As an accountant I see many Small Business partnerships go pear-shaped and whenever a client asks me about going into partnership, my most common recommendation is don’t do it. That might seem a little negative at first however I have some logic, statistics and even some personal experience to back this.
Business partnerships are more fragile than marriages. In a marriage you have a strong foundation called love to fall back on but in a business relationship that is obviously absent.
When you look at why marriages breakdown one of the most common reasons finances – be that either not enough or just different views to spending, investing, etc. So let’s think about a business partnership – where the relationship is all about finances – and the very real probability of the relationship breaking down becomes a lot clearer. In fact, statistics show 80% of business partnerships fail…compared to a 30% failure rate for marriages.
You see money brings out the absolute worst in people and makes even the nicest people turn ugly. Although we can anticipate and even plan for differences, it’s often not until we are faced with very real money decisions or when money really becomes tight that those very ugly traits surface.
So what can you do to avoid business partnership disaster?
At the very outset, when you are first considering getting into a business relationship with someone the first thing you need to address are your core values. If you’re like me, you’re probably thinking well that’s obvious but what’s not obvious is what happens when those core values are tested.
I have a friend who was in a business partnership where they were both absolutely sure that integrity was a core value they shared.….right up until they lost a client because one of the partners wouldn’t do something a client requested because it wasn’t legal and the other partner went ballistic because they’d just lost a big client and accused the partner of being ‘too straight’.
Regardless of how well you think you know someone you really don’t know them until values (and money) are tested
The second thing is to talk at length about expectations and then document them….all of them. Expectations around the number of hours each of you will work, revenue generation, roles and responsibilities, decision making, remuneration, communication, cash flow, holidays (school holidays), sickness, conflict resolution and importantly what are deal-breakers in your relationship.
At the beginning things are all wonderful and very exciting and the opportunities seem endless – or else you wouldn’t be even considering it – but it’s important to actually articulate and more importantly document what the expectations are so that you have a baseline you can come back and refer to if and when necessary – and I can promise you it will be necessary.
The biggie is to have a written formal legal agreement in place.
Regardless of how long you’ve known each other, whether your related, how well you think you know each other, how long you’ve worked together in another business before, how perfect this match made in heaven seems or even how low risk it may seem at the time.
The ultimate goal with a legal agreement is to never ever need it however you need to ensure that both of you are protected in the event of unforeseen circumstances. These circumstances could be something as simple as a disagreement where you need a way to resolve stalemate situations or more catastrophic situations such as the death or permanent disability of one of the partners – remember just because you went into business with someone doesn’t mean you’d be happy to operate the business with their spouse if all of a sudden they weren’t around anymore.
However, given the statistics are against business partnerships surviving, it is paramount that you have a have a clear, agreed exit plan before you even commence business together. Come up with a plan that covers all the worst possible scenarios while the feelings are positive and you’re both thinking rationally.
This is perhaps the most important thing you can do to ensure business success. By thinking about the worst possible scenarios you are playing the devil’s advocate and considering what can go wrong and why as well as getting an insight as to how you would respond and seeing what and how your prospective business partner is thinking – this step can be an eye opener all of its own and should definitely not be missed for skipped for absolutely anything.
Originally published in Smallville