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10 Most Deadly Mistakes Business Partners Make - And How to Avoid Them
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One of the best
ways an entrepreneur can find the investment money he or she needs to
grow their business is by finding a strategic or joint venture partner.
In a good partnership, each partner will bring expertise or assets that
the other party is missing, but that are necessary for the business
to be successful; for instance: CASH!
If done correctly,
a partnership can be great a way to grow your company without implementing
difficult and time-consuming changes to your business. A partnership
can help you increase your market share, gain a new competitive advantage,
and help you to respond and adapt more quickly to change in the marketplace.
But, business partnerships
can be tough, and getting out of a bad one can be worse than an ugly
In my practice,
entrepreneurs often come to me when it’s too late. In a typical
scenario, communications have broken down between the partners, they
have been kicked out of their business, money has been stolen, and everyone
is about to sue everyone else.
Let me put this
into tangible terms for you. What I have found is that when I help my
clients outline their relationship with their partners in writing before
they get started, it will cost them between $1,500 and $7,500 for a
simple partnership. When clients do not do this up-front work and hire
my firm to sue their partner (or defend a lawsuit) when things go bad,
it can cost up to 10 TIMES that amount in litigation!
What I have found
is that when future business partners hash out the terms of their relationship
before they get started, they have longer and more successful partnerships,
and they save a considerable amount of money on legal fees. To help
future business partners get the conversation started, I have created
a Business Partners Questionnaire that helps future partners begin to
outline their relationship in writing. To get your FREE copy, email
me at email@example.com.
Here are a few other
suggestions to help keep you and your partners out of court!
1. Go Back
to the Basics
Before you even
start hunting for a potential partner or decide that a partnership is
definitely the way to go, take a look at your business plan. Decide
whether such a move is in line with you business goals. What are your
organizational goals? Would a partnership help you achieve these goals?
Is it consistent with the objectives of your company? A partnership
is not a magic bandage that will solve your company’s problems.
If you feel that your decision to partner is a defensive move, it maybe
an indication of a core problem that should be fixed within your company,
not externally. Similarly, don’t rush into partnership because
you rely on one to start your business.
2. The Deadly
E’s: Ego & Emotion
The deadly E’s
can trap you in a potentially awkward situation with your partner. Surrounded
by a myriad of official documents and important decisions to be made,
your ego can cause you to make claims and opinions that can come back
to bite you later on. For example, by distinguishing yourself as the
company’s official decision maker, you become responsible for
your partner’s decisions too. Just as dangerous are your emotions,
which can lead you to form unrealistic expectations or impromptu promises
Ignore Possible Opportunities/Stay Flexible
have a tendency to stop their search for a partner once they find the
first person who demonstrates an ability to write a check. Remain uncommitted
until you sign an agreement with your potential partner. Actively cultivating
your alternatives can give you a better perspective on the partnership
process and allow you to ask yourself, “is this partnership truly
the best option?” Keeping your options open can help you compare
the relative advantages and disadvantages of each alternative, including
that of a partnership. Not only does this prevent you from devoting
excess time, money and effort on the sub-prime partner candidate, but
you get the assurance that whatever decision you made was the best one.
Also, consider possible
opportunity costs. Along with the benefits of a partnership, you also
assume liabilities, like your partner’s competitors. Will this
fact conflict with potential opportunities in the future?
an Exit Strategy Before You Get Started
Be realistic. Conflict
is inevitable and you never know how severe it may get. Although it
seems cynical, you should think of how you’ll exit from the partnership…before
you get started. Consider it staying prepared for your next opportunity.
While you and your partners are still on good terms, it’s crucial
to determine how to allocate your business’ assets in case you
and your partner decide not to work together anymore. You should also
agree about what to do with the business or assets in case of an untimely
termination, such as a partner’s death. Having an exit strategy
will help you maintain your autonomy – your fate and that of your
business remains in your hands, not your partner’s.
5. Map Out
Your Mutual Expectations In Writing
Before you get started,
and possibly before you meet with your lawyer, prepare a plain English
roadmap of the relationship between you and your partner. Some major
- it allows you
to draft the partnership agreement with your lawyer before presenting
it to your partner’s lawyer;
- its flexible
structure enables you to experiment with different relationship configurations
to see which one you’re most satisfied with;
have a clearer idea of what you want from the partnership; and
- most importantly,
you can clearly distinguish business issues from legal issues, and
use lawyers only to discuss the latter which will save you money on
This brings us to
the next point.
6. Get Legal
Get legal advice
from the beginning. Let your lawyer know what your goals are and he
or she will let you know what you need to do to get there. A lawyer
can also assess how realistic or beneficial your aspirations are. They
can help you strategize your negotiations and plan what to ask for and
when. Also note that the attorney representing the other side is the
one you should look out for. You and your future partner should discuss
the business side of your relationship first and, if possible, only
introduce lawyers later.
Do Everything Yourself
A good leader knows
when to delegate responsibilities. Don’t try to do everything
yourself. Assuming you’ve already taken the steps to carefully
choose reliable consultants and employees, communicate with those working
for you. Lawyers, accountants and managers can provide an objective,
specialized perspective and a more realistic tone to what might be an
overly optimistic plan. Having technical and expert advisers on hand
can also help you understand financial and operational implications
pertinent to both parties.
Makes (Costly) Waste
time is money. But ignoring details and attempting shortcuts will likely
cause delays or worse, bad decisions when forming a partnership. Remember,
if your partnership blows up, it will cost you far more time, money
and heartache than if you do things right from the beginning.
As an entrepreneur,
you already have a knack for seeing the big picture. It’s the
details, however, that will add value to your vision in the long run.
Covering the following bases will help buffer you against uncontrollable
changes in the market, operating costs, and even sentiments between
you and your partner. Before you get started:
- establish the
objectives and expectations of each partner;
- determine each
partner’s contribution in terms of funds, skill and time;
- assess how much
revenue will be allocated relative to the amount and type of work
- assign the roles
and related tasks of each partner; for example, decide who will manage
the partnership, who will get training and hire employees, etc.;
- form evaluation
objectives and plan ways to monitor and assess performance;
- and determine
a procedure to resolve problems when things break down; for example,
mediation or arbitration.
My present partner
excluded, I have been guilty of some bad decisions about business partners.
I was involved in a partnership where I owned and managed an investment
property in a ski resort with two other people. My partners were social
acquaintances whose company I enjoyed very much in that type of setting.
However, throw money, emotions, power, and economic risk in the mix,
and things quickly got tense.
The first indication
that the business partnership might not be a good one was in the very
beginning. We were sitting in a quaint Vermont restaurant and one of
the partners threw a temper tantrum about making an offer on a property
we were considering. What was a very logical and arithmetic decision
for me, was a very emotional one for this person. After the outburst,
I had a bad feeling about the interpersonal dynamics of the partnership.
I decided to go ahead anyway because the economic prospects were outstanding.
Sure enough, in
less than a year we were not on speaking terms. Luckily, before we got
started, I insisted on an iron-clad partnership agreement that had a
mechanism in it for me to get out. I ended up making money on the investment,
but not enough to pay for a year’s worth of arguments, stress
and distraction from my law practice. I didn’t trust my gut and
it cost me in the long-run.
A business partnership
is truly a marriage. As all marriages go, when things are good, they’re
great, and when they’re not, look out! If you get a bad feeling
about your future partner, trust you instincts, they are usually correct.
by Stephen T. Furnari
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