It's an exciting time! Your mind is swirling with new ideas about your new partnership venture. You and your partner have signed the necessary papers, decided on a company name, investigated marketing avenues and suppliers, submitted a business plan to your financiers and had a modern letterhead and logo designed. You're sure to be successful! Finally, you get to be your own boss! This is going to be Great!
But the success of your partnership is far from a sure thing. Most partnerships fail within several years. While low sales and marketing missteps certainly contribute significantly to that equation, there are other hidden factors which can, and do, derail a partnership even when finances are solid. When two or more people join forces to start a new venture and plan to be active in its implementation, many dynamics will develop which can strain the relationship.
People rarely investigate and discuss the politics of the partnership before they dive in. There are rules to be followed in any relationship, and partnerships are no different. Listed below are some of the pitfalls which need to be discussed and defined just like the legal documents or the partnership will struggle to survive.
- The partners need complementary skills - Too often colleagues who work together and perform the same job feel they can form a company and do better on their own. The only problem is both partners have the same exact skill set and want to do the same tasks within the new company. Partnerships which are successful have individuals with different but complementary skills. A partnership consisting of technical, administrative and marketing specialists gives everyone their own space to be creative and bring something different to the partnership.
- Spouses must support the partnership - If any of the spouses whose husband/wife is a partner disapproves of the partnership, it will not last. If the new venture requires a personal investment of funds, takes too long to turn a profit, occupies too much of the partner's time or gives the perception to the spouse that the other partner(s) are not pulling their weight, dissension will begin at home which can torpedo the partnership.
- Profit sharing must be fair to all partners - The shortest path to dissension is if one or more of the partners feel they are contributing more than they are getting out of the relationship financially. Watch out for profit-sharing plans which weight some of the profits more toward sales, marketing or e-commerce. The technology or administrative people will feel slighted, as they view their contribution to be just as valuable. I believe the primary cause of failed partnerships is a partner believing they are doing more to bring success than the other partner(s), and a feel they are sharing profits disproportionate to their contribution.
- Define what expenses are partnership expenses - What if one partner wants to take his/her spouse to an industry convention. Can they fly first class? Does the partnership cover the spouse's expenses? What is a reasonable cost for entertaining clients or prospects? What if your partner presents a $1,000 bill for reimbursement for drinks, dinner and entertainment? What if your partner spends $800 on a laptop computer which they keep at home, saying they need it for work when they travel? Make sure your partnership agreement defines what is and is not a partnership expense. As soon as one partner feels another is taking advantage of the partnership for personal expenses, travel or entertainment, the trust factor is lost and the relationship is in danger.
- Document the expected time frame for success - The fastest way to make a spouse nervous is if money is flowing out of the household instead of in. You and your partner probably understand that the new venture will take some time to gain a foothold. Many spouses are nervous about entrepreneurship and will take a cut-loses-and-run approach if they feel the new company is not successful quickly.
- Have adequate start-up capital - This point is in direct relationship to point five, as you want to ensure you can survive unexpected delays in service delivery, sales development or other unforeseen factors which may delay your success. If you think it will take six months to turn a profit, have resources to cover expenses for twelve months.
- Nail down the numbers - How often will the partners take a draw or salary? What if there isn't enough money in the account? How much partnership money can any partner spend without approval? At what spending level do all partners need to weigh in on spending decisions? Who writes the checks? Who signs them? Who sets priorities on what bills are to be paid first? How will you resolve the inevitable disagreements on some spending decisions? When it comes to expenses, some partners feel their salary comes first, and others feel the health of the partnership comes first. Know what philosophy you are working with.
- Understand and define each partner's roles and responsibility - Each partner should bring different skills to the relationship. Define what tasks and decisions rest with each partner, based on their experience and expertise. Make advance decisions on outsourcing for specialty tasks. Be cautious of service providers who have a strong personal relationship with a partner, as that could give that outside person unintended power in the decision making process. For example, what if none of the partners are competent at accounting. Who will keep the books? Handing this task to a spouse or son/daughter with limited experience will lead to trouble just as hiring a partner's close friend could.
- Have open lines of communication - The key to any activity or venture involving two or more people is teamwork. If I may steal elements from every sports analogy ever written, each partner must understand their own strengths and weaknesses, be prepared to cover for their partner when needed and communicate openly about strategy, problems, concerns and new ideas. The minute any partner begins to keep frustrations or new ideas to themselves, the partnership is in trouble.
A partnership is like a marriage, challenging enough in good times, tougher in bad. The odds are already stacked against you when you make the basic decision to go into business with an active partner. Keep the odds in your favor by knowing the answers to the above questions.
Donnelly K. Eurich, CAE, CMP is President/CEO of Eurich Management Services, LLC, an accredited Association Management Company located in Lansing. Eurich Management manages non profit organizations and Donn provides numerous consulting services to non profits including strategic planning facilitation and seminars on understanding budgeting and financial statements. He can be reached at Donne@eurich.com or 517-327-9207. The company web address is www.eurich.com.