Many business partnerships are beneficial because they enable entrepreneurs to pool complementary skills and share startup costs. Unfortunately, some of these advantages can also be disadvantages. Statistics show that 70% of business partnership fail.
The Key Takeaways
- A partnership agreement should be in place at all times
- Communication is essential in business partnerships
- You must be able trust your partner(s).
Mixing personal relationships with business
It is not uncommon for couples, families or friends to form successful partnerships. The idea of starting a company with someone that you trust and know can be appealing. Money can make or break a business.
A successful business partnership is based on complementary strengths, talents and personalities of both partners. A friend or relative must bring more than their relationship to you to a business partnership.
Note:
It’s important to create a partnership contract even if the partners are family or friends. This will ensure that all issues, such as finances and division of tasks, are clarified before the business is launched.
When done correctly, a partnership with friends or family can be profitable and rewarding, but if it fails, it can destroy relationships or break families apart.
Unequal Commitment Among Partners
It takes a lot of financial and emotional commitment to start a business. You are solely responsible for your business’s success or failure as a sole owner. In a partnership you depend on other partners and their contributions. If they’re unable or unwilling, this will lead to resentment or conflict.
In theory, a partnership where one partner makes a bigger financial contribution while the other partners promise to “sweat” the difference might seem reasonable. However, “sweat” can be difficult to quantify or describe in a partner agreement. The partnership will fail if the “sweat” promised is not delivered.
When a partner has other obligations, such as family or work, it may be hard for them to fully commit themselves to the business.
Warning
In a general partner, each partner is jointly and individually responsible for any losses or debts. If you feel you need or want more protection, you might consider other types of partnership. 3
Uneven contributions among partners can be a non-issue if they are understood and clearly stated in the partnership agreement. It’s more likely to cause conflict between partners if it is not addressed.
Failure to achieve Success
It takes perseverance and patience to build a successful business. Owners of successful businesses must be willing to commit for a long time.
Lack of revenue and/or periods with declining revenues can have a negative psychological impact on partners, and may even lead to conflicts. This is especially true if it becomes an expensive drain on personal finances. If the business isn’t doing well, then there should be a plan in place for the partnership to assess obstacles to success and renew motivation.
Business success is never guaranteed. A partnership can’t compensate for a lack in preparation or an unviable business idea. Business Planning is essential before and after the startup of any business. This includes research into the target market and realistic cash flow projections.
Differing Values
Many partnerships fail because partners don’t communicate their goals. As a business grows, differences can increase and cause friction.
Before establishing a business partnership, potential partners should meet to discuss:
- Why people want to be entrepreneurs
- Their vision for the company
- Their long-term goals
Be sure that you and/or your partners are both aware of the realities involved in owning and operating a business. To avoid disappointment, potential partners should be realistic with their business expectations.
Tip
Before working together, partners should discuss the goals and vision of the partnership to ensure they are on the same page.
Partners may have different visions for a company or have very different ideas about the long-term objectives of an organization. One partner might see the business only as an alternative way to earn modest income and not have any plans for expansion. Another partner, however, may have ambitious plans for expansion including hiring a large number of staff, opening satellite office and taking the company publicly.
In order to avoid long-term conflicts between partners, it is important that the vision of the company be decided upon and described beforehand in a vision declaration. Sections of the business plan can be used to formalize long-term goals for the organization.
Personality clashes
Business partnerships have many benefits. They can help you to share financial risks and develop complementary skills. Business partnerships can be in trouble if you and your partner are not getting along.
It is normal for partners to disagree, but personalities that are radically different can intensify differences and cause resentment.
Consider the following when evaluating a partner:
- Do they take risks?
- Are they highly motivated individuals?
- What would they do in difficult situations, such as when dealing with employees, customers and vendors who are problematic?
- What are the expectations they have for the business and partnership?
- Are they able to start and grow a business with patience and perseverance?
Remember that personality differences can be an asset rather than a hindrance if you respect your business partners, value their opinion, and share a vision.
Failure to Trust
A successful partnership is built on an honest and open relationship. Lack of trust can bring a partnership to a halt. Due to the shared liability that is inherent in business partnership, unethical or illegal business practices by one member can put the other partners at risk.
You can’t be certain that your partner will always act in an ethical manner, but you can reduce the risk by researching his or her history and reputation before you meet. Check out:
- If they had other businesses before, what were their past partners’, suppliers’, customers’, and employee opinions?
- They are well-known in the community
- Previous legal problems
- Their Employment History
- If they’ve ever been in bankruptcy, had a bad credit rating or run into trouble with the tax authorities
- If they will sign a partnership agreement outlining all critical aspects of your business
If someone has demonstrated a track record of integrity and stability, they are likely to be a trustworthy business partner.
Bottom Line
A comprehensive partnership agreement and a thorough screening of your potential partners will increase your chances of establishing a long-lasting business partnership. In case of any of these or other problems, you should plan an exit strategy from the partnership.
FAQs
What makes a business partnership successful?
To build a successful business partnership, you need to have clear communication, goals and metrics that are clearly defined, roles and responsibilities that are clearly defined, and complementary skills.
When should you end a business partnership?
If you are having major disagreements with your business partner, he or she is not contributing to the business, or if both of you cannot communicate, you may need to terminate a partnership.
