At first glance, taking on a partner seems like a great idea. You’ll be combining forces with a colleague who probably has complementary strengths and can help with the tough decisions. Sure, you've heard horror stories of badly-matched business partners before, but you two are perfect for each other.
Unfortunately, the fact is that over half of all business partnerships fail, according to small business expert Andrew Sherman, a partner with Jones Day (in Washington, D.C.). But many of those failures could have been avoided with smart planning upfront — something small-business partners often fail to do.
To increase the odds that your partnership works out, your best move is to familiarize yourself with the typical reasons for failure and what to do to make sure it doesn’t happen to you.
Mistake: Not Pinpointing Roles
Partners usually have a general idea of who will do what. If, say, you have a talent for rain-making, you’ll focus on bringing in the business, while your more analytical partner will attend to operations matters. But, often, they don’t explicitly spell out what each individual’s duties will be — and that's when problems arise.
“It gets very messy,” says Kelly Andrew Brown, an Akron, Ohio-based small-business consultant.
He points to a five-employee web-design company as a case in point. About five years ago, the founder decided to bring on a partner with more sales savvy. But, when business didn’t roll in as quickly as he’d hoped, the founder stepped in and started calling on his own prospects—without telling anyone else. Soon, he was arranging for deals on the sly, often agreeing to lower-than-normal terms the partner learned about only later. Eventually, trust between the two eroded and the partnership dissolved.
What you should do: Clearly lay out each person’s roles and responsibilities beforehand. And put in place a meeting and reporting system, so you always know what each other is up to—for example, by holding weekly meetings to discuss key business issues.
Mistake: Failing to Discuss Long-Term Goals
Just because you’re in a partnership doesn’t mean you both want the same thing — but your ultimate goals will affect how you approach the business. “You may want to build a $100 million company, while the other guy just wants to make a nice living,” says Brown.
Brown recalls three colleagues at the small division of a multinational technology company who bought out the unit and turned it into their own business several years ago. Soon after starting up, however, their differences became clear. One partner, determined to turn the company into powerhouse, worked 24/7. But the other two, who had less ambitious goals, weren’t willing to work that hard; they would show up at the office later, and often take weekends off. Slowly, over the first year, the more-driven partner became increasingly estranged from the other two colleagues, until they were barely talking to each other.
Eventually, a friend who had discussed the problem privately with all three stepped in and urged them to work out their disagreements. Thanks to that intervention, the partners were able to reach a resolution by compromising and prevent the partnership from failing,
What you should do: Discuss your specific long-term goals openly to make sure you’re all on the same page.
Mistake: Not Stipulating How to Make Decisions or Resolve Disputes
You’re likely to have disagreements about all sorts of issues. But, when you both have equal ownership, what happens if you can’t come to a resolution? Even in cases where one partner has a larger stake, you still can have problems. (In the previous technology startup example, the hard-driving partner had a majority ownership.) But “even if you have voting power from a legal standpoint, if your partners aren’t backing you, there’s going to be conflict,” says Brown.
What you should do: Introduce a formal method for making decisions and addressing disagreements. “You need to make sure that small sparks don’t turn into wildfires,” says Sherman. For most decisions, it’s usually best to agree that, say, sales issues ultimately will be handled by the partner with expertise in that area, while the more-finance oriented person will have more authority in the case of financial disputes. But, in more difficult situations, you can also turn to an advisory board or a consultant for help.
Mistake: Giving Short Shrift to Your Partnership Agreement
You should always spell out important partnership issues in a legal document. But, although this seems like a no-brainer, it often doesn’t happen. As a result, if the partnership begins to fall apart, there are no formal, objective rules for anyone to follow.
What you should do: Create a clear agreement upfront. That should include everything from roles and responsibilities, to how you’ll structure compensation. Perhaps most important may be the issue of how to exit—what will happen to the business if one of you wants to leave. “You need a game plan for what will happen if and when things don’t work out,” says Sherman. Although morbid and unlikely, you’ll also want to stipulate that if your partner passes away, you’ll have first right to buy out his or her side of the business. “That’s so you don’t wind up with your partner’s widow, who may or may not know anything about the business, as your partner,” says Brown.