Business partnerships have many advantages as they allow entrepreneurs to pool complementary skill sets and share startup costs and risks with one another. Unfortunately, many of the advantages of partnerships can also be disadvantages, and statistics show that up to 70% of business partnerships ultimately fail. Take a closer look at some of the most common reasons why business partnerships break down, so you can make any partnership you enter a more successful relationship.
Mixing Personal Relationships With Business
Many spousal, family businesses, or partnerships between friends are successful, and the notion of starting a business with someone you know and trust can be very attractive. However, money can change everything, and in personal relationships, like marriage, it is a recurrent issue that despite attempts to fix, is usually never resolved.
Any successful business partnership should be based on the complementary strengths, talents, personalities, and experiences of the prospective partners. A relative or friend needs to bring much more to a potential business partnership than just their personal relationship with you.
Separation of Business and Personal
To have a successful partnership between friends or family, maintain a separation between business and personal relationships.
Keep your personal and business lives separate. That way, you'll be able to have frank and open discussions with your partner(s) about difficult business decisions, goals, finances—discussions that a close personal relationship can make difficult.
As with any business partnership, it is very important to have a comprehensive partnership agreement in place so that issues such as finances and the division of work are clearly spelled out before starting the business. A simple handshake between family members or friends is not sufficient when your finances and reputation are on the line in a business venture.
Done properly, a business partnership with family or friends can be rewarding and profitable, but unsuccessful partnerships can break up families or destroy friendships permanently.
Unequal Commitment Among Partners
As any businessperson will tell you that starting a business takes a huge financial and personal commitment. As a sole proprietor, you alone are responsible for the success or failure of the business. In a partnership, you are dependent on the contributions of other partners, and if they are unable or unwilling to make the same level of personal or financial sacrifices, it will likely result in resentment and conflict.
A partnership based on one partner making a larger financial contribution and the other partner(s) promising to make up the difference in "sweat equity" might sound reasonable in theory, but "sweat equity" is difficult to quantify and describe in a partnership agreement. If the promised "sweat equity" is not delivered, the partnership is headed for disaster.
Similarly, it may be difficult for a member of the partnership to be fully immersed in the business when he/she has other distractions. Someone with other business interests or young children and a working spouse, for example, may be unable to fully commit to a business partnership.
It's important to note that all partners are legally liable for the partnership, which means decisions and actions made, or not made, by a partner can impact the other partner(s).
Unequal contribution among partners may not present a problem if understood in advance, and fully articulated in the partnership agreement, but otherwise, it's likely to lead to strife among partners.
Lack of Success
Building a business takes patience and perseverance and for a business to be successful the owners must be prepared to make a long-term commitment.
Lack of business and/or periods of declining revenue can take a psychological toll on business partners and eventually lead to conflict, particularly if the business becomes a heavy drain on the personal finances of the people involved. If one or more partners have previously been employed with a steady paycheck and benefits, they may be tempted to second guess their decision to become an entrepreneur if the business is not immediately successful or when business slowdowns occur. When this happens, the partnership should have something in place to renew motivation and assess barriers to success.
There are no certainties of success in business and the advantages of a partnership cannot overcome a lack of preparation or a business idea that is not viable. Thorough business planning before and after startup, including research on the target market, realistic cash flow, and revenue projections, and having sufficient debt or equity financing available when needed are all requirements for any business to prosper in the long term.
Many partnerships do not succeed because the partners are not in alignment with the values and/or goals of the organization. As the business evolves the differences can become an increasing source of friction.
Before entering into a business relationship, prospective partners should meet and articulate:
- Why they want to become entrepreneurs
- What their vision is for the company
- Their long-term objectives
Wanting to start a business because you hate your job or you believe that you can become wealthy can be great motivating factors but blind you to the realities of owning and running a business. Potential partners, particularly those entering into their first business venture, need to be realistic about the business prospects and temper their expectations accordingly to avoid possible disappointment.
Partners should discuss their goals and vision for the partnership before starting to make sure they're on the same page.
Potential partners may disagree on their visions for the company and have radically different notions of the long-term goals of the organization. For example, one partner may see the business as merely an alternate way to earn a modest living and have no wish for future expansion, whereas another partner may have ambitious expansion plans for the business, including having a large staff, opening satellite offices, and taking the company public.
To avoid long-term conflict between partners, the company vision should be agreed upon and described in advance in a vision statement and sections of the business plan should be used to formalize the long-term goals of the organization.
Sharing risk and having complementary skill sets are some of the great advantages of business partnerships, but if the personalities of the partners do not sufficiently mesh, the business may be headed for trouble.
Disagreements among partners are to be expected, but heavily contrasting personalities can amplify differences of opinion and lead to resentment and conflict.
Interviewing and evaluating a potential partner is a must if you are not already well-acquainted. Treat it like a job interview, discussing skills, talents, and experience, as well as assessing their personality with questions such as:
- Are you a risk-taker?
- Are you highly motivated?
- How would you handle difficult situations such as dealing with problem employees, customers, and vendors?
- What are your expectations of me and of the business?
- Do you have the patience and perseverance to handle starting and growing a business?
Keep in mind that differences in personality can also be a benefit rather than a hindrance, providing you respect your partners, value their opinions, and have a shared vision for the business.
Failure of Trust
An honest and open relationship between partners is the foundation of any successful business partnership, so nothing breaks down a partnership faster than a lack of trust. Given the shared liability inherent in business partnerships, illegal or unethical business practices by one partner put all other members of the partnership at risk.
While you can never predict with certainty that your partner(s) will always conduct themselves in an ethical fashion, you can mitigate the possibility by researching their history and reputation ahead of time, particularly someone unfamiliar to you:
- Have they had other businesses in the past and if so, how were they regarded by business partners, suppliers, customers, employees, etc.?
- What is their reputation in the community?
- Have they had previous legal difficulties?
- Have they had chequered employment or marital history?
- Have they ever been bankrupt, had a poor credit rating or been in difficulty with the tax authorities?
- Are they willing to agree to a written partnership agreement that outlines all the critical aspects of the business?
Chances are if the person has a history of stability and ethical behavior, they will make a trustworthy business partner.
Do Your Homework Before Entering into a Partnership
Thoroughly scrutinizing your prospective partners in advance and developing a comprehensive written partnership agreement will improve your odds of having a successful, long-term business partnership. Part of your planning should include exit strategies from the partnership in case any of the above or other problems thwart the partnership's success.