The Real Reason Business Partnerships Fail–and How to Save Yours
I met Jake (name changed to protect the innocent) at one of our business workshops recently. He had been in business for almost ten years now, and was looking to scale his business and gain more independence. When I asked him about his business, his eyes lit up with excitement as he talked about his product line, his team back home and the growth potential that he had laid out before him. He was eager to keep the momentum going.
We chatted for a while, and then headed outside for lunch. At our table were four other business owners in various stages of growth. We went around the table introducing ourselves, giving a little background about our businesses and what our pain points were at the moment.
And that’s when things got interesting.
The man next to Jake began telling his tale, and shared that he was dealing with a business partner issue. He was essentially cutting his partner a check every month despite the fact that his partner refused to ever come to the office or participate in the business. As the other man was talking, Jake grew quiet and a look of concern fell across his face.
When it came time for Jake to introduce himself, his entire demeanour changed. His enthusiasm turned to remorse as he shared his biggest struggle – his brother. For the past nine years, Jake had been paying his brother each and every month like clock work. While he had poured his heart and soul into growing the business and creating something that would give his family financial security long after Jake was gone, he worried about the future and what this partnership would mean for the business.
Unfortunately, after 25 years of business coaching I can tell you that Jake’s story isn’t unique. And there are three big reasons why….
1. Uneven Workload, Equal Pay
This is one of the most common problems with partnerships, and Jake unfortunately knew this scenario all too well. When you first start the union, both parties are excited and ready to grow the business. But over time, that enthusiasm starts to wane as the workload and stress level increases. All parties must feel fairly treated or the partnership will fail. Begin by dividing up the contributions all the partners are making to the business and put an equitable value on each of these contributions from the beginning. Look for external measures of value – what would you have to pay for this contribution on the open market? Rewards and control should follow contribution and risk.
If things change over time (and they will), your agreement needs to reflect how this will impact profit splits and equity ownership and by clarifying not just who is responsible to do what, but also the relative value of each of these pieces, you create a cleaner trail of the objective standards to help guide these later tough conversations.
2. Scaling and Future Growth
Another common concern I see far too often is disagreements over the future. One partner wants to see the business grow and scale while the other grows bored and complacent and moves their energy and attention to other things.
Which is why it’s important to think about these types of scenarios early on when all partners are brought into the project. This means having clear buy/sell provisions, disclosures and representations, and formal expectations of performance.
Also make sure you cover the five “D’s” in your partnership agreement:
- Death — What happens if one of the principals of the partnership dies
- Disagreement — What happens if you and your partners reach an irreconcilable difference on a fundamentally important issue?
- Debt — What happens if any of the partners becomes financially insolvent and declares a bankruptcy?
- Divorce – What happens if one of the married partners gets divorced?
- Disability — What happens if one of the partners is hurt and is no longer able to contribute time and talent to the partnership?
3. When Emotions Get In The Way
After a little more discussion, we found out that Jake had covered all his bases. He had a clear cut agreement in writing about responsibilities and profit sharing, and he had even looked at how they would handle the 5 D’s. But yet, he continued to write checks every month. Why? He went into business with his brother. The sheer thought of standing up to his brother, hiring a lawyer and fighting for his business terrified him. He was emotionally invested and therefore chose to push his resentment down deep and move forward.
So my last piece of advice when it comes to creating successful partnerships: be extra cautious about going into business with family. Only bring on a formal partner if that is the only way you can gain the talent, resources, or other element from your prospective partner.