I hate to be a skeptic here, but the majority of business partnerships end in a tragic falling out. There are an occasional few who make it work. I applaud their success! It takes dedication, open communication and a clear outline on roles and responsibilities to accomplish that.
Typically entrepreneurs fall victim to one of the many myths about partnerships. These set the partnership up for failure. I know this because I am the guy they call in to divide the company after the break up. While it started out dreamy in the beginning, the end can be ugly.
So if you are considering entering into a partnership, tap pause. It will be more challenging than you think.
To help illustrate the challenges, here are the 5 biggest myths about business partnerships:
1) The Ying to Your Yang
There are three main areas to every business:
- Sales & Marketing
No entrepreneur or CEO excels at every area of the business. That would be a modern day super hero. The same charisma to close deals doesn’t always translate to the executional side of the business. The same can go for the attention to detail in creating the widget translating to managing operations.
So to compensate, the default is to bring in a partner to complement your strengths.
But 1+1 doesn’t equal 3. As employees, your team will execute tasks to your standards. They trust your judgment. But, once you bring someone in as a partner, it changes the relationship.
First, their perspective of their opinion starts to change. As an employee, your decision was the final say. As a partner, they may believe their decision should be the final say.
Second, they will prioritize their area of specialty. While this is why you brought them on, you will prioritize it differently than they do. If they are a natural salesperson, that’s where their energy will go. Days will be spent on the golf course landing large clients. That work looks different than managing a team of 300 people. Especially when sales start pushing boundaries on your team’s capacity.
As a result, gray areas develop. Gray areas lead to discontent or resentment.
2) Shared Goals
Your partner doesn’t want the same things from the business as you do.
They might today, but life happens and priorities change. As life evolves, there will be issues around the three main drivers:
Life changes your commitment and desires around each of those drivers in relation to the business.
For example, let’s take two single 23-year-old partners. Things start out great and the business booms. Both partners put in upwards of 50 hours a week to spur growth. As time goes on, partner A gets married and has several kids. One has a disability that requires an expensive medical plan. Partner B gets married, but doesn’t have any kids. They want to travel the world.
Partner A will be very focused on low risk, steady growth with a standard workweek. The main goals will be to provide a stable income, comprehensive medical insurance and a normal environment for the family.
Partner B will want to explore higher risk endeavors that open possibilities for reoccurring revenue. The main goals will be to establish income with minimal effort to support an explorer’s lifestyle.
Life happens. Priorities change. How do you think your partnership will weather those changes?
3) Partners Work Harder Than Employees
“If I make them a partner, they will work harder, be more dedicated and we will be more successful overall.”
Sounds great right? If only it were that easy.
Ownership takes risk, liability, cash infusion, hours, creation, time and more. Just because you wave a magic wand and give someone ownership doesn’t mean that you will get all those for free.
In fact, giving ownership away can actually cause the reverse.
Ownership can be a burden. Once someone becomes a part owner, you weigh them down with the ins and outs of the business. The two biggest are risk and liability. This will change the way they approach the business. All of a sudden, their neck is on the line for your next business venture.
Instead of ownership, look at profit sharing models. That way you can reward the times their efforts make the business more successful.
4) Minority Ownership has Less Risk
As long as I give you less than 50% of the company, you aren’t fully on the hook.
A minority owner is fully on the hook. They have to sign for the line of credit and will be named in any lawsuits.
Let’s demonstrate how this might become a problem. Say I have three sons and want to split company ownership evenly between them, 33% each.
- Son A has been working in the company for 18 years. He is married with children, owns a house and has been doing well financially.
- Son B has been working with the company for 7 years. He recently went through a bankruptcy.
- Son C has been working in the company for 2 years. He went through a divorce and is rebuilding a financial base.
If the business takes out a million dollar line of credit, all three sons will need to sign for it. Son A is the only one with real assets on the line, but he only has one third voting power. His two financially unstable brothers combined have 66% voting power. If something goes wrong with the business, the bank will come after Son A’s assets.
Minority ownership doesn’t look to good to him.
This is the exact scenario of one of my clients. Rather than shared ownership, we will pursue a profit sharing mode. Son A will assume full ownership of the company. Each brother will then be compensated one third of the profits. Son A is going to sleep a lot easier knowing he has full control of the company.
5) You Aren’t Partners with Their Spouse
Pillow talk derails countless partnerships.
Many entrepreneurs don’t appreciate the role that a partner’s spouse plays into their partnership. If you are married, think about how often you bring work problems home. You lean on your spouse for support, advice and a venting outlet.
Most spouses will defend you. And when they side with you, they often begin to criticize the other partner.
- They don’t charge enough.
- You are working too hard. Your partner isn’t bringing enough to the table.
- They aren’t handling this situation correctly. You should step in more.
It’s hard to remain neutral when your spouse starts weighing in. Especially when they are a dominant personality, their viewpoints will enter into the partnership. When partners are married, a partnership isn’t just between two people anymore.
Now imagine if your partner isn’t married yet. You are essentially signing up with someone you’ve never even met!
I’m not going to say that partnerships never work. There are some that are wildly successful. They tend to be the exception. Most partnerships fail because the partners fell victim to one of the aforementioned myths. Other times life just gets in the way.
If you are considering entering into a partnership, I urge you to evaluate profit sharing models. This can be a great opportunity to create a financial incentive without burdening a potential partner with unnecessary risk. And you maintain full control of the company.
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