Should you be in a Business Partnership?
We’ve all heard about the misfortunes that have befallen business partnerships – partnerships going to the wall, one partner suing another, partners leaving on mass. And yet a partnership is still the preferred business structure for small business start-ups in Australia.
Partnerships have a myriad of uses. A sole trader may need to bring in an expert or two, or maybe they need critical mass to grow. Two or more people will always provide a diversity of skills. A partner may come in simply because the business needs another person to do more of what you do. Sometimes new partners are needed simply to provide capital.
The advantage of partnerships is that they are simple, cheap and you don’t even need a written agreement to begin. There is no need to spend money forming companies, paying wages or setting up trusts. Therefore, administration is minimal.
However, Rule No 1 ALWAYS complete a Business Partnership Agreement, if done with diligence and care the process itself is more valuable than the final document.
It’s easier to form a partnership than to dissolve one that isn’t going well. That’s why it’s important to clarify, in writing, the terms of your partnership. Get your lawyer or accountant involved in the agreement and ensure that these points are covered:
- Financial investments into the business.
- Division of responsibility.
- How profits will be shared.
- Dispute resolution process.
The disadvantages, however, are just as simple – and often emotional. One bad former experience may preclude another attempt. People who would otherwise wish to join forces with friends or relatives or even close business associates still go it alone, fearing the damage that may occur when “emotional ties” are converted into a business relationship.
As a business coach I’ve just about seen it all however partnerships are still one of the major problems faced by small business. And often its easier to ignore it and hope the problem just goes away.
The Pros and Cons of a Business Partnership: Here is a short list of both:
On the upside, partners:
- Share the risk, responsibility and work.
- Invest financially in the firm.
- Deliver complementary skills.
- Have their own network of contacts to benefit the firm.
- Provide support and motivation.
On the downside, partners:
- Take a share of the profits.
- May not have the same values or work ethic as you.
- Could leave you dangling with liabilities or law suits.
- Have a say in business decisions whether you agree with their opinion or not.
- Can negatively affect your reputation.
Are you meant to be a business partner? Who should you choose?
Partnership decisions are very individual. Some people make great partners and others don’t. And a great partner for one person may not be for another. To make partnership decisions, you need to know yourself well. Here are a few questions to ask:
- Do you want the spotlight all to yourself? If yes, select a partner that does not want it at all.
- Do you prefer a back room role? You might be wise to choose a partner who likes a high profile.
- Are you a clear communicator? If not, you need a partner who is especially skilled in this area.
- Are you afraid of conflict? Since conflict is inevitable in a partnership, you may need to go solo.
- Is it your way or the highway? If yes, partners are probably not for you.
Partners should share values and ethics
Resentment, often the result of values and ethics that are not aligned, can destroy a business partnership. When choosing a partner, consider these questions to reduce your risk of resentment.
- Do you share a vision for the future of the business?
- Do you share an understanding of how partners will be paid?
- Do you have a similar work ethic?
- Are your exit strategies compatible?
- Are the way you want to treat customers and employees similar?
- Do you respect each other?
- In your gut, are you a good fit?
A business partnership can expand your potential for success or drive your business into the ground, so set it up with care and tend to it well.