One of the hardest things to create in a new company is a long lasting business partnership. A common meme is that business partnerships are like marriages, but break up more often.
I’ve had “learning experiences” with both. I had a poorly executed business partnership that blew up very badly in 1998, and I got divorced personally the next year.
While I survived both, I still describe the business divorce as a “scar on my back.” And I try to encourage budding business partners to do it right, to avoid my pain, and not repeat my mistakes.
Investors, bankers and other funders often know this is an issue with young companies, and will poke at your partnership as part of funding due diligence. While that shouldn’t be the primary reason for getting your act together, it could prod you into action.
Business Partnership Done Right
There are three painful parts of doing a business partnership right. None of this is easy, but that’s why it’s not done often enough.
Then again there’s lots about building a company that isn’t easy. Just be prepared for getting out of your comfort zone.
The three components:
- Talk about important issues: money, workstyle, and success
- Come to agreement, and adjust to disagreements
- Put it in writing.
Business Partners Need To Have “The Talk”
Lots of people are more uncomfortable talking about money than talking about sex. But it’s critical for business partners to get out of their comfort zone and talk about money related topics. Here are some money issues you need to discuss together:
- What do you expect for salary, benefits, bonuses, profit sharing?
- What do you expect to contribute financially to support the business, upfront and in tight cash flow times, and what will you get in return for the financial contribution?
- What is your ownership percentage expectation, upfront and over time?
- What is your external funding expectation over time: equity, debt, grants, bootstrapping?
- How much financial risk are you willing to take? What is your expectation about negative versus positive cash flow? How much personally guaranteed debt is comfortable?
- How will you manage money: accounting, bookkeeping, financial controls, reporting?
- How will you balance profit distribution, revenue growth, employee compensation, and social responsibility?
Are you feeling uncomfortable yet?
Then you need to have an honest discussion about workstyle. Even people who know each other well may be surprised about what the other partner thinks about how much work is enough, and under what conditions.
- What is on- and off-limits in terms of working hours for regular work, meetings, and travel? How do you think about weekends, for example? Personal time off?
- What is your philosophy on work intensity: are regular breaks good or bad? How much stress is normal? How much workload?
- Who’s going to do what? How will you share or allocate unexpected tasks?
- How many “other things” are ok – side projects? Personal projects? Civic or philanthropic projects?
- How much collaboration is expected? What forms and how much communication? How much documentation of meetings, decisions, and plans is expected? How much process?
And then there are the mostly fun discussions that most partners have about “success,” although sometimes surprises and disagreements can surface.
- What does success look like in five and ten years in terms of products and services, revenue, profit, employees, customers, visibility?
- What is the expectation of business exit in terms of timing, sale or acquisition possibilities, financial return?
- What other key partners or senior management will be needed, when, and on what terms? What do each of you want to be doing in five and ten years?
Hopefully you can see that all of these are important issues. And just as with marriage, you shouldn’t expect to have exactly the same viewpoints on all issues.
The first goal is to think through these issues. As with many other aspects of building a business, some of these topics will be new territory. Don’t expect to find instant answers.
The very process of discussing tough issues with a business partner is important. You’ll learn a lot about each other. And you’ll improve your communications skills, which will be tested often as future challenges arise.
Achieving clarity about each partner’s viewpoint is goal number one. Gaining consensus on issues is goal number two. But learning how to “agree to disagree” is also an important goal.
For example, if one person is ok working weekends and another isn’t, you need to manage your way through that issue. Otherwise resentment will build. There are usually multiple ways to resolve such differences – you need to pick one and agree.
Put It In Writing
As you reach agreements and resolve differences, it’s important to memorialize the discussions in a written agreement.
Some of these may end up in your Limited Liability Company Agreement. Some will end up in a Partnership Agreement among the partners. There are lots of Partnership Agreement templates on the internet, and your company attorney will likely have one.
Other issues, though, don’t belong in the legal agreement. However, it would be helpful to have them written down in a document that the partners review annually. It doesn’t have to be complicated, just a set of bullets that says things like:
- We agree the company will be cash flow breakeven for two to four years and we’ll draw minimal salaries ($10,000 – $30,000/year) during that time.
- We agree the company should take on no more than $100,000 in personally guaranteed debt during the first three years.
- Partner A will do bookkeeping for the first six months, after which we will hire someone.
- The business is a side gig for both partners until it reaches annual revenue of at least $150,000, after which Partner A will go full time and Partner B will remain part time until the business reaches $300,000 a year.
- Partner A takes a 15 minute break every two hours, Partner B doesn’t take breaks, and both workstyles are ok.
Business Partnership Done Wrong
I didn’t do any of this in my a cappella business partnership. It ended badly, for lots of reasons.
He expected me to put in money, not increase my ownership, and be passive. Eventually I wanted to own more of the business for my cash and be actively involved in day to day operations.
He was ok waking up at 11 am, getting stoned by noon, and working into the wee hours. I wasn’t ok with him doing that.
He was ok being verbally abusive to our female employees. I wasn’t.
He was ok not paying artists for their products and services. I wasn’t.
He would lie and cheat to make sure he never lost money. I wanted to act ethically even if it meant losing money sometimes.
But I had nothing in writing.
So when our disagreements finally led to action on my part, it was very ugly. I did some things out of anger that I regret now. I sued him, he sued me.
I ended up starting a new company that competed with the company I’d started. It was very hard and frustrating.
Don’t go down that road. Make sure you have the talk with your partners, come together, and put it in writing.