The Two Partnership Killers And How To Avoid Them
Two Partnership Killers and How to Avoid Them
You may have heard a business owner or two tell you that partnerships don’t work. They typically follow this ”advice” with a cautionary anecdote about what a former partner did or did not do and how it ruined a relationship.
Whatever the specifics, I’ve found that these stories often share two fundamental features that lead to the death of the partnership.
Usually, they start out small, like a leak in the roof, not causing too much damage; but, over time, the stagnant water festers and rots the beams that are supporting the house until finally the entire structure collapses in on itself. What began as a minor problem grows into an unmanageable disaster and ruins friendships, puts people out of work, and wreaks financial ruin.
Shockingly, the solution to these two problems is simple, and yet partnerships fall prey daily.
So, what are these silent partnership killers?
- Unstated Expectations, and
- Verbal Agreements.
Be it the morning Starbucks run or a visit to the doctor, each of us has expectations for every situation and for every relationship in life. Some are simple—I give you money, you give me a coffee—but some are more complex. Business relationships are no different. Each partner comes into the venture with different expectations.
- The type of business to be built: lifestyle or high growth
- Whether the business is built-to-sell or built-for-cash flow
- The contributions of each partner (type, amount, timing, and value)
- The commitment level of each partner: part-time or full-time and hours of work.
- The deliverables (results of work) each partner will provide
- Whether the partners will guarantee loans and credit lines of the business, and
- What happens if a partner wants to leave or dies.
The first problem arises when the partners leave some or all of these expectations unstated. It seems contrary to one’s self interest to keep expectations secret, but partners often do so because the conversation is difficult or sensitive or because they assume all parties are in agreement.
Honeymoons aren’t only for marriages. They also exist at the start of a partnership. Everyone is looking expectantly to the future and is excited about how much money will be made. Neither partner wants to broach sensitive topics and risk offending the other. So, they steer clear of these crucial conversations to avoid creating tension, mistakenly believing that tension isn’t good.
Other expectations are assumed to be mutual. “Of course, we’re going to run this business for 20 years,” thinks Jim. “I can’t wait to sell this business for a hefty profit,” says Scott. Here, one partner wants to grow the business to cash out in two years, but the other wants to settle in for an easy life harvesting the cash flow. These two paths, however, require different business tactics that are often mutually exclusive.
Unfortunately, this creates small tears in the fabric of the partnership. When the partners’ basic expectations aren’t met and they do not agree on the path of the business, they become frustrated and the tears continue to grow.
This partnership killer is avoided by acknowledging that it’s alright, even necessary, to talk about sensitive and complicated issues. Having this detailed, granular conversation will either make the relationship stronger over the long term, or it will kill it now before time and money have been invested and lives changed. Either way it’s a win.
Many founders have decided not to move forward with a planned venture because, after having an open and honest discussion, they realized that their goals weren’t in alignment. Nonetheless, they were grateful to have discovered this at the outset rather than after they had invested their time, money, and energy. Often, they will remain friends because they didn’t let these unstated, and then unmet, expectations grow into personal resentment.
A full discussion of expectations, though, is not enough. Even the most comprehensive discussion can be undone by a verbal agreement. In fact, a verbal agreement is effectively no agreement at all.
Human memory is a wonderful but fragile thing. Even the best memory is subject to personal biases that color our recollection. Often, we remember events and discussions in the light most favorable to ourselves rather than with absolute objectivity.
Unless there’s something staring us in the face to prove that our memory is inaccurate (and sometimes not even then), our current desires can outweigh and ultimately distort our past memory.
Therefore, once the expectations of each partner have been openly discussed and agreed upon, these expectations must be put into a written agreement that has specific remedies for a breach and is signed by all of the partners. This partnership agreement sets the nascent business off on the right foot, with all the partners in agreement about its trajectory and goal.
If you leave no personal or business expectations unstated and make sure all partners have agreed in writing to these expectations, you will avoid many of the obstacles to a successful and profitable partnership. And, when the partnership does come to an end, it won’t take down the business with it.
At Alexander Abramson we help business partners avoid these problems by:
- Guiding a discussion that includes key areas where partnership expectations go awry using a three-page checklist of issues developed over 24 years of working with business owners.
- Providing advice about the consequences of the options selected and how to improve the benefits of the partnership agreement for both partners.
- Preparing a comprehensive written agreement that is tailored to your business situation and based on the decisions of the partners.
- Reviewing the final written agreement, paragraph by paragraph, with the partners so each understands what is being agreed upon and is sure that the agreement reflects the decisions the partners have agreed upon.
If you have questions about partnership agreements, shareholders agreements, operating agreements, founders agreements, or buy-sell agreements give me a call at 407-649-7777.