Business partnerships have a higher failure rate than marriages ((about 70 percent versus 30 percent for first marriages). Once the thrill of the chase is over and financial, business and day-to-day realities kick in, it can be a challenge to make things work.
I’ve been through a number of partnerships—business and personal—myself, so my advice for success is to start with a clear understanding and hope for the best, but plan for the worst.
Draft a Partnership Agreement
When one or both marriage partners are wealthy, a prenuptial agreement is often used to define support and how property will be divided in the event of a divorce. Business partners need a similar agreement, for surprisingly similar reasons. For example, if you dissolve a partnership, even for good reasons, such as reaching a financial goal or retirement age, there needs to be a clear understanding about who gets what.
There’s a scene in an old movie where a soon to be ex-husband asks his wife if he can have a couple of items of sentimental value from the big fishing boat they’re selling. She agrees. He takes the engines. It was funny in the movie, but it wouldn’t be in real life.
Most states require a formal agreement when you enter into a partnership, but regardless of whether they do or not, you should have one that lays out how the partnership will work and what will happen if it doesn’t.
Ask and Answer All the Right Questions
“You bought what?” are probably words you’ve heard or said at one time or another. Much of the strife in a partnership, whether marital or business, stems from financial issues. Clarity around decision-making authority is crucial, too.
Your partnership agreement should clearly address the who, what, when and how issues.
- Who owns what?
- Who is authorized to make what kind of decisions?
- Who has the authority to spend money? Up to what limit?
- Who has the authority to take on debt? Encumber assets? Sign contracts?
- Who’s responsible for what?
- Will assets be left in the business or distributed?
- What will you be paid, and when?
- What if there are no profits?
- What is each partner willing / able to contribute if new money is needed?
- What happens to each partner’s share if new money or partners are added?
- What happens in the event of a decision-making tie?
- How much salary will each draw?
- How will profits be divided?
It's Been Great and All...
Sadly, business and marriage partnerships don’t always make it to their silver anniversaries. Even the best of relationships can be driven to the precipice when the unexpected happens—an accident, illness, death, or even a divorce.
Regardless of whether a partnership is split by choice or by circumstance, it will be painful. A buy-sell provision in the partnership agreement can help ease the pain. It should address, among other things, how the departing partner’s share of the business will be valued and how they will be paid.
If you’re contemplating a business partnership, be proactive. Think through what you want out of the relationship, and make sure your partner wants the same things. Once the honeymoon is over it doesn’t mean the romance has to go, too. But you do have to work at it and be prepared for the worst.
After three marriages (three’s a charm) and seven businesses, I can say with authority that a clear and shared understanding of what you want and what you contribute are key to success.
Tom Harnish is a serial entrepreneur. Always on the bleeding edge of technology, he learned what works (and what doesn't) leading projects, products and companies to success (mostly).