Back when I was practicing law, a general contractor came into my office one day to tell me that his business partner had swindled him out of $100,000. He wanted to know if I could help him save his business. Because he did not have enough money to afford my fee, we
worked out an arrangement: he remodeled my house for the next 12 months, and I remodeled his business.
The moral of the story is that you have to be very careful when creating a partnership. It is the business equivalent to getting married; you have to be very careful to pick out the right partner. If you do, the end result can be a very satisfying and successful venture, but if you don’t, you are likely in for some emotional, financial and legal turmoil, not unlike my contractor friend.
Here then are five ground rules for successful business partnerships:
Rule #1: Know what you are getting into: There are both pros and cons of starting your business as a partnership. You must be cognizant of both:
- An extra pair of hands: Owning a business is tough enough, but doing it all on your own is doubly difficult. Having a partner is a big benefit.
- Another brain: As they say, “Two heads are better than one.” Having someone to bounce ideas off of is invaluable.
- Deeper pockets: It is also great to have someone to share the financial aspect of running a business.
- Less control: Your partner will have an equal say in how the business is run. You better trust their judgment and respect their values.
- Potential liability: Business owners are liable for the decisions their partner makes.
No one can say whether the pros outweigh the cons. It all depends on the circumstances. Nonetheless, it is important to go in with your eyes wide open.
Rule #2: Try before you buy: You may think that your new partner is great, but it would behoove you to test the relationship theory before committing to it. To go back to the marriage analogy, it is a good idea to live together before making a long-term, legal commitment.
How do you know if your styles mesh? Do you like working together? Can he or she take direction? Can you? Do you make decisions in a similar way and agree more than you disagree? Is it fun to work together? Working on a project or two before committing to a full-blown partnership can answer important questions like these.
Rule #3. Establish the basics from the start: Even if you have previously worked together, partnerships can often get into trouble when the partners are not on the same page about who is responsible for what, who will pay for what and so on. It is vital that rules, duties, responsibilities, titles and other parameters are set from the very beginning.
By the same token, it is equally important that you agree on the purpose and direction of the partnership. How big do you want to get? What are your goals, visions, and desires for the business?
Rule #4. Get it in writing. All of the above must be documented in the form of a partnership agreement. Think of your partnership agreement as your own private set of laws for your business that includes:
- Who is responsible for what?
- How much money and other resources is each partner putting into the venture?
- Who will get paid how much and how will compensation be decided going forward?
- How will decisions be made?
- How will disputes be resolved?
- Can one partner buy out the other? If so, how?
Rule #5. Be flexible: This rule may seem to contradict the other four, but in reality it does not. The previous rules are meant to protect you and help you choose the right partner. This one is meant to be realistic. Businesses are living organisms. It may be that your partner is better at sales than you knew. Or maybe you will discover that you have a proclivity for promotions. Great partnerships establish rules, and yet are flexible enough to take advantage of opportunities.
If you follow these rules, your chances of creating a successful partnership are much higher. Good luck.
Have you recently worked with a partner? Share your story below.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss