Published December 4, 2006

Business Partnership Problems and How to Avoid Them

Recently someone approached me to partner with them in a new business. I'm excited about the business and I like my potential partner; the only problem is that I foresee challenges with changing our relationship from friend to business partner. I'm not against going into business with a friend - after all, you do need to like the person you will be working with - but I am very wary and want to tread carefully!

Partnering really highlights the differences between people! I want to create a business plan to determine viability and costs and my partner wants to incorporate the business. I would rather put that incorporation off for a few months while we prepare a sound business plan that ensures the business will be profitable and handle the storms that may come.

If we do end up doing business together, here is what we will do:

We're going to decide what level of ownership we each have and clearly spell out our responsibilities. This will take some intricate planning because we won't want to simply deal with new issues as they arrive; we'll need to figure it out and spell it out clearly right from the very beginning. This will help to avoid such issues as who is responsible to do what and help to eliminate a situation where one of us feels like we're pulling more than our weight in the business.

A partnership does not always have to be equal partners and what I'm considering in this situation is creating an agreement where I am a silent partner simply providing capital and advice for a percentage of the profits while the other person does the day to day work. My potential partner is talking about an equal partnership but I know that I don't have the time for that right now so already this is an area of disagreement we will need to sort out before we move forward.

Compensation does not have to exactly match the partnership percentage in the business but I tend to think it's a good idea. One of the ideas my potential partner and I batted around was a 50 / 50 partnership but a 70 / 30 income split. I'm not sure that's the solution to our situation and I think it might make things more confusing in the long run.

Additional partnership problems that are often overlooked include the consideration: "What happens when one partner wants to sell?" or the grim question: "What happens if one partner dies?" In both cases the agreement should stipulate a suggested course of action and there are special insurances you can buy (called "criss cross insurance" or "buy sell insurance") to deal with the untimely demise of a partner.

At the end of the day, though, I don't want to give up my friendship for the opportunity to own a business. Sadly, I've seen many businesses AND friendships fail when there was a partnership created- more failures than successes, in fact. That's not to say it can't be done but, it adds a new element to the mix.

Partnering is powerful because the whole is worth more than the sum of the parts. However, it can also cause problems. Planning and communication may be the solutions.