Articles

Partnership Pitfalls

Business Information

Posted by Jennifer Hendrickson on

You, like many Americans, just might be entrepreneurial.  The idea of being your own boss, selling a product or craft that you make yourself, or providing a service to other people or businesses, is tantalizing.  You also know that starting a business is easy and so is failure.  We have to balance risk and reward.  Nothing ventured, nothing gained.  You get what you give, reap what you sow.  Sometimes.  One way to minimize your personal risk is to join forces in business with partners.  Partnerships pool resources, distribute risk, and benefit from the varied skills of all partners.  Sure, it’s a clever play on words; there is also some truth to it. As Dave Ramsey says, “The only ship that won’t sail is a partnership.”

Between our consulting firm, Hendrickson Business Advisors, and our business brokerage firm, Murphy Business of Cape Girardeau…we see a lot.  Some of the most difficult situations we’ve seen have come from failed partnerships and so we thought it might be helpful to share some of our own insights and also some ways that you can help minimize the chances of partnership problems down the road.

Insights:

  1. Both sides are usually very excited to go into business together.  No matter how long they’ve known each other, it’s a new chapter and both sides genuinely trust each other.  
  2. Two couples going into business together have a more difficult time because the couples will talk and “join forces” feeling very justified in their opinions.  There WILL be “pillow talk”.  Sometimes the lines are drawn between the women and the men.
  3. Because of their different competencies, one person (or one couple) will do more work than the others at certain times of the year.  This can cause the other party to feel underappreciated and under compensated. Be sure to talk it out rather than sweeping it under a rug and responding in a passive-aggressive way.
  4. In a partnership, there are more mouths to feed so even though the business might be making decent earnings, when you divide it up it might not feel like it’s worth the effort.
  5. One person usually has a more dominant personality, but that doesn’t give them the right to pull rank.  This can often be difficult when trying to make decisions that are best for the business and can sometimes result in gridlock.  Team management requires serious conflict resolution skills and adherence to the partnership’s ground rules.

Things to do:

  1. Make sure you know the person (or people) you are going into business with really well.  Know their strengths and weaknesses and talk about how you can complement and help each other.
  2.  Sit down with a good business attorney before starting the new venture to iron out all the necessary legal documents.  This includes both partnership agreements and buy/sell agreements.  This will save a lot of heartache and hurt feelings down the line because you will have already prepared for many of the curveballs.
  3. Consider whether owning a business together is really a good idea or not.  Many people get so caught up in the dream that they don’t really think about things from a practical perspective.  Could you each form your own business and buy products or services from each other instead?
  4. Avoid making assumptions; document everything to make sure you agree and can continue to agree even when under stress.
  5. If the business will be substantially harmed by one person’s illness or death, be sure to buy a “key man” life insurance policy on that person.
  6. In a start-up, it’s hard enough to pull one salary out of the business within the first few years, let alone multiple salaries.  Money needs to be reinvested early on to build the business so make sure you have a good business plan with solid financial projections AND a way for everyone to meet their personal financial needs.
  7. Hope is not a strategy.  Make sure that you plan, execute, and communicate really well.

In short, going into business with another person or another group can be very rewarding and profitable so long as you acknowledge the risks to your relationships and possibly the health of the business if things aren’t handled just right.  We excel at business plans, conflict resolution, and training.  Contact us when we can help you start, buy into, or improve your business.