On Business Partnerships: Painful Pitfalls to Avoid

So You're Forming a Business Partnership

You and your best friend are having a conversation about a new-found passion both of you share and soon, you find yourselves talking about an awesome business idea and a potential partnership.You are a mom of young children planning to launch a business and thought that having a partner to share the load is a good idea.Or maybe you have just been approached by someone to start a business venture together.Do you find yourself in one of the above situations?If you are, congrats on taking the entrepreneurial path! But before you take any further actions, read the rest of this post. It will potentially save you from some painful experiences you want to avoid.

Remove the Rose-Tinted Glasses

Starting a business can be fun and exciting. You have big dreams and can’t wait to see them materialize. But have you and your partner sat down together and done the hard work? No, I’m not talking about the business plan, marketing tactics or even strategies.What I’m referring to is discussing issues with your partner like: Who should make the call if no consensus is reached regarding a business decision? How much of the revenue do you reinvest in the business and at which point do you start drawing a salary? If either of you want out, who can you sell the share of the business to or at what price can you buy back the share?If you are having discussions about these issues, well done. You are on the right track. But if you have not done so, it’s time to buckle down and get to it. It might be awkward or even difficult to talk about the issues, but if you don’t, you could find yourself in for a nasty shock one day. The fact is, there are more business partnerships that have failed, than those that have worked out well. Addressing potential issues before they come up is a great start in setting your partnership up for success.

The Potential Pitfalls

If you don’t know what the potential problem areas are, below is a list of the common pitfalls to help you get the conversations going:1. No clearly defined roles or responsibilitiesMany business partnerships, especially between good friends, often start off with assumptions about what each other should do. Yet not having clear roles and responsibilities is often the main cause of frustration and disappointment between partners. Roles can change over time, but that doesn’t mean you can be hazy at the start.Having clearly defined tasks not only ensures that the business runs smoothly, it will also help both of you to set some measurable goals and be accountable for them.In addition, talk about your expectations of how much time each of you will spend working on the business. This helps prevent one party from feeling that the other person is not doing enough.2. Not knowing each other’s working stylePeople approach tasks differently. Some people like to work on multiple projects at a time while others are very focused on a single task; some people enjoy team work while others prefer working independently. Add the complexity of individual personalities and it’s easy to see why without a good understanding of each other’s working style, misunderstandings and conflicts can arise quickly between two partners.Besides working style, it is equally, if not more important to know how your partner handles challenges. Unless both of you can weather storms together, it will be hard to keep the business going for the long-term.3. Not being aware of your partner’s financial situation or money habitsIf you do not know your partner’s financial standing and money habits, there is potential for big troubles later on. For example, does your partner have a big outstanding housing loan? This could mean not having extra capital to invest in the business if the situation calls for it or that your partner may want to start drawing a salary when you think that it is not yet the right time.Does your partner like to splurge instead of spending wisely? This could lead to unnecessary business expenses that do not contribute significantly to the bottom line.Money can trigger our deepest fears and insecurities and cause people to act irrationally. So don’t overlook its impact on your partnership.4. No written contractWe trust our friends and think that it is unnecessary to have a contract when we go into a partnership with them. But a business relationship is not a friendship and they can’t be managed in the same manner.I was once in a partnership where my friend walked off with the business and denied we were ever in it together. As there was no written contract, I had no recourse. In order to avoid such pitfalls in your partnership, it is important you don't assume that you know everything about your friend.It is advisable to go to a lawyer and get the contract drafted. However, if you really can’t afford it at this point, at least come up with a contract (research online to find out the common clauses) and get a neutral party to sign as a witness. At some point in the future, you should go to a lawyer and get a formal contract done.5. Not having a clear exit planNothing remains stagnant. You or your partner may need to exit the business for various reasons but unless you have spelled out the terms clearly in the beginning, contentions can arise.  For example, who can you sell your share of the business to? At what price can you buy back partner’s share? What happens if your partner becomes incapacitated or passes away? Would you be comfortable working with your partner’s spouse or friend if they take over?We can never predict what the future holds. Having an exit strategy planned out in advance can make a difficult situation manageable.6. Going into partnership for the wrong reasonsDo you really need a partner? Why can’t you do it on your own? Many times, our fears and insecurities make us think that we are not good enough to do it alone. So we go into a partnership, telling ourselves that our partner complements our strengths and weaknesses, and together we can achieve much more.But working with a partner can actually turn out to be harder than going it alone. Like marriage, making a business partnership a success doesn't come automatically. In addition to the time and effort required to run the business, the partner relationship also requires conscious effort.In some cases, by opting into a partnership we are playing it small and not allowing ourselves to grow into our fullest potential. If you can hire someone to manage the tasks your partner handles, it's a good indication that a business partnership is not the best course of action. There are many ways you can collaborate with others without having to create a formal partnership.If you do decide that a business partnership is right for you, be smart about it! Make sure that you have considered all of the potential pitfalls that a partnership might bring. Remember that your priority is to take care of yourself and your company, and prepare for the rough situations even if they don't seem probable. With the right precautions and good communication you can set your partnership up for success.

Let's hear from you. What are your reasons for entering into a business partnership? Which of the above potential pitfalls do you think is most important in your discussion with your business partner? Tell us in the comments!