Thinking About Money

Chris at InvestorGeeks just posted an article on “8 Rules to Successful Partnerships“. Since I’m of the opinion that most partnerships are disasters in the making, I thought I would elaborate on his post.

Don’t get me wrong – everything he says is absolutely true. Having the right partners can make a huge difference in the success of a business. But having the wrong ones can kill it even more quickly, which brings us to my own small contribution to the topic. 8 rules to building an unsuccessful partnership:

1. Don’t bother getting to know your partners before forming the partnership. A lousy partnership is like “love at first sight” – you meet someone or find someone with a common interest and next thing you know you’re married. Sometimes it works out, but it’s more likely to end in a messy divorce when you discover what the person is really like. A business partnership is like a marriage (usually without the sex, though at the beginning you may be spending more time with this person than your social partner). Entering that relationship without taking the time to get to know the person is pretty darn risky and a good way to kill the company before it even gets started.
2. Don’t define your roles and expectations of each other ahead of time. It’s a safe bet your partner won’t do his or her “fair share” of the work if you haven’t discussed what “fair” means ahead of time. Communicating after the fact is very important (Chris’s rule #3), but it’s a hard road if you haven’t defined roles and expectations to communicate about ahead of time.
3. Don’t have a long term strategy that your partner(s) agree with. Of course businesses change directions as time goes on and you and your partners will need to discuss that, but if you don’t have a long term strategy there’s a good chance the disputes can start out within months of the company forming – a good way to abort it before you have to deal with the nuisance of income.
4. Don’t discuss finances at the start. In some ways things get harder once real money starts coming in because that’s when people get greedy. If you haven’t already defined the rewards at the beginning, the resentment and infighting that can result might quickly overwhelm other issues – like running the company.
5. Use a general partnership as your organizational entity. There are so many great ways to structure a business (S-Corp, C-Corp, and LLC) that choosing the one that generally has the worst tax consequences and liability issues is a great way to add stress to an otherwise stressful time.
6. Don’t sign a pre-nuptial agreement. Even the best partnership have occasion to need to kick out one of the partners. You can add a huge amount of cost, stress and drama to the process by not defining ahead of time basic issues on buy-outs (like how to value the company, payment terms, etc.).
7. Don’t prepare for disasters. Your partner will never get sick or die in a terrible accident, so there’s no need to worry about things like key-individual insurance, or the possibility that you might end up having to do all the work while your partner’s heirs enjoy the benefits without having to do anything.
8. Don’t talk to a lawyer to help you set up the partnership and address all of these issues. Lawyers are a waste of money, and besides – by the time your lack of foresight gets you into trouble, your business is sure to be able to afford the prolonged legal fees.

Seriously – Chris is right. Many successful companies have been formed by partnerships. Hewlett & Packard and Page & Brin being some good examples. But many others have been formed by unequal partnerships – where one person has the drive and vision and brings on minority partners to be part of the enterprise and fill certain roles.

Chris’s rules are all valid once a partnership exists. The problems with partnerships are that people often dive into them without thinking things out ahead of time. It is important to take the time to get to know the people (if you don’t already – many successful partnerships are formed by people who’ve known each other for years). It is important not only to discuss how you will deal with problems, but equally important – how you will deal with possible success.

This entry was posted on Wednesday, July 19th, 2006 at 8:19 pm and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.