibilities. It’s great in theory to say everything is “50/50” but in reality this just doesn’t work. Profit-wise it’s fine, but authority and decision making needs a clear leader or a way to defer for a final decision. Without this the business will never move forward and there will be power struggles. Define this early and always defer to the agreement.
5. Define financial authority and considerations. This may be covered in the areas above, but it is extremely important and needs to be clearly defined. Who is in charge of handling the finances, who approves charges, how much will each partner be paid, set up regular internal audits, etc. Money is a major area of conflict in any partnership.
Business partnerships work as long as the responsibilities of each of the business partners is clearly spelled out and understood, and the partners have assessed their personal as well as their professional interests. There are always going to be conflicting dynamics in any relationship. Business partnerships are no different, and it’s not so much trying to avoid disputes as to having a plan in place to handle them. Partnership disputes are common and many of the problems follow similar patterns. Learn from other’s mistakes and clearly detail everything with the help of a lawyer at the beginning.