The Perils of a Bad Partnership

Avoiding the Perils of a Bad Partnership

Mike Armour

Darrell Royal, the legendary football coach at the University of Texas, was a master of the running game. When asked why his teams put so little emphasis on passing, he would reply,"When you pass the ball, one of three things can happen. And two of them are bad."

You could express a similar sentiment about partnerships. There seem to be far more ways for them to go bad than for them to succeed.

Not that I would discourage anyone from entering a partnership. But you must do so with your eyes wide open. VERY wide open.

There are more ways for a business partnership to go bad than for a partnership to succeed.

I've spent much of my career as a business coach trying to salvage partnerships that were in trouble. From that experience I can truthfully say that having a dysfunctional partnership is a curse that I would not wish on anyone.

So if you're thinking of a partnership, let me make some suggestions aimed at sparing you needless misery in the future.

1. Be particularly cautious if the partnership is to be long-term

Like it or not, we are all impacted at work by things going on in our personal and family lives. When teaming up with partners for the long haul, I'm gambling that future developments in their health, their family, and their off-the-job interests and involvements will not be detrimental to the company or to their performance as a partner.

The longer the time horizon for a proposed partnership, the greater the gamble. I'm amazed at how many people go into a long-term partnership with someone that they do not know very well at all. This is a case where what you don't know can hurt you — and probably will.

Personally I like the idea of "trial partnerships," where the parties form a business relationship that mimics the longer-term partnership that they eventually envision. But the trial partnership has a finite life-span, perhaps two or three years. At the end of the designated period members of the group determine whether they are a good enough fit to make the partnership more permanent.

During the trial partnership, you structure the working relationships, the decision-making process, and the standards of accountability exactly as you would if you were already in the permanent arrangement. This is the only way that the trial partnership is truly a trial.

By putting together the trial partnership along these lines, you learn under real working conditions whether the partners are truly compatible in their business philosophy, their ethics, their approach to risk, their financial decision-making, and their work habits, not to mention their personality traits.

Because a partnership can be formed on a handshake, trial partnerships can be quickly launched, quickly modified, and quickly dissolved. Take advantage of this flexibility by starting off with a trial partnership that allows a gracious exit in two or three years if the experiment proves disappointing.

2. Insist on a partnership agreement before the business begins

A partnership agreement is the equivalent of by-laws or operating agreements in corporations and LLCs. Neither state law nor Federal tax codes require a partnership agreement. A partnership can therefore function legally with no formal operating agreement whatsoever. But you're inviting wholesale problems if you take that easy course. In my opinion, even husband-wife partnership ventures need a strong partnership agreement.

Yet, I will tell you from experience that hammering out a partnership agreement is often much easier said than done. For many of my clients, finalizing a partnership agreement was one of the toughest business challenges they ever faced.

A good partnership agreement is going to be very specific about how to handle conflict among the partners, the death or disability of a partner, ownership rights of a partner's surviving spouse, standards of accountability, delineations of authority and responsibility, decision-making processes, nepotism policies, and a host of similar issues.

As you delve into the specifics of these topics, it's amazing how many differences of opinion — sometimes heated differences — rise to the surface. And when lawyers and CPAs are involved, representing the interests of individual partners, reaching common accord on an operating agreement can be doubly challenging.

It's for this reason that I've seen more than one partnership simply table the writing of a partnership agreement in the interest of getting the business underway. After a few hours of locking horns on how the agreement should be worded, they decide that there will be time to work out an agreement once the business is underway.

I've never — I repeat, NEVER — seen this approach to be well-advised. It gets no easier to hammer out thorny issues in a partnership agreement once the business is up and running. And with all of the demands of keeping the business afloat, it's easy to keep putting off work on the agreement until "we have more time."

Meanwhile you're settling into a de facto agreement. Decisions are having to be made. Partners are having to exercise responsibilities. Precedents for handling particular types of situations are being set.

The problem is, this de facto partnership agreement has little or no legal enforceability if something goes wrong. You are exposing yourself to a decision-making and even a legal quagmire if the partners get at odds with one another or if one of them decides he wants out or if one of them is disabled in an accident and no longer able to carry an appropriate proportion of the load.

Resist the temptation, therefore, to start the business, then work out the partnership agreement later. After all, if you and your partners cannot work through your differences on how to frame a partnership agreement, that may be a good sign that the partnership is too problem-prone to be wise.

3. Think through your exit options carefully before you commit

No partnership is ever formed with people expecting things to go wrong. Quite the contrary. Despite having heard all the horror stories about partnerships that proved disastrous, partners putting together a new venture are always convinced that their undertaking will be the epitome of harmony, good will, and success.

That's one reason why, when someone like me offers cautionary advice, partners do not take the warnings seriously. Such deleterious mishaps, they believe, will never happen to them.

So I may be swimming against the tide when I offer my final guideline. But here it is anyway.

Before you commit unequivocally to a partnership, map out how you will get out of it if things go wrong. Write out what your exit will cost you, not just in money and legal fees, but also in time, personal upset, and business reputation. In a word, detail the consequences of the partnership failing.

If you can live peaceably with those costs, then you can proceed with the partnership in greater confidence. On the other hand, several of my clients have backed out of promising partnerships once they weighed the impact and the possibility of the interpersonal relationships going sour.

This consideration is particularly important for encore entrepreneurs, especially those who are in the older portion of this cohort. When we are in our 60s or 70s, we don't have a great deal of time to recover from a business that takes several years of our time and investment, only to fail.

It behooves us, therefore, to approach potential partnerships carefully. A good partnership has the advantage of leveraging the collective experience of its members and creating a synergy that pays huge dividends. But put together carelessly or managed poorly, partnerships can make the later chapters of our professional career a disappointment beyond words.

Share This With Friends

Leave a Reply

Your email address will not be published. Required fields are marked *