Whenever I mention “partnerships” to business owners, I invariably hear groans and tales of partnerships gone bad. Many swear off partnerships period.
But, while it is true that partnerships can become problematic, the upside can be significant. Partnerships have created some of today’s most valuable businesses (think Google / Alphabet). Plus, for many small businesses, adding a partner is the first step of a succession plan.
Here are six things to consider in order to create a successful partnership:
What is the business reason to enter the partnership? Retention of a key employee? Business succession? Complementary skill sets of the partners? Additional capital?
Whatever the purpose, it must guide the terms of the partnership. For instance, if the reason is complementary skills, ensuring that the partners are required to work for and provide their skills to the business is essential to a functioning partnership.
Do you and your partner have the same business goals and interests? Often, partners don’t have in-depth conversations about goals and interests for fear of causing discord. But alignment of goals and interests is essential for a well functioning partnership.
For example, if one partner is looking to operate the business on a long-term basis, but the other wants to grow and sell in five years, there’s no alignment. Similarly, if one partner receives a healthy salary, but there’s little or no profits to distribute to the other partner, their interests aren’t aligned.
Do you really know your prospective partner? For the most part, people don’t change. You should expect your partner to be the same person she was in prior business arrangements. If she had three prior business breakups, you’re likely to be the fourth.
Do all partners have skin in the game? Growing a business is difficult and there are times when it would be easy to throw in the towel. Having a financial stake in the business means a partner is less likely to walk away.
Is there an easy way to undo the partnership? Even with the best preplanning, a partnership can fail. Life circumstances can change people and their life goals (think divorce and new paramour). So, there must be a fair and straightforward way to unwind the partnership without relying on the partners to come to an agreement when they’re not happy with one another.
And, by the way, this isn’t the traditional ‘right of first refusal’ provision. These simply don’t work to fairly split the partnership for many reasons.
Should the partners participate in a comprehensive guided discussion to create the terms of the partnership? Though partners will often consider some of the more common issues that should be addressed, an in-depth discussion leading to a comprehensive partnership document creates the greatest chance of partnership success because it ensures that partners have discussed the crucial issues and, should something not work, there will be a structured way for the partners to split and protect the business.
A comprehensive guided partnership discussion is what we provide in the Partnership Design Session. If you’re considering a partnership, call us to learn how we can guide you and your partners through a comprehensive partnership terms discussion to create a long-lasting protected partnership.
