By Bonnie Robertson

 Shocked, confused. A premier client of five years cancels a contract worth $450,000. A call to the client, and the response is “we didn’t cancel it; we just signed it under your new company.” But I don’t have a new company…what are they referring to? A rapid review of the financials reveals a near $100,000 in cash drain for expenditures that do not make sense and were not planned for. What is happening? I already know the answer but don’t want to face it. My business partner of six years, whom I trusted explicitly, built a dream with, solved problems with, even shared clothes between our kids with, had done the unthinkable.

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A business partnership gone bad is professionally, emotionally, and financially a devastating challenge from which to recover. But I was fortunate, the need for a partnership split was clear, and our partnership documents gave me clear direction and legal capability to do what needed to be done. The decisions were evident, although still devastating.

More than a decade later, writing these words still leaves a knot in my stomach. But I am not alone. Statistics show that business partnerships amongst entrepreneurs have a fallout rate higher than marriages in this country. It is estimated that two out of three of all business partnerships break up within the first five years. The risk is enormous. The recovery is costly.

But this is not to discourage all business partnerships, for there are positive stories in that one third that makes it. Bob and Ray have been business partners for more than 30 years. They have had some ventures that turned out better than others. They have had issues to resolve between them. They live in different cities, making communication around business decisions more of a challenge. All in all, it has been financially, mentally, and emotionally a rewarding experience with great returns. What is different? Why is it that so many entrepreneurial partnerships fail while so few live up to their vision and promise? These are questions I have been asking of entrepreneurs for years, and while human relationships are complex and are rarely understood in simple terms, there are some basics that can increase the probability of success and mitigate the risk of failure.

Why Take on a Business Partner?
The first question every entrepreneur needs to ask themselves is “why do I want to take on a business partner?” There are only two right answers: 1. Competency and/ or 2. Capital.

Competency
When your business vision requires expertise, knowledge, and skill to fulfill, sharing the burden with someone who has these capabilities can expedite growth and improve chances for success. It is important that someone with the competency to fulfill the work also has both the competency to help run the business and the stomach for the risk. If that’s not the case, it would be better to fire someone and take the risk yourself. Firing someone, although not easy, is far less painful than dissolving a partnership.

Capital
Building businesses requires money for start-up, expansion, and rides through the rough times. If there is a potential partner who would like to invest in the business for the opportunity for a return, it can be an effective way to generate capital. Be clear however, on what that return is expected to be and when. Often times the optimism of visionary entrepreneurs can distort the reality of cash needs. Plan together carefully and conservatively. If the return comes faster than anticipated, that will be a fun problem to solve.

Companionship
Unfortunately, many entrepreneurs choose to take on a partner because of a need for companionship. It gets lonely chasing a vision. Your family and friends get tired of hearing about it; no one else quite understands the possibilities and opportunities. Creative entrepreneurs find themselves in a search for someone who understands, who can be as impassioned about their dream as they are. They long for someone to share the excitement. But companionship without competency and capital can be risky business. While companionship is essential for friends, families, and marriages, if a business partnership is based only on companionship and does not have strong doses of capital and/or competency to support and sustain the relationship, it can be costly to both partners and the business.

Other considerations for building and maintaining a healthy partnership:

Shared Values
This is a tricky one. Often times the thrill of a new business will cause people to sell themselves on their values, and it may take time to determine the real deal. Values are not expressed by words but by actions. Observing a potential partner in situations other than your immediate business can give you some clues. How does your potential partner interact with others? Do they communicate openly and with respect? How do they handle crisis or conflict? Do they display integrity and honesty? Do they view the world realistically and manage their lives the same way?

Financial Transparency
Having facilitated and mediated business partnerships, it always strikes me how little business partners understand about each others’ personal financial conditions. Changing financial conditions can derail a good partnership, as one party finds themselves in an increasing need for more cash. If your partner or potential partner has difficulty managing their personal finances, it is highly unlikely he/she will have the capability to manage the changing financial condition of a business. It is important to have open dialogues with a partner regarding financial expectations of the business. How long can you maintain without taking home money? What backup plan do you and your partner have for personally getting through the lean times?

Exit Plans
Many entrepreneurial partners spend countless hours discussing how to build the business and expansion strategies. Far too little time is spent discussing how and when the owners would like to exit the business. The excitement and stress of day-to-day business keep entrepreneurs focused on the here and now. Consideration and time for dialogues and planning about the future for both partners and the business is crucial to a happy ending for all involved. How long do you and your partner intend to stay in this business? Is there a triggering point by age, lifestyle or financial gain at which one or the other of you will be ready to exit the business? Will you sell the business? If so, to whom?

Emergency Response Plans
In the adrenalin producing days of business, it is hard to imagine a crisis occurring, but responsible business owners have a clear emergency response plan. What happens in the case of fire or natural disaster? Do you carry business continuation insurance? What if one of you as owners has a health issue that would keep you from working? Buy and sell agreements between owners should clarify what triggers a sale to the other partners in the event of health issues or even death.

Management Contracts
Partners working in the business should have clearly defined roles and expectations, and it should be documented. Who gets to make what decisions, especially about money and people, is crucial between partners. Clear expectations for what a working partner is to deliver for the business, as well as actions that constitute dismissal or force a sale in a partnership are critical for helping keep a bad situation from getting worse. My own example of a partnership gone badly was remedied quickly because of such a document that had been signed by both of us and witnessed. Most business partners don’t want to discuss these situations with each other, but agreeing to what is expected from each other not only helps to mitigate the risk, but it also can build a foundation for greater trust.

Open Communication and Planning are Key
It is not my intention to discourage good business partnerships. However, understanding the risks and openly discussing how you will deal with such risks could increase the probability for a successful and profitable business partnership. Preparation and open dialogue on these topics can help increase the odds and the good fortune to be one out of the three business partnerships that works effectively.