Europe emerged slowly from the Dark Ages that followed the fall of the Roman Empire. Trade during that time virtually ceased. Growth was stagnant. Most people rarely traveled more than a few miles from where they were born.
As Europe revived, trade across regions began to blossom. Intrepid merchants traveled across Europe and returned home with new products. Locals began producing excess goods and selling them to merchants for trade. In the beginning, these new businesses – traders and producers – were family affairs. It was rare to have a business partner that was not a close family member.
Over time, however, businesses grew and the family was no longer able to produce all of the partners needed to make the enterprise run. The Company was created, and it became more common for non-family members to become owners of the enterprise.
The term company itself reveals the enterprise’s family origins. The word “company” is derived from the Latin “cum panis” – “with bread”. A member of a company is your “companion” - someone you share bread with. The new partners, not bound by ties of blood, were chosen very carefully, and became like family – permitted to take in the hospitality and protection of the home, symbolized by the sharing of bread.
Today most business enterprises are still owned by a single individual. In 2000, there were 27.2 million business tax returns filed with the Internal Revenue Service. Of those 27 million enterprises filing returns, 17.9 million – 66% - were sole proprietorships. Widely held, publicly traded firms made up less than one percent of enterprises. The remainder, about 32%, were closely held businesses owned jointly by a small group of people, often not in the same family. True companies.
There are many advantages to the company over the sole proprietorship. Companies allow entrepreneurs to get more done – spreading out the work of the firm among more owners. Companies allow for more entrepreneurial talent to be added to the firm, with each partner bringing a unique set of skills and perspectives to the group. Companies spread financial risk, with more partners to put in capital or guarantee loans. While many of these can be done by adding employees, an employee rarely has the loyalty and buy-in of a partner.
The family-owned businesses of the late middle ages found that non-family owners were needed to expand the business into new areas, and to access new talents. The same can be true today. Those early companies were careful about who they added, though. New partners became a part of the family, and were selected with great care. If you are an entrepreneur or professional operating a sole proprietorship or a family business, and you are thinking of offering ownership interests in your firm to non-family members, you should consider the wisdom of those earlier business pioneers, and take such a course of action cautiously.
Here is why:
1. Time. You are going to be spending a great deal of time with this person, and in a more intimate way that if they were your employee. You will be sharing more of your thoughts, hopes, dreams and finances with this person than with most any other. Make sure you like the person you are partnering with enough that you don’t seek to avoid spending this time with them – over time that will cause major problems in your business.
2. Privacy. Most people tend to be very private about certain things, like finances. Talking frankly about money can be hard inside a family, and can be harder with non-family members. As business partners, you will have to openly and frankly discuss the company’s money and how to spend or save it. You will also need to trust this person with some sensitive financial and personal information. If they have a history of business relationships gone bad, you will want to proceed with caution.
3. Control. Entrepreneurs are, quite often, control people. You became an entrepreneur because you wanted to be in control of your own destiny – to call the shots. Taking on a partner means losing some of that control. Make sure you are comfortable with some level of collegial decision making and that you are prepared not to get your way all the time.
4. Divorce. When spouses split, they go through a divorce. When business partners split, there is the business equivalent of a divorce. Like real divorces, they can be amicable, but they are never fun and quite often they end up acrimonious and in court, with lawyers.
Partnering has great advantages for a small business, and for many entrepreneurs it is an excellent way to grow. Solo entrepreneurs often reach a point where they just can’t do any more, and bringing in partners is often a preferred method of growth over professionalizing management too early. Choosing those partners wisely, and engaging in some frank up-front planning will help keep you and your new partners happily breaking bread together for years to come.