The most consistently ignored bit of advice I have given, over the last fifteen years, is to people about to go into business together and that is to get a partnership/shareholder agreement in place before they commit to a new venture.
I can understand why they ignore it firstly, there is a cost involved and secondly, the new venture is in its infancy and no-one knows if it will work or not.
Why come up with a formal agreement if the thing isn’t going to work at all?
Both reasons are totally understandable, but of the business failures I have seen over the last few years, 80% of them have been partnerships.
So here are my top 5 reasons why these businesses are failing more than sole owner businesses:
1. The Partners want different things.
At the beginning, it can be all very agreeable but it can quickly become apparent that partners are looking for very different things from their businesses. A common disagreement among partners is concerning the pace of growth. Some people are risk adverse and some are gung-ho about growth. When partners want different things out of the business, or even life, then it becomes difficult to stay in business.
2. Inequality of effort
Unless agreed early on, it can become apparent that some partners just aren’t willing to pull their weight and this can cause resentment, especially if they still expect to draw the same income from the business.
3. No Agreed Exit Strategy
Again something that should be agreed early which often isn’t, is the eventual exit strategy. A common cause of disagreement is when someone approaches to buy the business. This can cause major issues if one partner wants to stay and run the business and one wants to sell, especially if the remaining partner can’t raise the funds needed to buy the other out.
4. Clash of Personalities
You never really know someone until you spend a significant amount of time with them. Just because someone is your friend it doesn’t mean you really know them. I have had clients who after working together for a few years can’t be in the same room as their business partner; this makes it really difficult to grow a business.
5. Life gets in the way
There’s not a lot that can be done about this one, but sometimes simply life gets in the way. A family member is ill, a partner is ill or circumstances just change. During life events a partners outlook changes. In a sole owned business, decisions only affect one person but in a partnership this can cause friction.
My standard recommendation is to avoid a partnership or friendship type business if at all possible but if you can’t, then make sure you have an agreement in place that covers things such as:
This is not an exhaustive list, but any agreement you have in place has the potential to save you heartache, worry and money in the future.
