Click to Print

What a Match!

Feel like your business is missing a key element? Finding a good partner could be just the thing to complete the picture. Here's what you should keep in mind if you want to make a partnership click.
September 1, 2004
URL: http://www.entrepreneur.com/article/72346

Jeff Olson started Velocity Business Publishing in 1997 with one partner and soon took on another. For the next five years, the business grew, sales increased and the partnership prospered. But then sales slumped, the business struggled and the partnership cracked. The 46-year-old entrepreneur bought out his partners in the Middlebury, Vermont, publisher in July 2003 and now says, "I'll never go into a partnership with anybody again. I'm going to be in charge of my own thing."

Olson's experience is one that many people considering starting a business need to hear about. Lured by the promise of companionship, the hope of sharing financial and decision-making burdens, and the potential for synergy with someone who has complementary talents, entrepreneurs by the millions decide that starting a business with a partner is far better than going it alone.

The good news is that when it works, it works well. "Companies that start out with partners tend to be the most successful," according to David Gage, an Arlington, Virginia, business mediator and author of The Partnership Charter: How to Start Out Right With Your New Business Partnership (or Fix the One You're In). Unfortunately, according to Gage, many partnerships fall apart after a few years.

That doesn't stop people from forming new companies with partners. There are more than 2 million businesses organized as partnerships, according to the 2003 Statistical Abstract of the United States. Yet that probably vastly understates the popularity of going into business with someone else, says Denis Clifford, a Berkeley, California, attorney and co-author of The Partnership Book: How to Write a Partnership Agreement. Many businesses that are legally corporations are, in fact, run by two or more partners who share ownership, decision making and finances equally.

Whether an S or C corporation, an LLC or professional corporation, businesses run by de facto partners have many of the same advantages-and face many of the same issues-as by-the-book partners do. If you live by the partnership, you can die by it, too. "The basic human realities are the same, whatever form of organization you have," says Clifford. "And they're the most important."

Partnership Solutions

Most partnership problems are best avoided before the partnership is formed-even before you discuss it with a potential partner. The first thing to do is make sure you need a partner, says Olson. Even if you already have someone in mind, it's best to start with a clean sheet of paper. Keep your options open, and evaluate your business, yourself and your potential partner before making it official.

Start by making a list of the things you hope that partner will contribute, Olson advises. Then, consider whether you would be better off getting those things elsewhere. For instance, instead of taking on a financial partner, you might prefer additional outside financing.

If you decide a partner is worth taking on, Gage says you should next consider what kind of partner you will be. Make another list, this time of the things you'll bring to the partnership. This could include money, talents, contacts or other assets.

Next, ask yourself what you want from the partnership. Whether it's a salary, a share of the profits, the perquisites of position or anything else, be frank about what you hope to gain from joining forces to start a business, Gage says.

Now it's time to start looking for a partner-or, if you already have someone in mind, evaluating your candidate. One surprising bit of advice from experts and veteran entrepreneurs: The last place you should look is among your friends. "You want somebody who complements you," explains Fred Kiesner, entrepreneurship professor at Loyola Marymount University in Los Angeles. "Your friends are probably clones of you. You don't want a friend as a partner." The same goes for relatives, he adds.

One reason to rule out friends is that, if worse comes to worst and the business goes under, your friendship may suffer collateral damage. "When people say they're going into business with their best friends, I say they're going to have a best enemy one of these days," says Kiesner. "It's a very common thing that you end up hating each other."

When you add it up, the best source for partnership candidates is among the people you work with. Your best bets are colleagues, suppliers and customers whose business skills you know and respect, and whose personalities you can tolerate. Olson worked alongside his first partner in his last job and credits that experience to their initial success. "I'm not sure I would partner with anybody I hadn't worked with before," he says.

When considering candidates for your partner, look for people who complement you. Ideally, they'll bring assets you don't have and that will benefit the company. That may mean getting someone with financial and operations expertise to match your skills at marketing and product development, as Olson did.

Picking a complementary partner could also mean seeking someone with a personality that's different from yours. Darlene Ziebell, president of business management consulting firm Actoras Partners in Hoffman Estates, Illinois, partnered successfully with her co-founder for nearly a decade. "If my personality didn't work with a particular client, his did," says Ziebell, 50. "It pays to have different kinds of personalities."

If your potential partner passes all these checks, it's time for some background research, says Leslie Grossman, 49. She did just that when she started Women's Leadership Exchange-a New York City-based organizer of business conferences for fast-growth women-owned businesses-with two partners in 2001. Check out a partner by calling former employers or other references, just as you would with a candidate for a job, Grossman says. And be prepared to hear bad news. "Sometimes," she says, "partners might not have the expertise you think they have."

Tough Questions
Everybody's looking forward to the future when they start a new partnership, and that's just the problem, according to Denis Clifford. "You're generally in an optimistic mood-too optimistic," says Clifford, co-author of The Partnership Book: How to Write a Partnership Agreement. "You figure you're buddies, and you'll hash this out. But this is the perfect time to put everything in writing," he says. Every partnership is different, and no one can predict the future or the obstacles it will present. Clifford suggests partners start by considering these questions before shaking hands to seal the deal:
  1. Who will contribute capital and how much?
  2. Who will contribute what skills?
  3. Will all the partners work full time?
  4. How much will partners be paid?
  5. If one partner brings in more business, will that partner be paid more?
  6. How will profits from the business be divided?
  7. What happens if more capital is needed?
  8. What happens if one of the partners wants to leave?
  9. If a departing partner will be bought out, where will the money come from?
  10. How will the value of the company be determined in case of a buyout?
  11. What happens if somebody dies?

Partnership Foundations

Once you have an acceptable partner or partners, it's time to make it official. Have everyone go through some of the same exercises, listing what each will contribute and what each wants from the business. Focus especially on the overall vision for the business-how much growth, how fast, what markets and so on. Then share the lists frankly with your future partners. "Partners get off track fast when they haven't had very thorough discussions in the beginning and have left some ambiguity," says Gage.

Next, Gage advises drawing up more lists, this time of possible situations that the partnership might face along the way. "We suggest that partners individually come up with as many hypothetical scenarios as they can-from the very best scenarios of being inundated with money and orders to the very worst, like not having enough money to pay the bills," he says. "Then create guidelines as a group for how you'll handle those."

Only after you've done that should you begin to draft documents clarifying the partnership's goals, methods, structure and, especially, says Clifford, its conclusion. "All partnerships end, by definition," he notes. "So you need to figure out how you're going to end." This will probably involve an attorney's help to draw up buy-sell agreements describing how the interest of a partner who leaves the business will be bought out by the remaining partners. An insurance broker can help with insurance to finance a buy-sell agreement in the event of a partner's death. If the partners face fundamental obstacles to agreement, Gage suggests bringing in a professional mediator to help find a fair solution.

Don't rely too much on the professionals, however. Gage says too many partners assume all they need to do is draft legal documents describing their partnership. "The legal documents are very narrowly crafted to protect partners from one another," he says, "not to create a successful and effective team of partners."

Keeping Your Partnership Healthy

No matter how much care you take in preparing to go into business together, you have to pay attention after the business gets underway if you want your partnership to stay healthy. Problems can happen soon after starting. But before getting into serious danger, most troubled partnerships show signs that something is going wrong.

Often, one partner begins to seem less interested in and committed to the business than he or she was in the beginning, according to Gage. Signs include skipping meetings, working less, and generally showing less involvement in company affairs. If your partner voices-or you feel-emotions of unfairness about working hours, contributions, salaries or other partnership matters, that's another warning sign.

Difficulties can be posed by external events as well. For example, a downturn in business is a frequent stumbling block. Tough decisions about cutting costs, laying off employees, and foregoing personal perquisites test the strength of many partnership bonds, Kiesner says. "It's lovely when things are going well," he says. "But nothing stays good forever."

Making Your Partnership Better

Even healthy partnerships can benefit from preventative maintenance. Efforts to keep partnerships in good shape should start with communication. Communication is, in fact, the nearest thing to a cure-all for imperiled partnerships. Not just any communication will do, however. It's critical to express your concerns honestly and, if possible, immediately. Covering up concerns leads to festering resentment, says Grossman.

"If one of us says something at a meeting and the other one has a problem with it, after the meeting, we'll sit down and talk about it," Grossman says of her current partner. "We try to be direct with each other. We air how we feel immediately, and we're both willing to make changes. We don't let things build up."

Don't neglect nonbusiness communication, adds Clifford. In a former partnership with several attorneys, they learned that when the going got tough, it was time to schedule a lunch outside the office. But they avoided discussing business over the meal. "By the end of the meal, we'd realize we liked these people and that's why we went into business with them," he says.

It's important to remember that, although partners can be problems, they can also be solutions. Olson, for instance, has no trouble remembering why and how his partners helped him start and grow his business. "I didn't have to worry about finances, because Dave had that covered," he says. "My job was to get the product out; his job was to sell it and account for it. Guy's job was to automate in-house and get our Web site up for e-commerce. Getting together like that allowed us to do what we do best and leverage our skills."

That's why partnerships, formal and informal, are still so popular. If you decide a partnership is for you, and you pick your partner wisely, starting a business with someone can be one of the best ways to go. And if it succeeds, it's successful for both of you.


Mark Henricks writes on business and technology for leading publications and is author of Not Just a Living.