“If you want a lifetime of misery, marry with the intention to change behaviour…”
We recently discussed the benefits of partnering as a start-up to exploit the potential upside of taking the various options available to entrepreneurs. There, of course, some serious potential pitfalls and hazards to creating a partnership or a joint venture. Working with people is probably one of the greatest challenges facing anyone in business, let alone the start-up entrepreneur! Charlie Munger’s quote above hits the nail on the head, make sure you get married to someone in your business that has the correct attributes for your short and long requirements. Making a marriage work involves handling a volatile mix of partnership issues: ego, money, stress, monthly overhead and day-to-day expenses. Throw in some employees you must manage, and you have a good idea of the work required to make a business partnership successful.
Some of these issues and will be discussed in further detail this week with the view to enable the entrepreneur to be aware of, and avoid, potential problems with choosing a business partner.
The literature on this matter clearly reflects commonly recurring themes affecting partnerships across various industries and in different types of partnerships. Again, Charlie Munger’s quote is pertinent to these problems, with people difficulties playing a large role in breaking down partnerships. Another major problem is that of the business being undercapitalised, resulting in tensions in the partnership that are akin to newlyweds who are struggling financially.
Steph Wagner, in an article for Entrepreneur (www.entrepreneur.com), writes of the complete mismatch in her partner’s interpretation of managing the finances compared to hers that led to the breakdown in the partnership. These money issues, such as the size of each partner’s salaries and how to treat unexpected windfalls in profit, are almost sure to founder the ship unless clearly stated contractually before the partnership is consummated. Key issues such as capital expenditure on purchases of a strategic nature, versus supersizing your salary, need to be understood implicitly by each partner in the business. Disagreements over salaries can stall a business right out of the gate, so it’s important to get on the same page before anything is formalised. Each party needs to discuss their expectations regarding salaries to ensure that the business will be in a position to sustain these financial requirements.
The dividend policy is another area of potential discontent. How to treat the profits of the company should be established before the partnership is formed. Of course, most experts would agree that newly formed businesses should plough most, if not all, profits back into the business for strategic long term growth. Instant gratification does not only apply to toddlers however, so all partners need to be aware of each other’s expectations in this regard.
Financial infidelity is more difficult. Suspicions that your partner is stealing money from the business can be devastating. However, accusing your partner of the act, while failing to establish and document the allegations, could result in defamation claims and create a highly contentious relationship going forward.
To avoid this scenario, create a process of checks and balances wherein one partner oversees the day-to-day accounting, while another is responsible for account reconciliations, including (but not limited to) banking, credit cards, trust accounts, accounts receivable and accounts payable.
Of course, none of us want to be suspicious of our business partner regarding money, so it may be a good idea for all the partners to conduct background checks before the partnership is finalised. This should eliminate any suspicions, and should also allow for greater transparency between the partners.
Working with other people in your business where you used to have the sole discretion with running the business, is almost a certain passion-killer. The entrepreneur needs to be aware of their own shortcomings and of their potential partners. The idea of the partnership should be that the whole is greater than the sum of the parts, where your, and your partners’ shortcomings, should be overcome by the very establishment of the partnership. This implies that very different types of people may be combining to create the partnership, and most people struggle to work with others that have a vastly different world view. Just think of an accountant and an artist trying to figure out strategic direction…
Dave Smith, writing for inc.com (http://www.inc.com), quite rightly mentions that communications is the cornerstone of every happy marriage, and the downfall for many failed partnerships. Problems are bound to arise with every new business venture, and proper communication at the earliest juncture is crucial to the survival and ongoing success of the partnership. Managing expectations is the key issue here, making sure each partner is absolutely aware of problems as they arise, and before these become a festering issue.
Broken Telephone Syndrome
We all know the game from our childhood, where we have to pass a secret message on to the next person and the last in line tries to say what the original message was that was sent down the line. Normally a garbled mess! The same ailment can easily afflict the partnership. In the early stages of every partnership, the partners typically convene to share their visions, hopes, and plans for the future of their company. In addition, it's also beneficial at this point that the partners decide on procedures for when specific obstacles come their way. Neglecting to lay out these details together can be costly to your relationship, as well as to your growing company.
Partnerships have the potential to make better business decisions than sole proprietors, but every partnership decides matters differently. There's no perfect, proven way for business partners to make decisions, and moreover, it doesn't actually matter what system you choose to make decisions. Just make sure that from the start it is consistent and agreed upon by both partners. Every business has to decide how they make key strategic decisions that will have long-term consequences on the business.
In any partnership agreement, define the terms of an exit strategy that allows you or your partner to walk away from the partnership, or that provides options to buy out the other party. This can be done very clearly and simply, without imploding the operations of a successful business. Of course, this should be conducted before the partnership is formed.
While most of the above article reflects on the potential problems facing a partnership, it is certainly not all bad. The partnership should be a stronger, more viable business than the sole proprietor, and the strengths of each partner needs to be leveraged to attain long term growth.
Understanding and accepting that people are different to you will certainly help with all your relationships, let alone your business ventures!
As with all partnerships, problems will arise and there should be processes documented while the relationship is rosy to be used during the stormy times. Differences of opinion and arguments are certainly not grounds for dissolution. Like with all marriages, these will happen. The decision will probably boil down to whether the partnership should be fixed (resolved), or not (dissolved).
A strong and experienced board of directors, including independent directors and an objective chairperson, should be appointed in the start-up company sooner rather than later, as these wise “grey beards” should be able to provide sage guidance to the business to improve its chances of sustainability in the long term. Having access to an objective third party, almost like a marriage counsellor, should assist with many of the difficulties described above, especially with personal interactions.
Financial infidelity? No cure for that besides jail time!
Smith, D. Five Reasons It Might Be Time to Find a New Business Partner. 25 March 2011. Accessed 22 June 2016 from http://www.inc.com/guides/201103/five-reasons-to-find-a-new-business-partner.html
Wagner, S. The Two Biggest Money Problems That Can Ruin a Business Partnership. 10 March 2015. Accessed 22 June 2016 from https://www.entrepreneur.com/article/242513