| Business partnerships are one of the most unique | | | | he was not. When this partnership began to fall |
| and trying relationships we will ever enter. Some | | | | apart and his partner extended a very fair offer |
| work, but most fail. I did a quick test. I searched | | | | to buy him out, he refused. Why? In his mind, he |
| Google for "business partner problems" and found | | | | could not communicate to all of his family and |
| about 169 million results. Compared to only 143 | | | | friends that the business could exist after he left. |
| million results for what I assumed would be the | | | | He was so infatuated with his fictitious position |
| more common term of "business partner," I think | | | | that he could not make reasonable or logical |
| it is clear that many struggle to make these | | | | decisions. The matter was finally resolved, but not |
| arrangements work. Here are four warning signs | | | | without great distractions and damage to the |
| that our relationship with our business partner(s) | | | | business. |
| may be headed for failure. Please note that this | | | | The best way I have seen to keep pride out of a |
| article assumes that business partnerships are in | | | | partnership is to regularly review the contributions |
| the common form of a Limited Liability Company | | | | of all involved as well as discuss how each partner |
| (LLC). | | | | can improve. If done correctly, this serves to |
| 1. No Operating Agreement - many states do not | | | | keep everyone grounded and grateful for each |
| require an LLC to have an operating agreement, | | | | other. |
| and, therefore, many business owners and | | | | 3. Compensation and equity are confused -Let me |
| entrepreneurs do not understand the importance | | | | be as straight-forward as I can with this topic. |
| of this legal document. The operating agreement | | | | Too often I see entrepreneurs, founders, and |
| is the agreement between all of the owners, or | | | | business owners that confuse equity and pay |
| members, on how the business will run, who will | | | | compensation. These two items must be |
| be in charge, and so much more. Let me share | | | | separated in order to set your partnership up for |
| one brief example to portray the need for an | | | | success. A few years ago I was introduced to a |
| operating agreement. | | | | business with 50/50 partners. 12 months earlier |
| While at a social event recently with my wife, we | | | | one of the partners had become permanently |
| connected with one of her friends from college. | | | | disabled and unable to further participate in the |
| He has started a business and his product is | | | | business. The partner remaining in the business |
| starting to sell and pick up some nice momentum. | | | | was frustrated that the other partner put zero |
| He spoke for quite some time about how excited | | | | time into the business yet was still getting 50% |
| he was, how much fun he was having, and his | | | | of everything the remaining partner generated. |
| new-found joy in finally pursuing his passion. I | | | | This partnership was about to fall apart until we |
| asked if anyone else was involved with the | | | | set a fair and reasonable wage for the partner still |
| business, and he said he had two partners. The | | | | working in the business. The other partner's wage |
| entire tone of the conversation changed as he | | | | was reduced to zero since he was not working in |
| described how his "partnership" had evolved, or | | | | the business although he was still entitles to 50% |
| perhaps a better description would be | | | | of the profits. Problem solved. |
| disintegrated. It started with three friends getting | | | | Ownership does not mean you should receive a |
| excited about an idea. They decided to split | | | | wage or guaranteed payment. Ownership means |
| everything three ways and they failed to put | | | | you participate in profits after all expenses are |
| anything into writing (namely, an operating | | | | paid, including the wages of those working in the |
| agreement). As time passed the expectations, | | | | business. In the spirit of understanding the |
| time commitments, investment, and basically | | | | difference between equity and pay, each |
| everything else related to these "equal" partners | | | | partner's compensation should be reviewed at |
| fell completely out of balance. Arguments replaced | | | | least annually. In this scenario, it would not be |
| friendship and greed supplanted a desire to share | | | | uncommon for one partner to receive a higher |
| everything equally. The problem - they never | | | | salary than another, especially if there is a |
| created an operating agreement that defined all | | | | difference in the amount of time put into the |
| of the important legal, financial, management, and | | | | business. |
| time issues for their business. The lack of an | | | | 4. Beginning without the end in mind -perhaps all of |
| operating agreement has sent this budding | | | | these points lead to this one - the need to |
| partnership into a death spiral that will likely end in | | | | contemplate every way the partnership will need |
| a painful and expensive divorce. | | | | to end or be dissolved. Here is just a brief list of |
| Please know that I have many more examples | | | | the different life events that could impact a |
| like this than I do of successful partnerships. One | | | | partnership: death, disability, lack of interest, |
| thing all of the successful partnerships have in | | | | relocation, new opportunities, family changes, and |
| common - they have an operating agreement. | | | | more. How will each of these situations be handled |
| While certain online resources can help | | | | by the partnership? An operating agreement and |
| entrepreneurs organize their entities legally, special | | | | potentially a buy/sell agreement should |
| care and consideration should be paid to the | | | | contemplate these events. |
| operating agreement. It is very wise to seek | | | | In addition, beginning with the end in mind implies |
| appropriate legal counsel as well as have healthy | | | | that a partnership will have planned exits as well. |
| and lengthy discussions with your partners before | | | | Selling a business can be very rewarding, and a |
| you finalize this agreement. | | | | partnership needs to look down the road to how |
| 2. Partner Pride -This is something that usually | | | | each of the partners will exit. For example, one |
| shows up when a partnership begins to have | | | | partnership I work with consists of three partners |
| struggles and accelerates its demise. Here is one | | | | under forty and the fourth partner is almost 65. |
| real-world example of partner pride. Two men | | | | The younger three want to stay in the business |
| started a business, each owned about 45%. The | | | | for a long time while the older partner is hoping to |
| remaining 10% went to other key employees. As | | | | exit the business and retire in a few years. |
| the business grew and became quite successful, | | | | Orchestrating this partner's exit while not hurting |
| one of the 45% owners took great pride in the | | | | the business from a cash flow and leadership |
| success of the company. He began to tell his | | | | perspective take thought, consideration, and |
| family and close friends that it was his company | | | | planning. |
| and that he was the major contributor to its | | | | The point is this - if a partnership does not |
| success. His pride allowed him to minimize his main | | | | properly plan for expected and unexpected exits, |
| partner and falsely establish himself as something | | | | it will likely fail. |