May 13, 2021 | 10-minute read (1850 words)
A business partnership typically begins as a jointly beneficial arrangement between at least two individuals or sometimes two companies. The parties sign an agreement, plan their strategies, possibly hire more staff and rent office space, then commence with running the business as newfound team. The partnership usually runs seamlessly for a while as the partners bask in the wisdom of their decision. They think about how much money they save by sharing costs and delight in having someone help to navigate business decisions, manage employees and share the overall load.
But almost inevitably, cracks will start to emerge. They may be minor, and if both sides are amenable to a quick resolution, the problem blows over. However, they may be grave schisms with no obvious solution, in which case it is less likely a compromise can be struck. Tempers may flare, accusations might fly and finances turn into a hot button as mutual distrust escalates. If it continues, staff and clients may choose sides. Eventually the partnership may have to be dissolved.
The worst outcome in a collapse like is when the financial details of the partnership in the event of a split were not addressed in the agreement. Even with a well-crafted partnership agreement, when a partnership implodes, it can entail massive legal bills, damaged reputations and the loss of loyal clients. Litigation is extremely costly and contentious, and handling legal action while also continuing to make a living is highly challenging. You may suffer psychological damage from losing a partner who has become an adversary or even betrayed you.
Before entering a partnership, play close attention to 10 serious pitfalls:
- Multiple heads … multiple verdicts: When approaching partnerships, we of course look for people who will bring progress to the company. Human nature dictates that we usually select partners with similar skills and abilities to our own—but they may very different opinions as to how to accomplish the business’ goals and vastly different personal values. Your partner may have a distinctive technical talent that helped establish the base of your partnership. But that is not enough to be a good business partner.
- Conflicting values, or a lack thereof: In hindsight, those who have been through it often say that incompatible personal values were a major contributing factor to their partnership’s collapse. For instance, one partner may depart at 5 p.m. sharp Monday through Friday while the other stays until the wee hours of the morning to get everything done. When one partner is routinely dedicating 80 hours a week to keep the venture running and the other is putting in 40, absent a compromise the harder-working partner will at some point become disgruntled. Or, a partner’s once-hidden destructive behavior, such as a fondness for going on drinking benders and not showing up for work, or a penchant for using the business credit card for personal shopping sprees, may emerge after months of “good” behavior. Now the reliable partner has an added burden of being forced into a parental relationship with the person who is supposed to be their reinforcement. The trust is broken, yet because their finances are interconnected, simply walking away isn’t usually an option.
- Leadership traits gone awry: The urge to control dominate is common among successful entrepreneurs, but these traits can play out badly in a partnership venture. What often happens is one or both eventually forget that both parties are at the same level. One partner may begin to badmouth the other to employees or circumvent the other’s authority. An outsized ego may even lead one partner to try to prove their dominance over the other partner in front of clients. The potential consequences of such controlling tendencies make it essential to clearly delineate each partner’s functions and duties upfront in the partnership agreement. Otherwise, your workplace risks devolving into a mess of office politics. Meanwhile, the business suffers.
- Lopsided work: This is where one partner claims to be putting in more energy and time than the other or complains that the other partner is taking up more of the company’s resources in terms of employee man hours. For example, one partner may claim the partner is taking up all of the admin’s bandwidth and therefore why should they share the expense of that salary? A careful examination of the partnership value, investment returns, commitment and requirements must be specified from the start to identify the effort required of each partner to make the partnership venture succeed. Build in consequences for situations like these in your partnership agreement ahead of time.
- Partners are dishonest with money: This is an all-too-common partnership breaker. In a business partnership, there is a truism that whoever manages the money holds the power. A lack of transparency can have unhappy endings, like tricky partners who syphon off funds and leave others behind with the debt. A partner lacking conscience or suffering from an addiction may hide client payments from the other. They may attempt to write off company time to appease a client without informing the other partner. You need more than one set of eyes on accounts receivable, period, and this person should be a professional rather than a family member who volunteers to “help” with the books.
- Hidden / surprise debts: This may sound almost inconceivable, but cases of this have been documented. Sometimes a partner will bring hidden debts quietly along with them into the new venture. The unknowing partners are often left to pick up the tab because they didn’t figure it out in time. What if your business partner’s spouse ends up getting 25% of the company in a divorce?
- Secret plans: Sometimes, partnerships begin with transparency, but down the line things sour as private agendas and ulterior motives emerge. Be upfront and clear with your plans and make provisions accordingly in your partnership agreement in case one partner decides they wish to leave. Too often, one partner accidentally discovers their trusted business partner is planning to strike out on their own. Perhaps they accidentally stumble across the partner’s new lease agreement. Maybe a loyal employee tells you what’s going on. Worse, a partner might pack up their belongings in the middle of the night and take the best employees with them. Then you find out they stole your client database. This is not the stuff of fiction; these are real-life scenarios.
- Communication breakdown. A communication breakdown is another frequent occurrence in business partnerships. Its effects ripple throughout the entire functioning of the business as responsibility for who will manage what, accountability and responsibility go out the window, the reasons for which can be complicated but always end up hurting the business. The communication breakdown will trickle down to employees too, and they can’t perform optimally in a vacuum.
- Nonexistent or incomplete contract. Sometimes partnerships kick off based on trust without a contract. The parties see themselves trusted allies who would never dream of stabbing each other in the back. But if trouble does arrive, the first logical place to look will be the partnership agreement you both signed. Without recourse found in the agreement, protracted legal wrangling is likely going to be necessary.
- No exit clause: A challenging yet critical part of the partnership agreement is the exit clause. This must outline the course of action triggered upon a partner’s exit, and it must cover intellectual property, debts, profits, clients and the minutiae of any possible other concerns. Further, an exit clause is crucial if partners bring assets to the partnership venture and desire to keep those assets upon dissolution.
So how do I find a trustworthy business partner?
First, consider whether you genuinely need a partner. Be sure your decision isn’t motivated by fear. If you decide to move ahead, choose a potential partner only after conducting a thorough analysis. You should be looking for a partner who complements your character and skills but who also brings something distinctive to the table, such as a knack for client development or a talent for managing employees. The No. 1 consideration should be that they are enthusiastic about the business and share your passion to grow it. And it is a given that they must be honest.
As distasteful as it may sound, you must probe the potential partner’s motives rather than simply take what they say at face value. Ask for complete references, and call every one of them. Evaluate the prospect’s online presence to see how they conduct themselves on the Internet. Conduct a background check. All this needs to happen before inking an agreement. And if the potential partner balks at any of these steps, think twice.
The essentials of a viable partnership:
- A well-drafted partnership contract:Partners must be willing to put a contract or agreement in writing, even if a contract isn’t a legal requirement in your state. A properly drafted partnership agreement protects both parties and forced you to think about how you and your partner will implement your entrepreneurial vision. Business partners should be able to settle any issues that may appear by mentioning the contract. In the absence of an agreement, flaws will be resolved by your state’s general partnership law, which will undoubtedly will not cover the complexities of your particular business partnership.
- Ascertain each partner’s role and duties: Manage expectations and responsibilities by formally delineating them upfront. Although partners do not necessarily need to commit the same amount of time to the business, there must be certain required time commitments. All partners need to be transparent on their roles, responsibilities and duties. Avoid potential bitterness that will likely arise when partners start sharing profits and measuring them against their individual efforts and outcomes. How this will be handled must be addressed in the partnership agreement.
- Regulate partnership towards gains: Earnings usually result from creating value for your clients. But commitment from a possible partner to the business must be just as strong as yours. You will need to decide how you and your partner will be liable for outcomes. Consider how you will measure performance and results, upfront.
- Create an exit strategy: Ironically, you must enter the partnership venture with the understanding that it will likely end at some point. Therefore, you must draft an exit strategy for a partner who decides to depart. Be as granular as possible. You will need to consider how to handle ongoing and past expenses not yet paid, the resolution of outstanding invoices, what to do about the terms of the lease you both presumably signed, bonuses and more.
- Decide how to handle a partnership breakup: Business partners usually go in separate directions eventually. Be ready. Define how partners will be compensated, resources distributed and customers served. Emotions will undoubtedly run high if the partnership does not work out, so the best time to decide how to handle a break-up is in advance, preferably in the agreement you created. Nevertheless, there will undoubtedly be considerations specific to your particular industry, business and circumstances.