Great partnerships can make great companies. Look at Hewlett Packard and Microsoft for example. However, before getting involved, it pays to get an understanding of the perils and pitfalls of partnerships.
For anyone starting or trying to grow a business, working with a partner can be great. After all, it’s tough and lonely to build a business single handedly. It can be a big help to have someone with whom to share the expenses, enthusiasm, setbacks and successes.
Moreover, in a partnership, there’s increased strength from having a balance of complementary talents or personalities.
One person may be an exceptional “outside” person: securing sales, marketing and networking. The other on the other hand may a terrific “inside” person: making sure bills are paid and staff are managed. Or, they may be very talented at creating the product – whether it’s software or food items.
There are many advantages to partnerships, but individuals need to be careful before rushing in.
Once the initial enthusiasm of starting a business begins to subside, it is easy for tensions and resentments to grow. The “outside” person may come to find that the “inside” partner starts to view the time spent on business lunches, trade shows, and sales calls as just fun-and-games. Meanwhile, the “outside” person may come to feel that since they are the one bringing in all the customers, why should they share all the benefits with a partner just doing mundane office work?
Over time, even in good partnerships, the partners’ goals for the company may differ or the amount of time you each have to devote to the company may change, creating conflicts.
When partners can no longer work well together, the business can suffer or even fail completely. So deal with any partnership in a formal and business-like manner. Before committing to a partnership, there are some potential problems that should be thought over carefully:
5 STEPS TO PARTNERSHIP SUCCESS
1. Understand what events may trigger a partnership. A written agreement is not required for a partnership to exist in the eyes of the law. If, over a beer, two friends decide to make up some bottles of a special barbeque sauce and sell it at a street market, a partnership may have formed. That means that both parties may have equal rights to the recipe and each may be responsible for all bills and obligations. So be very clear about the nature of the relationship before working with anyone.
2. Cover the details early. Before embarking on any venture which involves a partner, it is a good idea to sit down together and go over the details of the partnership, and also the expectations of each partner. Here are some issues that should be covered:
- What is the ownership division?
- Who owns what percent?
- What jobs/responsibilities does each partner have?
- How much time will each partner put in?
- How much money will each partner contribute?
- How will general business decisions be made?
- What decisions does each partner have final authority on?
- How will you communicate on a regular basis?
- How will serious disputes be resolved?
- What happens if one partner wants to leave the business? Moves?
- What happens if one partner wants to sell the company?
- What happens if a partner dies? Becomes disabled?
- How can new partners be introduced, if at all?
- Can partners work for any other company or do any other work on the side?
3. Prepare a written partnership agreement. Once these issues have been covered, partners should seek legal advice to prepare a formal partnership agreement. It may be tempting to prepare one informally to save money. This is risky – if the agreement ever needs to be legally tested, the courts will interpret from a legal view. It pays to ensure that the agreement deals with the intentions of the parties legally from the beginning.
4. Decide on the business structure. Get advice about what legal structure best suits the partnership. Different structures have specific benefits – cost of compliance, ease of entry and exit of partners, risk management and taxation. The choice of structure is one that should be made when considering all the facts..
5. Consider a buy/sell agreement. A “Buy/Sell” agreement spells out the terms by which one partner can buy the other out. In the event of a dispute or differing goals, a buy/sell agreement can enable the company to survive. Discuss ways, such as purchasing life insurance, to buy out a partner’s beneficiaries in the event of death or disability.