Vol. LXXIX
Dear Manager,
Nearly forty years ago I received some sage advice that is as insightful now as it was then. I was in my second year of college and it was the first day of the semester in a finance class. The professor introduced himself and made the following opening statement: “If you learn only one lesson from this class it should be NEVER, NEVER, NEVER ENTER INTO A PARTNERSHIP.”
At the time it seemed to be a startling comment, perhaps made by an individual who had recently been burned. Now, after thirty-five years of business experience, I’m inclined to believe his sentiment was very close to being on track. Perhaps he overstated his position a bit; I would prefer to go on record stressing only two NEVERS.
Having said this, I’ve certainly seen some well thought out and well-conceived partnerships flourish for extended periods of time. I’ve also personally entered into some successful limited partnerships. My observations over the years, however, show me that the vast majority of business partnerships are fundamentally flawed from the outset. We’ve certainly all seen them fail with similar ramifications and emotions to a divorce, but often even more costly!
THE ENGAGEMENT
This is when two or more individuals develop the concept or strategy for their partnership. Often a partnership is consummated for one or more of the following reasons: capital, convenience or courage. Truth be told, these have also been known to be factors for life’s ultimate partnership: marriage.
In either case, if this in any way characterizes the fundamentals of a new partnership, all parties destine it for failure, disappointment, and potential loss of significant resources. How can so many be so naïve as to believe that this is a match made in heaven? Invariably, and in conflict with most fundamental business judgments, rather than a partnership they are wrapped up in a dream. A dream is a wondrous thing; failure to exercise an equal dose of caution and reality can make it a nightmare.
Capital: The financial resources of two or more people are certainly greater than one. All this confirms is that now there are additional resources to lose. Courage: Many lack the confidence to proceed on their own. This implies that a second party’s judgment and blessing should hold greater relevance than ones own. Convenience: Finally, a vehicle such as a partnership just might be a means to the escape you’ve been pining for!
My best suggestion is to enter any new relationship with a fair degree of suspicion and street smarts. You not only need to evaluate your own motives but clearly evaluate the motives of each of the other players. Are they consistent and compatible with your own? Remember, you are personally liable for their financial investment in equal parts to your own! Are all members willing to not only dwell in the dream but to also tackle the realistic and difficult issues that certainly need to be addressed in advance?
The inception is clearly your window of opportunity to discuss the specific roll of each partner, the financial participation, and the short and long-term objectives. It’s in this period of blush when everyone’s best intentions are clear and everyone will be granted benefit of the doubt. What commitment of time will each member be expected to make, and how will this time be compensated? Who will be making the day-to-day decisions required to seamlessly run a business? There’s nothing worse than “group think” to focus limited resources on whether or not to stock Coke or Pepsi in the company fridge. Seriously, this is absolutely how ridiculous it can become!
By addressing all of these issues you will be providing this entity some form of foundation that provides at least some chance for survival. You should also be evaluating your own level of comfort in proceeding at this stage. With any indication whatsoever that all parties aren’t on the same page, I would bolt, no questions asked!
THE MARRIAGE LICENSE
Prior to consummating this relationship, make sure you have fully discussed your individual and collective exit strategies. What if one party would need to move to another state to be with family? What if a partner dies, how will their stock and compensation be addressed? Have you addressed a buy and sell agreement should members leave or to be asked to leave? This is also the time to document all discussions and execute a mutually agreed upon contract or letter of intent. Leave absolutely nothing to doubt or interpretation.
LEAVE THE DOOR OPEN PLEASE
Now that you’ve crossed every “t” and dotted every “i”, we must also remember that in most cases this is a new endeavor. Often it’s not “the expected” that brings down a partnership, it’s “the unexpected.” All of a sudden, one member’s participation has been significantly altered in some form (in the best interest of the partnership) and unexpected responsibilities are now clearly in his lap. The partnership is now clearly “out of sync.” Do you abide by the original plan of equity under a completely different scenario, or is there a vehicle and scheduled time to review the initial (albeit uneducated) initial plan? If a structure is not established to do so, and in many cases it simply won’t be, the founding pillars will begin to crumble.
Similar to any relationship, a partnership is no stronger than the health and satisfaction of all parties. All parties must think in terms of protecting the interests of others, often before their own. If all partners rely on this fundamental axiom, no partner’s interests “should” be in a position to be individually compromised. The checks and balances should currently be in place and prepared to address all issues in an open forum.
Family and friends often find themselves considering partnerships. While there’s significant benefit in having a history with a potential partner, more often than not these are a form of convenient partnerships. This single question should be asked: With what I know of this individual, is he or she the best possible person to protect and enhance my financial future? If there are others with greater abilities and resources, wouldn’t you clearly owe it to yourself to proceed in that direction? Sadly, the very best way to ruin a relationship is to enter into a partnership!
Quality partnerships are founded on the premise that each member has the individual abilities to significantly enhance the group as a whole, be it financial or intellectual. Each partner holds significant investment in some form and holds substantial respect from other members of the team. In fact, it’s likely that there’s a substantial sense of unease at the thought of losing a member. This alone will serve to assist in protecting the individual interests of all parties.
Significant quantities of trust and integrity are fundamental to a successful partnership. To solve the interpersonal relationships of a partnership is only the first of many steps. Success also demands a significant product or service that creates benefit to the marketplace. Without this, it just won’t matter how perfectly cohesive a group of partners might be! In the end, you must be fully prepared in word and deed to give more than you receive … at least from your perspective.
I hope this reflection on partnerships sheds light on some of the pressure points in this momentous business decision. My objective is to bring pause to the process; while there are certainly matches made in heaven, they are rare. Many principles of business partnerships are no different than those of romantic partnerships. Neither comes with a lifetime guarantee. Once the courtship is complete, take the plunge or beat feet!
Personal Regards,
Keenan
INTERPERSONAL© is published by INTERPERSONALBIZ.COM, Keenan Longcor, Editor, ©2011. Duplication of this publication is permitted for both personal and business use. Excerpts may only be quoted with acknowledgment of INTERPERSONAL/INTERPERSONALBIZ.ORG as the source. For re-publication rights, please contact the editor at KEENAN@INTERPERSONALBIZ.COM
