What You Need to Know Before Entering a Business Partnership

Here are 4 motivations that could lead to a bad partnership, and 5 steps you should take to build a healthy one.
May 02, 2014

Spend any time as a small-business owner, and at some point you’re bound to consider forming a partnership. At first glance, the synergistic effect of joining forces with a like-minded individual seems like an inspired idea, but partnerships aren’t for everyone.

Before you commit to a business relationship with another entrepreneur, there are real advantages and disadvantages to consider. Think carefully prior to tying the knot.

“There are several key benefits to creating business partnerships,” says Shawn Prez, president and CEO of Power Moves, a grassroots and alternative marketing agency that serves small businesses, as well as music industry personalities. “Partnerships give you additional support, and they provide a great way to expand your company's services and offerings without hiring additional staff and incurring greater overhead.”

The right partner can augment your skills and experience, and there is strength in numbers. Putting two heads and four hands together to compete for a big account, for instance, may increase your chances of landing the business.

But while in theory partnerships seem like a good idea, the reality is that many fail, says OPEN Forum community member Bennett Johnson, a small-business strategist and entrepreneur coach, who owns Arete Business Methods.

“With the exception of legal, medical and sometimes financial companies, the vast majority of business partnerships fail in a bad way,” Johnson says. “People enter partnerships without much thought, but with a tremendous amount of emotion. The greatest consequences of failed partnerships are the destruction of dreams.”

Poor Reasons to Form a Partnership

According to Johnson, most business partnerships fail because people enter them for the wrong reasons. “I teach my clients who are considering partnerships to explore why they want to form an alliance with someone else,” he says. If the reason is one or more of the following, he suggests that they reconsider.

Afraid to go it alone. Lack of confidence and fear of going out on your own are not reasons to form a partnership. “Being a small-business owner can be a lonely, scary experience, but that doesn't mean you should team up with someone else,” Johnson warns.

Lack of financing. If you don’t have sufficient capital to run your business, it can be disastrous to align yourself with another businessperson because of this. Doing so is likely to cause resentment and power struggles.

Skill set. Just because you’re "bad at sales" or "bad at bookkeeping" isn't good enough reason to join forces with someone who is better. These are skills that you can hire, and jobs you can outsource, without all of the attached strings.

Connections. Piggybacking on someone else’s connections is a dangerous way to go. “You should be developing your own alliances,” Johnson says.

Common Partnership Problems

Like any relationship, partnerships have their share of challenges. Some of the common problems include a varying work ethic and differing expectations.

“The goal of creating partnerships is to increase business opportunities, but if your partner is not as passionate about growing the business and succeeding as you, it may be a recipe for failure,” says Prez. “People also work differently, and that can cause problems. For instance, some people are more productive working in the evening hours, while others believe that ‘the early bird gets the worm.’"

Failure to discuss expectations and production benchmarks can also lead to trouble, Prez says. “One person is likely to feel as if he or she is bringing more to the table than the other, and that causes a very uncomfortable relationship that usually ends in separation.”

Steps to Effective Partnerships

If you decide that a partnership is an arrangement you want to pursue, keep the following in mind.

Complete strategic planning prior to partnering. “Find an expert to help guide you in making a plan for the partnership,” Johnson advises. “That guidance should include a checklist of your individual strengths and weaknesses, as well as those as a team.”

Identify why you want to become partners. “Keep an open mind about the partnership and remove the emotions,” Johnson says. “If you are a for-profit business, your goal for becoming partners should be a healthy bottom line. If you’re running a nonprofit, your goal should be the greater good.”

Form partnerships with people you respect and admire. “More times than not you will be required to work closely with your partner for many hours a day, so it's better that you both have a mutual respect and liking for one another,” Prez says.

Discuss the long-term company vision. "Strategic business partnerships are in many ways like a marriage, and both parties must be committed to the growth and long-term development if it’s going to work,” Prez says. “From the onset of the partnership, express your expectations and sign contracts with one another so everyone is clear about responsibilities, deliverables and percentages.”

Develop an exit strategy. Like a prenup agreement, an exit strategy should clarify what will happen to the company’s real and intellectual property should you decide to dissolve the partnership.

Read more articles on leadership.

Photo: Getty Images