A small business partnership is like a marriage – you need to choose your partners wisely. That is some smart advice.
Especially in business, many do not.
While you may have a stellar track record when it comes to your life partner, it can be more difficult to maintain the relationship with your business partner. I have been married to Gayle for 40 years and we are still enjoying life together.
And I’ve successfully brought people together to partner in buying a small business. But when it comes to the partners I’ve had in my own businesses, I’ve not been as wise. One of the partnerships I have been involved in worked for 15 years; the others unravelled after two or three.
In the longest lasting one the partners were compatible, of the same age, capable, smart, honest, hardworking, each making great contributions.
But as time passed, our personal goals took us down different paths: one partner wanted to retire, one wanted to focus on their young family, minimize risk and maintain the cash cow while I wanted to continue to grow the business.
In other instances, I found out the hard way that the individuals were dishonest and in fact, stealing from the business. The temptation was there and we didn’t have proper controls.
What happened to me is not uncommon-more business partnerships fail than succeed. Yet some thrive. So how can you reduce the risk and set the course for success?
Evaluate the needs
A partner can help share the load, bringing in financial resources, services, property or skills that you lack and need to “complete” the business. Sharing the decision-making may not come easy. Making their own decisions, after all, is one of the perks small business owners enjoy. But splitting the areas or aspects of the business and related responsibilities and authority is easier when the partner’s skillsets or talents are complementary to yours.
Screen your prospective partners and get to know them well. Make sure they are aligned with your values and goals. Do you both want the business to get to the same place, the same way? When it comes down to it, which will they place first-he best interests of the business or their own?
One model I’ve seen work well is where an owner or prospective owner brings in a younger partner who will eventually take over the business-almost like a parent-child relationship. In one example, the owner wanted to keep a guiding hand in the business, but clear more time for himself, shedding the day-to-day weight of operational concerns. In another of the more recent instances where I brought two clients together to purchase a business, the older of the two contributed wisdom and resources, while the younger brought energy, drive and field management skills.
Formalize the details
Have everything spelled out in a legal contract. Set out contributions, roles, rights and responsibilities. Set out who is contributing what-cash, property or services-and what ownership percentage each will have. How will profits be allocated? How will decisions be made and by whom? What will happen when one partner leaves the business? Can an ownership be transferred?
A buy-sell agreement protects each partner by requiring a sale under certain circumstances e.g. a partner becomes disabled, gets divorced, or dies, and specifying the terms, including the valuation, beforehand.
I’ve done valuations under a shotgun clause, where one partner makes an offer and the other has to accept or buy the offering partner out at the same rate.
Buy-sell agreements are essential in keeping everyone honest.
While a new business or partnership starts out with much goodwill and the excitement and energy of common goals, things can and will diverge over time. As a recent article from the Sunbelt Texas office says,
“Good business partnership agreements are all about the ‘what ifs’. Sit down and talk about all the outcomes and how they will be addressed.”
It is just as important to have everything defined and agreed to beforehand when your partners are family and friends. Success has a way of changing people.
Regular communication is essential
Like a marriage, a business partnership takes work. Remember to check in and report back. Keep your communication open and honest. Don’t put off difficult discussions-share your opinions, deal with and resolve the issues. Work through your differences. Use your operating agreement for clarification.
“Remember that every vacuum in communications can be filled with negative assumptions, so keep talking and drill down into issues so that agreement can be found,” says Paul Reicks, founder of The Inner Circle mid-Atlantic, in the second article of his four-part series on business partnerships.
Each individual wants to be treated fairly, respected and rewarded for what they contribute. A good partnership will work to those ends for all involved.