Partnerships why and why not
Hi, I’m Jack Dunigan of thepracticalleader.com, and this is another episode in our series on things to know before you start a business. We’re talking today about business partnerships, should you become a business partnership, why and why not. Let’s take a look.
I’ve formed a business partnership some years ago, did not turn out well. I think about half of them statistically do, and about half of them do not. It is not something to be entered into lightly or flippantly or casually. It needs to be carefully considered.
So in today’s episode we’re going to talk about the reasons why a business partnership can be a good thing and why it cannot be a good thing. And the next week we’re going to talk about, for the next two weeks actually, we’re going to be talking about business partnerships and the components that make up for successful ones and what you need to look out for. A lot of people are attracted to business partnerships, but I am very, very cautious.
Here’s what a business partnership is. According to the Wex legal dictionary, which I got at Cornell University, a partnership is a for-profit business association of two or more persons. Because the business component is defined broadly by state laws and because persons can include individuals, groups of individuals, companies and corporations, partnerships are highly adaptable in form and vary in complexity. And that’s true. Major groups each can be a partner in a joint venture, but we’re not talking about that in this series. This series is dealing with small business, a business that you might start, and what a partnership would mean for you.
For most small businesses a partnership is two individuals who decide to go together and start a company or organization or a business. It is typically good friends. I see ads from time to time in various business places where someone is looking for a business partner, but by and large that’s not the case. What usually happens are two friends are sitting around and they think we could go into this, let’s do this together, and they start a business together.
Partnerships are more than business collaborations. When I ran a millwork company down in the Caribbean I collaborated often with another cabinet shop. I was not a cabinet shop, I was a millwork company, I made stuff out of solid lumber. The business that I partnered with was run by a lady who had a cabinet company and she didn’t use solid lumber very often, she used sheet goods, which are typically plywood or veneer products. And from time to time part of one of my jobs would include cabinets and the like, which she was able to make. And from time to time she would have projects that would include solid goods, doors and windows and molding and the like, which I would make and we would collaborate together on a project, but that’s not a business partnership. A business partnership is far more formal and it has far more binding arrangements (***) can often be corporations, but there are certainly legal agreements that are drawn up by an attorney.
Now, here are some reasons why business partnership can be a good thing.
Both partners share the cost of a startup. They usually invest equal amounts of money. Sometimes you have a share equity partnership, where someone invest the money and the other partner doesn’t invest any money, they invest their time and their labor for a specific period of time, which would be the equivalent of the amount of money. So they both buy in to the company with equal amounts of investment, whether it is money or labor share investment, doesn’t really matter, they both share the cost of the startup.
Both share the responsibilities and the work. So, you divided down the middle, one person does one thing and one person does another. In the partnership that I had that didn’t last very long, but I was that the front end person, I got the sales and I handle the customers, and my business partner handled the shop, the production of those things that I sold.
Both share business risks and expenses. And so, because you are a partnership agreement, you have a partnership agreement, then whatever goes right or whatever goes wrong you share equally. If it goes good everybody does well, if it goes bad well everybody does badly.
Each person in the partnership add unique skills and their own contacts in the business community or in the community at large in order to make the business a success.
Finally, a business partnership can offer mutual support and motivation. You can be there to sort of encourage each other and talk things over, and come to decisions altogether. Now that’s on the right side of things. That’s how things are supposed to work, doesn’t always, but that’s how things are supposed to work.
Here are the reasons why not to have a business partnership.
You both must shoulder joint responsibility and individual liability. In other words, you are liable for the obligations of the company together, but should your business partner default or in some cases simply disappear, just skip out, you are still liable for everything. That’s joint and individual liability. You shared together, but you are individually liable for everything, including the obligations made by another person in the partnership.
Two. You share the profits, right down the middle, you each get half. So, what often happens in the business partnership arrangement is that one does more work than the other, or at least they feel like they do more work than the other, and they feel like they should get more of the profits, but the partnership agreement almost certainly says that you share it down the middle. And so that’s a potential conflict, probably the most common source of conflict in business partnerships.
Number three, and this is a bad one too. No one has total control over the business, it’s a 50-50. And so there are often standoffs and power plays in order to exercise control over the business. 50-50 arrangements don’t work very well, in fact they work badly. People try them all the time, but this is a challenge here because nobody has total control.
Number four. Sadly, your friendship will probably not survive the partnership. Did not in mind, the guy that I went into business with we we’re good friends before. We are not good friends today.
And number five. The meeting where you sit down with your lawyer to form your partnership agreement will be the best meeting you will ever have, it will go downhill from there. Sorry to sound cynical, but it’s the sad truth, it’s going to go downhill from there.
All right, 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.”
Next week we’re going to talk about the qualities that make you a likely business partner type. We’ll see you then.