Common Pitfalls of Having a Business Partner

Entrepreneurs start a business with a business partner for many reasons, such as complementary skill sets or access to customers or capital. These benefits generally offset the difficulties of sharing control with another individual in a very stressful undertaking.

Here are common pitfalls of having a business partner followed by three important areas that should be addressed in advance through the partnership agreement or the shareholder agreement.

Taking that precautionary step at the outset may lessen the potential for dispute when challenging situations emerge after the honeymoon phase has passed.

Different Perceptions about Risk or Tolerance of Risk

Being an entrepreneur is readily seen as having more risk than a full-time paying job, as such entrepreneurs are often seen as risk takers. However, once in the venture each individual manages the level of risk they are willing to accept.

When you and your partner discuss the steps to move forward, do not be surprised if this requires a long discussion as you learn that your business partner has a different perception or tolerance of risk. In some instances, actions may be regularly taken by one partner to continually lessen their own risk, while the other partner agrees to take on more risk to compensate so the business’ full potential is explored.

Each partner wants to be assured they limit their financial liability for their part ownership in the business. One way they can pursue liability protection is through the choice of the business structure of the company which best be done with the advice of an attorney or accountant.

Failure to recognize and resolve different views about risk may result in friction over which party is carrying the decision-making load to grow the business.

Different Ethics

We have all been raised differently which is reflected in our personal ethics. Business decisions day in and day out are based on the individual’s values and ethics and those of partners may differ significantly.

Two examples of how different ethics impact a business are Enron and MCI Worldcomm.? In both cases, the business leaders strayed from acceptable business conduct leading to the demise of each company.?

For partners differing values may emerge in how scrupulously money is handled, the quality of customer warranties, and the accuracy of prepared financial statements in meeting compliance standards.

Once you are in business together with other individuals you will need to establish business practices that are ethical and accepted by all. Do not be surprised by situations where there may be discomfort with the “shortcuts” one partner is willing to take and you may not.

Discuss your company’s business practices and whether your company includes in its business mission to provide exemplary service and high-quality products to your customers. And if not, why not? and are both business owners comfortable with how the other sees the role of ethics in running a business?

Different Values about Money

One of the ongoing conversations with your prospective business partner will be how money should be spent. Day-to-day expenses such as rent and utilities will generally not be a concern, but other discretionary areas may result in strong differences in opinion.

For instance, one partner may view money as an incentive to motivate and retain key employees, while another partner may feel that as much money should go to ownership. They may be frugal in every aspect of the business except for his or her own compensation.

Different values about money may significantly impact your company’s culture and work environment. Seeking professional accounting advice may facilitate discussions about sharing profits and potential benefits of partner relationships.

Take a hard look at your prospective partner about how important money is in their everyday life. Do they need the Mercedes, are they prone to leaving no tip in a restaurant or do they overpay for everything? Make these observations before forming the partnership, since what you see will be what you get once you are in the partnership. Are you comfortable?

Conflicts surrounding Territory and Areas of Responsibility

At the outset of the partnership, each partner’s responsibilities should be delineated. Pettiness may arise when decisions made by one partner intrude upon the other’s area of responsibility. In many instances, these tension points may be talked out and a good working relationship may develop. A partner with an intrusive and controlling personality may be totally resistant or unable to adjust to working well with a partner.

A number of steps may be taken to manage this including well-defined job descriptions for each partner and budgeting so that decisions about spending money are spelled out, requiring less discussion. If conflict about control and intrusive behavior persists, an HR specialist who offers personality testing may help resolve issues and avoid these emotional issues.?

Different Levels of Energy

A startup and growth company requires endless amounts of energy. The eighty-hour work week may be the norm with no vacations for the first three to five years and work on weekends.

Each partner is expected to have an active role unless a silent partner has made a strategic investment in the company.

Some individuals may be able to work endlessly without a break without sacrificing performance at any time. However, the other partner may be productive only if they pace themselves by taking breaks away from the business to refresh their focus and energy.

The more intense “workaholic” personality may not understand and accept this other style, becoming resentful of the other partner’s periods away from the business…even if the periods away are very short in duration and result in better performance by the partner.

Agree upon the amount of time to be contributed by each partner and the added time that is discretionary for each, as well as recognizing and acknowledging each other’s different responsibilities and styles of management and endurance levels.

Different Levels of Contribution to the Venture’s Success

Very often a partnership is set up 50-50 as determined by equal amounts of capital contributed and each partner taking on a title and share of the work. What sometimes emerges is that one partner may have a greater role in the venture’s success that becomes apparent over time.

This may occur in the first year as one partner is well suited to the entrepreneurial lifestyle, while the other may be ill-suited. Or, it may happen when the business has become a multiple-employee company and one partner’s skills have not grown to meet the new challenges. Gradually, one partner begins to truly lead the company, while the other partner’s decision-making role recedes, and yet each is entitled to an equal share of the business’ profits.

This may be the hardest issue to resolve and maintain the partnership. If one partner believes they are carrying the other partner (whether perceived or true) it may eventually result in squabbling and resentment. Once the partnership share is established, rarely,? will one partner be willing give up part of their ownership to recognize the other partner’s greater contribution.

Evaluate your prospective partner’s skill base before establishing the business partnership. There is a greater chance of a mismatch if the potential partners have not previously worked closely together. Think hard and twice before offering an equal share to an individual who has not proven their mettle and skill base.

Different Views on the Meaning of Business Success

Very often the stress and energy to make the business succeed requires the business partners to be narrowly focused, blocking out virtually all distractions and other opportunities. Once firm ground is reached, each partner may have a different view of what success means to them.

One partner may decide that there is a greater opportunity to spend more time with their family or take more vacation time. The other partner may feel that greater effort in the business will enable it to grow even further. Success gives each partner opportunities that are not possible while the company struggles to succeed.

Jockeying may emerge by each partner to optimize what they now feel are the fruits of a successful business. This may significantly impact the existing comradery during the honeymoon phase of a startup and cause business goals to be changed. The partners should address these different attitudes to minimize their impact on their day-to-day working relationship.

Reevaluating the business plan is a tool that will elicit discussion among partners about the change of priorities emerging from business success. Re-establishing explicit understandings about priorities and what will be required to take advantage of business opportunities to achieve the next stage of growth may be helpful, as well as considering growing the contribution of key employees who may take on some of the load and lessen the demands on the owners for future growth.

The Three Areas Your Partnership or Shareholder Agreement Should Set Out

When you are starting a business with partners or shareholders, you should have prepared with an attorney’s assistance either a partnership agreement or shareholder agreement. Here are three important areas provided by Rick Pinto, managing partner of Stevens & Lee, that should be covered in these agreements:?

1. Management/control related issues. Decide who is going to do what (now and later). Set out clearly how the business will be operated, how management decisions will be made, and how disagreements will be resolved. Spell out how certain major actions (such as changing, financing, or selling the business or admitting new partners) will be taken and whether or not all (or most) partners need participate or consent.

2. Finance/sale related issues. Decide who is going to contribute what (now and later). State whether partners have either the obligation or the right to make future investments. Indicate how you will adjust individual partner compensation or investment shares (if at all) should, in future, one contribute more than planned or another contribute less. Have rules to deal with a partner who leaves the business early. If the business or its remaining partner(s) gets to buy out the partner who dies or leaves, have rules regarding how the buy-out will be valued and paid.

3. Proprietary issues. Decide (i) confidentiality obligations, (ii) under what circumstances, if any, will individual partners co-own or be allowed to use information, rights and property (including intellectual property) created by, or contributed to, the partnership, and (iii) under what circumstances, if any, will individual partners be permitted to undertake separate activities in competition with the business of the partnership.

In summary, deciding to share business ownership is a very very important decision when setting up a business venture and often individuals are not wary enough of the potential for conflict arising from personality or business issues that may occur at any stage of the business. The partnership and shareholders agreements offer some help in addressing the more common business related issues, but the entrepreneur should have strong knowledge about their prospective partner’s personality and skill base with whom they are going into business, as well as their own.?

Jeanne Gray is founder and publisher of American Entrepreneurship Today and consults to entrepreneurs and early-stage businesses.

Special thanks to Rick Pinto, Managing Partner of Stevens & Lee, a Pennsylvania law firm with offices in Princeton, New Jersey. Rick Chairs the firm’s Venture, Technology and Entrepreneurial Services Practices and is a member of its Corporate, Finance and Capital Markets and Health Care Departments. He represents public and private companies and non-profit entities in all phases of organization, financing and operations.