Partnerships are Wonderful (Partnerships are Terrible)

Partnerships are wonderful.

They allow people with different talents to come together to create a business that is stronger and more capable than any business each could have formed separately. Partnerships have a broader economic support base, a wider talent pool, and more dedicated entrepreneurial time and headspace than solo start-ups. Partnerships are engaged in the work of solving some of our most intractable problems, and provide employment for an increasing number of people.

Partnerships are terrible.

Partners, while getting along in the early, frenetic time of building something new, often fall out when times are tougher than expected and the money runs dry, or when times are better than expected and greed and selfishness crack the partners apart. There are entire hordes of lawyers who do nothing but make a living off the “divorces” of business partners. Like actual divorces, partnership break ups are emotional, acrimonious, and expensive. Like actual divorces, often only the lawyers win. Perhaps it is better, in life and in business, to be single?

The truth is, partnerships are both.

At their best, partnerships offer a wonderful way to live and work in a close-knit group, pooling funds and talents to the common good. [First Step - Choose Your Partners Wisely] At their worst, partnerships offer communication challenges and a loss of authority some entrepreneurs hate, and a trip into the courtroom at the end. How, then, can a small business owner or potential small business owner who is contemplating a partnership work to make success more likely, and try to avoid failure? Communication is the key. For the partnership to have a real chance of success, the partners must share a common vision of the future. The partners must engage in uncomfortable and real discussions about the future and management of their business. [Need Help? Here are 5 Areas to Get You Started]

Agility is a Must

The product of these discussions – a set of management documents and a plan – is not an end at all, but a beginning. One hallmark of entrepreneurial companies, one of the attributes that sets them apart and allows them to compete with better funded widely-held rivals, is their agility. Their ability to respond to changing circumstances quickly. Your partnership’s vision can, and will, change over time. That’s ok.

What is imperative, is that you:

·     open the lines of communication

·     have a beginning point – an initial vision and plan

·     agree on a method for communicating, agreeing and enacting changes to the vision and plan, and

·     ensure that your legal governance documents reflect the governance decisions you have made.

It won’t be easy, but creating that shared vision is the first step to partnership success.

Partners Need Vision

You Need a Shared Vision

Every entrepreneur, when they begin the journey of starting a business, has an idea of what they want to create. What it will look like, feel like. Where it will be. What it will make or sell. How it will grow. Certainly, this vision will change over time. Respond to circumstances. Latch on to new ideas. Seize unlooked-for opportunities. For the solo entrepreneur, the challenge is to be able to weed the bad ideas and the poor opportunities out from the good, when yours is the only viewpoint. For partners, though, there is a different challenge, and a critically important one - to share the same vision.

Partners may have different visions. Even after hours and hours of discussions about the business and day to day involvement with each other in running the business, partners often will have radically different ideas about the businesses exit strategy, its growth plans, even how the partnership is governed and what the relative rights of the partners are.

Partners Often Have Different Visions

One partner believes they will all retire running this business.

Another believes they will sell the company in 5 years.

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One partner believes everyone is happy in the current location.

Another believes they are looking to move as soon as possible.

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One partner believes there will never be more partners.

Another is on the lookout for new partners already.

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One partner believes his children will join the business.

Another thinks there is an understanding they will never hire family.

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One partner wants to borrow money to expand.

Another wants to pay down existing debt as fast as possible.

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It is difficult to appreciate the extent to which partners in entrepreneurial firms fail to share a common vision until you have worked with many such partnerships.

This lack of communication and understanding is not the exception; it is the norm.

The failure to share a common vision is also the cause of most of the disagreements and the breakups in entrepreneurial partnerships. You may believe you are having disagreements over this or that small decision - whether to hire someone, whether to lease or rent some equipment, whether to attend this or that conference, whatever. Most of those small fights, though, are only proxy fights that disregard the real issue: you have fundamentally different visions.

Vision Informs All Decisions

Each partner’s vision for the future informs almost every decision the partnership must make. Hiring, firing, expansion, borrowing, capital, lines of business, marketing, finance – all these decisions are informed by the partner’s vision of where the company is headed. Often partners will say that they cannot begin to understand the decision their partner has made in one of these areas. The decision just seems incomprehensible. If they understood their partner’s vision for the company, though, the decision would make perfect sense.

Only by aligning the partner’s visions can we begin to create a true partnership, where each partner gives the other positive regard and trusts that they are making decisions and giving advice in good faith working toward the same goal.

The benefits of vision run beyond correcting misapprehension, though. Even partners who are on the same page about everything they have discussed have not discussed everything. Budding entrepreneurs will often have created a detailed business plan and discussed at length the company’s business operations and marketing plans and even the long-term exit strategy. They won’t, generally, have discussed the capital model, or adding partners, or how to create specific, measurable goals for the partners, or a host of other issues. The benefit of creating a shared vision is to address the areas before they become problems. Before people become entrenched.

Documentation is Critical

A final problem with the shared vision is its documentation. Too often even partners that have created a shared vision fail to have the important bits of that vision properly documented. Too often they hire a lawyer that simply gives them canned, boilerplate organization documents that the partners don’t read or understand. The partners may have agreed that, if the business needs additional capital, they will all sign personal guarantees to the bank to get it. But the canned bylaws don’t reflect that agreement. Years later, when funding is needed and one partner’s mind has changed, the agreement cannot be enforced due to the poor documentation. Poor documentation often leads to lawsuits and business divorce. It is important that you get your lawyer, and your accountant for that matter, to understand your agreements and document them clearly and correctly.

Stay Agile

Whether you are contemplating a new partnership and want to get it off on the right footing, or you are in an existing partnership and want to get a better one, use the topics in this post and in other posts to guide discussion among the partners, make decisions about these issues, listen and understand each other’s point of view, and, most importantly of all, document the results. And remember, you’re an entrepreneurial business. Agility is your hallmark and your best advantage. The discussion you have is the beginning. You will need to keep the lines of communication open and revisit these issues as needed.

Partnerships are wonderful.

Partnerships: Managing Apples and Oranges

We might be apples and oranges, but we make a pretty good pear 

One of the strengths of partnerships is that each partner brings a particular set of skills to the venture. By complementing one another’s skill sets, you each make the partnership stronger. This source of strength, however, contains within it a hidden source of weakness.

The differences that make the partnership stronger also reinforce the inevitable tendency of partners to overvalue their own contributions and undervalue their partners’ contributions over time.

This tendency cannot be denied. Over time, you will overvalue your contributions and undervalue your partners’ contributions. You may only misvalue the respective contributions by a little, or you may misvalue them by a lot, but misvalue them you will. The only antidote to this tendency is to be aware that it is happening and to substitute objective analysis for subjective observation wherever possible.

I once mediated a business divorce in which one partner had put up all the initial seed money for the venture and the other partner, who had put in no capital, had operated the company for its entire life. The partnership had been very successful, and in the partners exited by selling the company to a third party for a lot of money. The sale should have been a cause for celebration. Instead, it was cause for litigation.

The money partner believed that he had taken all the risk, and the work partner had been paid a salary all along to run the business. “Why should he get a windfall on my investment. I could have hired anyone to run that business. I took all the risk and should get most of the reward.”

The work partner had a different view. “I had the original idea and operated the business the whole time. I grew this company into what it is. He has already gotten all his original money back and then some. Why should he get a 10x windfall off my hard work – I could have borrowed the money from a loan shark on better terms than that.”

Both of these partners overvalued their own contributions and undervalued their partner’s contributions. The fact is that the money partner did not have the idea for the business in the first place and could not have hired someone to operate the business. And the work partner could not get the funds to start anywhere else: that’s why he entered into the partnership in the first place. The point is that even in success, the tendency to misvalue contributions can cause dire problems.

A common cause of partnership stress is over compensation and work levels during business operations. Consider a partnership for a retail store where one partner operates the store, hiring, training and firing employees and greeting customers (the “Front Partner”). The other partner operates the back office, paying taxes and making payroll and getting licenses and ordering inventory (the “Back Partner”).

Over time, the Front Partner resents that he is always at the store and hardly ever sees the Back Partner. He doesn’t understand what could possibly be taking so much time and thinks that he is developing all the relationship and running the business and is entitled to a larger share, or at least a higher salary.

Meanwhile, the back partner comes to think that the front partner is just working a minimum wage job running the cash register and dealing with customers. Meanwhile, the back partner’s job requires real business skill you can’t buy cheap. Why should the front partner get more money? If anything, the back partner should make more.

This misvaluing of contributions over time will begin to lead to friction and dissent if not carefully managed. How, then, to manage this tendency? The solution is to focus on the needs of the business, and together to set goals for each other that will satisfy those needs. At a minimum, the partners should set these goals annually. Tom Mendoza of NetApp famously likes 90-day goals. You can even set monthly goals if you want. One does not preclude the others – you can set monthly, quarterly and annual goals, so long as you devote the time to measure and report them.

These goals must be specific and measurable. The goals cannot be subjective, like “run the best front of the house operation in the business.” For these partners, some goals might be:

Front Partner:

Goal 1: Maintain a full staffing level of 2 full time and 4 part-time employees. Replace any employee losses within 15 days.

Goal 2: Conduct new employee training within 5 days of hiring. Provide the partners with a new employee training outline for approval before the end of Q1. Conduct Quarterly ‘all-hands’ sales training. Hold a once-monthly all employee bonding night, paid, where the employees are fed, learn more about our products, and peer-teach one another to sell.

Goal 3: Ensure the weekly work schedule is published to employees no later than the Friday prior to the Monday week start, by 3:00 PM. Implement a new online scheduling system to replace the current paper scheduling system this year.

Goal 4: Be present at the store no fewer than 35 hours each week, working in the front of the house and interacting with customers. Ensure that at least 15 of those hours are during our busiest times when we make the most money. Provide an analysis from the point of sale system of the busiest volume times of the week by the end of Q1.

Back Partner:

Goal 1: All employee paychecks to be deposited or available for employees no later than 12:00 noon every other Friday (payday).

Goal 2: Ensure that the income, payroll, property, and sales taxes are paid on time and all reports are filed on time and accurately.

Goal 3: Review and reconcile all back and credit card statements monthly and provide the reconciled reports to our accountant for review.

Goal 4: Ensure all inventory levels remain at or below $XXXX, while also ensuring that our 15 best-selling items are never out of stock. Implement an automatic ordering system for high volume items in our point of sale system by the end of Q1. Each quarter, review pricing on our inventory items from the ‘big 5’ distributors and seek discounts and best terms – report the results at the partnership meeting.

These sample goals are specific, and each one can be measured: we know whether the partner succeeded or failed in each task. In setting the goals for one another, the partners should focus on what it will take for the business to be successful. Likely, each partner will need more goals than in this short example, but the result should be: “if you accomplish all these things, partner, I will be satisfied.” The goal setting time should be the result of some back and forth negotiation but conducted in mind of each partner’s clear commitment to the vision they have agreed on. Like all other items in this book, the goal is to reach a consensus up front, and not leave everything unsaid and festering. Perhaps, in this example, the Back Partner will agree to a goal of a certain number of hours working in the store, and the Front Partner will take on some tasks of helping manage inventory. What matters is to listen to your partners and craft goals that not only meet the needs of the business but also meet their particular concerns.

It is not enough, of course, merely to set these goals. The partners must also set up systems to monitor and measure performance. The front partner may have to clock in like the hourly employees to measure compliance with Goal 1. The back partner may have to create a spreadsheet of deadlines and update the spreadsheet regularly when reports are filed or taxes are paid to measure compliance with Goal 2. The point is that all partners should have consistent and easy visibility into the measurement of one another’s goal achievement. When a partner is falling behind or failing, the partners should meet to discuss why, and what changes need to be made or resources need to be available to help that partner succeed.

Avoiding conflict where each partners’ work is apples and oranges takes active planning and consistent communication. If the partners’ allow disgruntlement to fester, they are in for a rocky time.