Starting a business with a partner offers many benefits, not the least of which is having someone to share the many responsibilities of running a business. But partnerships can quickly go bad if you don’t give it ample forethought and planning. Consider these pros and cons to be sure your partnership lasts.
Ten years ago, Samantha was sitting in her best friend Rachel’s kitchen, and an idea was born for them to start a business together.
Their only consideration was the excitement they felt. They soon had their first client, and agreed they would each work an equal amount of hours and split their profits 50/50. Within a year, their client base increased to the point that it allowed them to each work their goal of 30 hours per week.
After a few years, Rachel’s time on the job and quality of work suffered. For every hour of work Rachel performed, Samantha was putting in two. Clients commented to Samantha about their dissatisfaction with Rachel’s job performance. Rachel was sensitive by nature and exploded in teary screams when Samantha tried to gently tell her that the quality of her work had deteriorated.
Instead of performing client services together, Samantha slowly transitioned the business whereby each was independently attending to client needs. A few years later, Rachel was down to one client while Samantha’s client base was teeming. Their partnership soon dissolved, and so did their friendship.
This real-life scenario is just one testament to the fact that a business partnership formed without necessary forethought is likely to be doomed to failure. With the proper planning and consideration, though, a partnership can be an unequivocal success. It is the simplest and least expensive co-owned business arrangement. Additionally, businesses with multiple owners are more likely to survive longer than sole proprietorships, says Economist Brian Headd of the U.S. Small Business Administration.
As with other business considerations, though, partnerships can be a good or bad thing depending on the parties and circumstances involved.
Some possible pros:
- Shared cost of start-up.
- Shared responsibilities and work.
- Shared business risks and expenses.
- Complementary skills and additional contacts of each partner can lead to the achievement of greater financial results together than would be possible apart.
- Mutual support and motivation.
Some possible 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.
- Shared profits.
- You do not have total control over the business. Decisions are shared, and differences of opinion can lead to disagreements, a “falling out,” or even one partner buying out the other.
- 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, you would be well served to first determine whether or not you yourself are cut out to be the “partner type;” and if so, to thoroughly investigate prospective business partners as well.
Are you the business partner type?
Do you prefer to do things solo? Be aware that the longer you’ve worked for yourself, making decisions without consulting anyone else, the more difficult you’re likely to find sharing the decision-making.
There’s also a chance that one business partner may not work as hard as the other, but will want the same rewards as the more valuable partner. If you have a low tolerance level for this type of inequity, partnership may not be for you.
Related: Avoiding Partnership Pitfalls
Is your prospective business partner a good match?
A business match is much like a marriage, and just as one would normally take great care, time and consideration in the selection of a mate, so it should be in the selection of a business partner. During your “dating” period, here are some questions to ask yourself to find out if you’re compatible:
- Do we have the same motivation, values and similar work habits?
- 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.
As tempting as it is to go into business with a friend or relative, be aware that there’s a big difference between getting along with someone on a social basis — and getting along with the same individual amidst the daily stress and strain of running a business. Many a friendship has been lost forever to a business partnership gone bad.
Since a partnership is typically much easier to get into than to get out, you’ll want to achieve absolute clarity at its onset. Avoid any potential problems by making sure duties and responsibilities of each partner are detailed in a legal agreement. This agreement should include and set forth: division of labor including who’ll be responsible for making purchase decisions; 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.
Involve a lawyer and an accountant from the outset to help form your partnership and to draw up legal agreements. And don’t forget, take your time. Just like a good marriage, you’ll want this business partnership to last.