One of the most popular ways for an entrepreneur to start a new business is to form a partnership with one or more other people: They join forces with friends or associates who have complementary and mutual supportive skills that are necessary for the success of the business.
But a partnership can be the worst way to start a business, if you don’t know what you’re doing. Because entrepreneurs are likely to be optimistic and action oriented, they’re often impetuous and unthinking when they decide to form a business partnership. To protect yourself, you must be careful to do your homework before entering into a business partnership of any kind. By understanding the nature of partnerships and by thinking them through in advance, it’s possible to form and develop successful partnerships over the course of your entrepreneurial career.
There are two important rules to consider when it comes to partnerships. The first is that a partnership is always easier to get into than it is to get out of. The other is that the time to think about a business partnership is before you get into it in the first place. Partnerships often start like romances or marriages, with high hopes and good intentions on the parts of all people involved. But just like a marriage, they can end with bitterness, anger, bankruptcy, lawsuits and ruined relationships.
Before you even entertain the idea of entering into a partnership with someone, it’s important to understand the strengths and weaknesses of this business structure.
Starting a business usually requires the talents and abilities of more than one person. That’s because you need someone who’s excellent at detail work, at producing the product and at administrating the business. You also need someone who’s excellent at sales and marketing and at generating revenue and cash flow. If both partners have strengths in the same area, one of them is obviously not needed.
The purpose of a partnership is to help the partners achieve greater financial results together than would be possible if each of the partners worked individually. For this reason, each partner must have skills that the other partner lacks. Together, the partners should form a powerful combination that’s capable of generating economic results.
Keeping that in mind, understand that the starting point of a successful partnership is achieving absolute clarity before you begin. You must be clear about the values, mission, purpose and goals of the business–and you must both agree on those things. You must be clear about the performance requirements and responsibilities of each person–and you must both agree on those things.
The biggest problem in partnerships generally has to do with the individual responsibilities and work requirements of the partners. It’s almost always the case that one partner makes a greater economic contribution to the business and works harder than the other. But the partner who works less and contributes less wants the same rewards as the more valuable partner.
To help solve that dilemma, remember that to make the business a success, the focus of the partnership must always be on sales and revenue generation. Therefore, the person who can generate sales and revenue makes the most valuable contribution to the partnership and is therefore entitled to a greater percentage of the profits.
Understandings prevent misunderstandings. Agree on the job responsibilities and standards of performance for each partner. Set up the partnership so both parties know exactly on what terms they can leave the partnership should things not work out as planned. And decide upon a formula now to determine the value of the partnership should one partner decide to leave.
Disagreeing over money and control is one of the major problems in partnerships. How will the profits of the partnership be divided? Agree in writing about how the money is to be accounted for, divided and distributed. Give one person 51 percent or more of the ownership and control of the partnership so there’s never a 50/50 impasse that can’t be settled. Be sure to discuss each partner’s legal liability for the actions of the partnership. And continually review and discuss, at least once a week, the partnership’s financial status.
Your partnership agreement should be carefully drawn up and all elements should be agreed upon in advance. Always write a contract as if the business is going to break up sometime in the future. It may sound crazy now, but when you write the agreement, you should imagine that your partner is going to become your enemy in the future. This is one of the best ways to protect yourself from the very beginning. And be sure to have your partnership agreement reviewed by a lawyer who can advise you about the dangers inherent in this business structure.
Sometimes the very best partnership arrangements are the ones that you don’t get into in the first place. So think any partnership through carefully before you act.