The Two Partnership Killers – And How To Avoid Them
The Two Partnership Killers – and How to Avoid Them.
You’ve probably heard a business owner say “partnerships don’t work.” The statement is typically followed by a story of what a former partner did (or in many cases did not do) and the tale of a lost relationship.
I’ve found that, no matter the story, there are two primary things that lead to the death of partnerships.
Though rarely noticed early on, these two things start small and, over time, cause stress to grow into tensions, then tensions to expand into disputes, and disputes to evolve into outright conflict and destruction of the partnership business. Together these two things cause failed friendships, put people out of work and cause big financial problems.
Shockingly, these two partnership killers can be easily avoided and rendered benign and powerless. Like avoiding an infection with a simple alcohol swab, the solution for both is simple. Yet partnerships fall prey daily.
So what are these stealth partnership killers?
- Unstated Expectations; and
- Verbal Agreements.
Each of us has expectations for every situation and for every relationship. Each partner has his or her own set of expectations for the partnership relationship.
The first problem arises when the partners keep any expectations secret. It would seem contrary to one’s self interest to keep expectations secret, but they do so because they don’t want to rock the boat, or because they’re assumed.
- The type of business to be built: lifestyle or high growth
- Whether the business is built-to-sell (exit) or built-to-cash flow
- The contributions of each partner (type, amount, timing and value)
- The level of committment of each partner- part time, full time or greater than full time, and hours of work
- The deliverables (results of work) each partner will provide
- Whether the partners will guarantee loans and credit lines of the business, and
- What happens if a partner wants to leave or dies.
Honeymoons aren’t only for marriages. They also exist at the start of a partnership. No partner wants to offend the other. Everyone is looking to the future and how much money will be made. Difficult decisions are not discussed because it could lead to tension. And they believe tension isn’t good.
Other expectations are assumed to be mutual so they’re not considered. Only, there’s been no confirmation that the expectations are mutual. One partner wants to grow the business to cash out in two years while the other wants to settle in for an easy life harvesting the cash flow. These two paths require different tactics that are often mutually exclusive.
Unfortunately, this plants the seeds of the partnership killer. When expectations aren’t met and the path of the business isn’t in line with all partner goals, partners become frustrated and stress starts.
This partnership killer is avoided by acknowledging that it’s alright to talk about divorce before the partnership marriage is completed. A business partnership isn’t a marriage – it’s not ’til death do us part.’
Having the conversation – and making it a detailed granular conversation – will either make the relationship stronger over the long term, or kill it now before time and money have been invested and lives changed. Either way it’s a win.
Many founder’s have decided not to move forward with a planned venture because, after having an open and honest discussion, they discovered their goals weren’t in alignment. Nonetheless they were grateful to have discovered early rather than after having spent their time, money and life energy. Often they remain friends.
A full discussion of expectations, though, is not enough. Even the most comprehensive discussion can be undone by a verbal agreement. In fact, a verbal agreement is effectively no agreement.
We humans have lousy memories. Everything we see and hear, then subsequently “remember” is colored by our personal biases and expectations. We remember discussions in the light most favorable to ourselves; we don’t actually remember the occurrence.
Unless there’s something staring us in the face showing that our memory is inaccurate (and sometimes not even then), our current desires cloud out (and render unreliable) the past memory.
Therefore, agreed upon expectations must be put into a written agreement that has specific remedies for a breach and is signed by all of the partners.
Avoiding the unstated expectations and verbal agreement partnership killers will remove many common partnership problems and increase the odds that your partnership will be profitable and long lasting. And, even if it isn’t long lasting, the end of the partnership won’t take down the business with it.
At Entrepreneurship Law Firm we help business partners avoid these problems by:
If you have questions about a partnership agreement, shareholders agreement, buy-sell agreement, operating agreement or founders agreement, give me a call at 407-649-7777.
- Guiding a discussion that includes key areas where partnership expectations go awry using a three page checklist of issues developed over twenty years of working with business owners.
- Providing advice about the consequences of the options selected andhow to improve the benefits of the partnership agreement for both partners.
- Preparing a comprehensive written agreement that is based on the decisions of the partners, rather than a cookie cutter form.
- Reviewing the final written agreement, paragraph by paragraph, with the partners so each understands what is being agreed upon and is sure that the agreement reflects the decisions the partners have agreed upon.
Florida Revised LLC Act Seminar:
In 2013 Florida adopted a new Limited Liability Company Act (Section 605, Florida Statutes) that took effect in January. After December 31, 2014, the new law will apply to previously formed limited liability companies.
If you have an LLC, you must determine what changes should be made to your operating agreement to make sure it complies with the new law. Some of these, if unchanged, could result in personal liability for you. And, if you don’t have an operating agreement, the new law provides a default operating agreement that you may not like.
Peggy Hoyt (of Hoyt & Bryan) and I will present a no cost seminar next month to show you the major changes and how they effect you and your business.
The seminar is scheduled for March 25 at my office in downtown Orlando. Only 8 seats are left.
Call 407-649-7777 to reserve your seat now. You don’t want to miss this information that is crucial to your business and your financial success.
If you can’t attend, give me a call at 407-649-7777 to set a time when we can talk to make sure you and your business are protected.