Business Partnership - Is It Financial Suicide?
March 19, 2008
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A business partnership doesn’t work for the majority of people. That’s not to say they never work at all. But there’s several things to consider before going into a partnership and there’s many pitfalls you should be aware of, including death.
Why Choose A Business Partnership?
First ask yourself why you would prefer to enter into a business partnership rather than go it alone. The fact that your potential partner is a good friend, or a husband or wife should be the last reason. Just because you enjoy hanging out with someone, it doesn’t mean you’d actually like working with them.
Will they bring capital, or skills or knowledge that you don’t have into the business? If the answer is no, then you seriously want to reconsider.
Why Not Test The Water First?
If it sounds like I have a downer on business partnerships I don’t. But I have been in a bad business partnership before and I would hate to see you get stung. So, if you’ve not already actually started the business you’re considering, why not test the water first? Check out the following pointers to help you decide.
Trust: Is your potential business partner trustworthy? If they’re not to be trusted in other aspects of life, they’re liable to be dishonest in business too and you should run a mile. And yes, some people do enter into business partnerships with people they don’t trust - I did.
Research: This is a good way to test the water. You’ll want to do a lot of research into your business before your start. Is your potential partner willing to put a lot of effort into this? Ask them and if they give one of the following responses you should run a mile: I just don’t have the time, I’d rather you did it, I don’t have the skill, or research isn’t really my thing. Or worst still: It’s difficult to get enthusiastic now, but I know I will once it’s a “real business”.
Vision and Goals: What is your potential partner’s vision for the business and what are their goals in life? Do ask them before you share yours because some folks are liable to go along with anything you say, even if they don’t really mean it. If you want to grow a multi-million pound empire and your potential partner just wants to make enough money to live comfortably, you will almost certainly encounter problems.
Their personal goals will also give away a lot about their intentions for the business. And, if their only goals are financial ones, you may want to reconsider.
Protect Yourself
If you decide you still want to go ahead with the partnership, carefully consider the legal structure. For example, you really want to try to avoid going into an actual partnership where you could both be personally liable for debts if the business fails - especially if you’re married.
1) Make sure you have a partnership agreement drawn up which clearly states how the business ownership is split.
2) Make sure both your names or on the bank account.
3) Agree on things such as salary and bonus and decide how purchases for the business will be made. You could set things up so that you both have to sign cheques, but this can be a pain. And if the other person is so untrustworthy that they’re liable to empty the account, you shouldn’t really be in business with them.
4) Put a plan in writing for what should happen if one of you dies. This may sound morbid but it’s definitely going to happen some day.
Potential Problems
There’s so many potential problems with business partnerships and here are just a few. If you begin to hit any of these problems and you’re unable to sort them out quickly, you may want to consider ending the partnership, before it ruins your business.
Marital problems - If you’re in a partnership and you have marital problems that can’t be resolved, they will affect your business.
Divorce - If your problems are so bad that they lead to divorce, don’t even consider trying to continue to run the business as a partnership. It just will not work.
Friendship Problems - If you go into a business partnership with a friend and you hit a point where you’re no longer friends, it may be time to end the partnership. I know two guys who were the very best of friends. Nowadays, they really don’t get along anymore. Business problems and personal problems that have taken a toll on the business has ruined their friendship and their business is suffering too.
Money - If one partner wants to spend every penny the business makes, whilst the other wants to reinvest it all in the business, you’re really heading for trouble.
Time - If you’ve been trading for a couple of years and one of you wants to devote all your time to growing the business, whilst the other wants to work a three day week, you’ve got problems.
Conflict of Interest - What happens if you want to concentrate all your efforts on growing your business and your business partner wants to invest time and money in additional businesses?
There’s many things that could go wrong too such as personal problems and illness and they could all affect your business.
So What Should You Do If Your Partnership Goes Wrong?
If your partnership goes wrong - you need to end it fast. And if you’re the one who is staying in the business and your partner is leaving, make sure you protect yourself.
1) Change the business bank account immediately so the other partner can no longer legally access it. I really can’t stress enough how important this is because I didn’t do it myself. When my ex-husband left our business partnership, I thought he no longer had access to the account, but he was able to draw significant amounts, for several months simply by taking ID into the bank.
2) Make sure they hand in anything to do with the business - eg keys, equipment, company credit cards and fuel cards. And don’t overlook anything because you think it will be ok. And don’t assume that garages won’t give fuel to people when they can’t see the registration number of the car. Tesco’s certainly do.
3) Do end the business partnership abruptly once you’ve decide it’s going to end. Don’t allow the leaving partner to take their time deciding and come into work only when they feel like it, whilst they decide what they want to do with their life. Replace them immediately, preferably with a new employee - not another business parter and don’t look back.
Have you been in a business partnership before? What were the benefits? What problems did you face? Would you do it again? Please share in the comments section.
This article is part of a series on business problems that can be overcome. If you enjoyed it, click here to subscribe in a feedreader and make sure you don’t miss the rest of the series.
Previous Articles From The Series
There’s No Business Problem That Can’t Be Solved
Risk and Money In Business - The Rules
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17 Responses to “Business Partnership - Is It Financial Suicide?”
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Hi Catherine,
This is a great eye opening post for anyone thinking of forming a partnership.
We considered a partnership, only because we were asked by another person. We decided against it. Instead, they started a business of their own and we helped (subcontracted) each other on jobs.
If you can fund a business on your own, often another person could be hired as a consultant and you can pay them on an as needed basis.
With business partnerships it often comes down to money. If one partner doesn’t feel they’re getting their fare share, problems will surface.
Barbara Swafford’s last blog post..Bloggers Embark On A Lonely Journey
Harry and I have a very strong partnership and it’s worked well for years. But we took the time to learn who each other was first, our individual quirks and personality weaknesses, our strengths, our talents…
We had a long haul as friends before taking it further, and when we did bring business into friendship, we had another long haul.
But we had strong respect for each other and the ability to separate business discussions from our friendship. If the business fails, we know we’ll still be friends. Arguments happen, patience is tested daily (sorry, Harry, I don’t mean to). Knowing how to have a relationship first before working together makes all the difference. Knowing that business isn’t personal matters, too.
It’s much like a marriage. Both people have to put in and care about the business or it’s not going to work.
James Chartrand - Men with Pens’s last blog post..Overhaul Your Image for Better Results
Having worked for both catherine and her ex husband i have seen exactly what it is like.
When one partner wants to grow a successful business and the other just wants to take as much as they can get.
From an employee’s perspective it is very hard to know what to do as you dont want to upset either partner and risk losing your job.
In my case i chose to stick with the business as catherine was very honest and upfront about how the business was doing.
I have to admit i nearly called it quit’s but when hearing of catherine’s vision for the future i decided to stick with it and help out.
To all those people out there thinking of going into business with a partner, really think it through first and ask yourself is it what i really want to do.
I chose to go into business with catherine and must admit it was scary, but with catherine’s knowledge and a lot of hard work from us both, i know the future looks bright.
Hi Barbara - Thanks. I totally agree - outsourcing or hiring are often better options if you can. It avoids so much hassle.
Hi James - Actually when i was writing it, you and Harry were one of the business partnerships I thought of as actually making it work. You seem to have sussed it out well before you even got into it though and your expectations also sound realistic.
Hi Stuart - I am glad my vision encouraged you to stick around, or i would have been in the shit during Carlisle floods.
And I’m pleased you appreciated my honesty. I know not everyone would and it would scare a lot of people, but I’ve always thought it was far better to be honest, no matter how bad things are. That is how I would want people I was working for to treat me. There is nothing worse than being kept in the dark.
Everyone thinking of entering into a partnership needs to read this article first.
I appreciate Cath & Stuart openly sharing their experiences. I feel like I learn much more when others share their personal experiences, than when someone is trying to teach something they only have theoretical knowledge about.
sterling | bizlift’s last blog post..How To Travel & Work Remotely As A Couple
Hi Sterling - Thank you. Stuart usually avoids commenting on my blog, but I told him that if he had something to say, he should just come out and say it.
Experience is important - that shows through on your blog too. And your post, “How To Travel and Work Remotely As A Couple” is brilliant. I really think it will open a whole new window of possibilities for anyone reading it.
I read so many blogs where the info is just rehashed from something else the blogger has read and you can tell. Mind you, many business books are the same.
My friend and his so called ‘best friend’ ran a garage for many years, and all seemed to run smoothly, until Morrisons bought the land and bought them out. The accounts had been taken care of through the other friends wife, when my friends wife eventually took the account book to an accountant, it was found that money had not been put through the books.
Cutting a long story short thousands of pounds were missing but my friend never pursued it.
Saying that my last business was owned by two property developers and they got on very well.
Regards.
jsanderz’s last blog post..Interesting and Fascinating Images By Deputy Dog
This post gave some key insight on considering the benefits of what can come out of a partnership. I think you couldn’t stress enough that you shouldn’t do it solely for the reason that you like the person. You really should think about what he or she can bring to the table and if it’s in your best interest to partner up. Partnerships are great if you are lacking in some things and the other(s) fill in that gap. Also, you may get a sense of the person…meaning if he / she will be a good partner or not. There’s no scientific reasoning behind it…but more like a hunch. I like how you ended it with what to do when it goes sour since quite often this happens. Good post Catherine and just noticed the gravtars, cool!
Giun Sun’s last blog post..Essence and Accidents of Internet Marketing: Is there a Silver Bullet?
Hi Jeff - That is bad. I’ve heard a few stories like that where some con man deliberately picks out someone naive and inexperienced as a business partner.
Hi Giun - good point - there is always that good old gut instinct to rely on too. I have Barbara Swafford to thank for the Avatars, as she showed how to do them in this post: http://bloggingwithoutablog.com/how-to-get-andor-add-a-gravatar-to-your-post-comments/
Catherine,
Your business series is turning out great — full of useful tips and insights.
I have a business partner — we each had had out own separate business before — and things have worked out really well after a year and a half.
We’ve found that we have skills that complement each other, and while we still book clients as either business, we often help each other out in the field, plus one can easily back the other if he’s sick.
We also bounce ideas around a lot, and discuss future plans.
We’ll definitely have to talk about the contingency plans like you mention.
Anyway, my business would not have progressed this far this quickly if I had not teamed up.
Nez’s last blog post..Blog Haiku #1
Nez - that is good. I’m guessing that the fact you both had business experience before must have been a crucial factor. And it sounds like you both had complimentary skills to contribute.
You definitely need contingency plans. They’re so useful if things go wrong. And if there is a crisis, sometimes it’s difficult to think straight.
Hey Cath - great post. I use to set up business structures for tax and asset protection for businesses. It wasn’t fun but paid the bills and I learned a lot about internal business strategies. (thus I have lots to say about this topic)
I am one who likes to do things alone whenever possible and do like Barbara suggested, subcontract out work.
There are times, however, I think it makes perfect sense to form a partnership with a family member, like a spouse, for certain benefits a business structure can provide even if the spouse really doesn’t contribute too much.
For example, you could create a health benefits package that a family member might be able to make use of.
A nifty little way to get yourself life insurance on the cheap is to create a “buy out” clause in case one of the partners dies. It’s typically (here in the States, anyway) cheaper to set up an insurance coverage where if I die, our business insurance will pay my wife to buy the company and manage it on her own.
This could be a million dollar buy-out clause/insurance that only costs about $100/month. A pretty good deal. Plus it’s all tax deductible.
It’s a little more in depth than that but I think you get the idea.
Anyway, good post and I’ll keep an eye out for the rest
John Hoff’s last blog post..Google’s PageRank: We All Love It, We All Hate It
Hi John - you’ve done a lot of stuff. The buy out clause sounds like it would be a good idea for many people - especially if they can get the insurance.
[...] And if you missed the earlier articles in the series you can check them out below. There’s No Business Problem That Can’t Be Solved Risk and Money In Business - The Rules Business Partnership - Is It Financial Suicide? [...]
As one of my old law professor said “a sole proprietor is an idiot and a partnership was a group of idiots working together.”
Limited Liability Companies and Corporations can be set up and organized for only a few hundred dollars. They offer superior asset protection in the event of a lawsuit. They are also much easier to sell in the event that the business prospers or conversely if it needs to be would down.
Pete Johnson’s last blog post..The Guide to UK Home Ownership
Hi Pete - that is very true. However, I doubt that a Limited Liability Company would have helped much in my situation and it wouldn’t have offered me that much protection - at least certainly not from the theft from my account anyway.
In the early stages, when the business is making less profit - a limited company would actually pay more tax than a sole trader or partnership would.
The asset protection can be a bit deceptive also. Whilst it is true that a Director of a Limited company will not be made personally bankrupt if everything goes pear shaped, they may still suffer financially. The trouble is, if a Limited Company wants to borrow and they don’t have assets to borrow against, the lender will often ask Directors to guarantee the loan with personal assets, such as their homes. So, if the company does fail - they still lose out personally.
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