Avoid partnership perils

• Partnership perils.doc

Partnership perils.doc

Breaking up is hard to do.

The breakdown of personal relationships can be devastating for everyone involved. 

But the collapse of a business partnership and the ramifications it has for the parties is often underes­timated.

Most people don’t go into a perso­nal relationship lightly.

Often they will have a lengthy getting-to-know-you phase, living together beforehand, pre-marital counselling and even a pre-nuptial agreement in cases when significant assets are involved.

 Unfortunately, try before you buy preparation often doesn’t go into business couplings. 

Often, business partnerships are forged over one too many drinks and common sense takes a back seat to considered planning.

Deloitte Growth Solutions partner Julia Bickerstaff said too often peo­ple were so carried away with the business idea and so keen to go into partnership that they did not like to ask the tough questions.

She said they do have the tough questions but never get around to asking them.

“They tend not to talk about the difficulties,” she said.

“They get focused on what a beautiful future can look like and jump into bed with this person.” 

Ms Bickerstaff said people were often so seduced by the idea of starting a business and being their own boss that they did not confide in the usual people for advice.

They keep people who they normally use as a sounding board out of the loop.

Ms Bickerstaff said typical problems include not sorting out what the individual roles and responsibili­ties will be for each of the partners.

She said another big issue was working out how much they were going to put into the business and how much they were going to take out.

Ms Bickerstaff said it was also important to ascertain what skills each person was taking into the business.

“One person might have good networks which is worth a lot … the other person may or may not value it,” Ms Bickerstaff said.

Ms Bickerstaff said devising a proper business plan and making sure that it was revisited every three, six, nine months and so on, would ensure that you were keeping tabs on the business and where it was going. 

She said constantly revisiting the plan would be an inbuilt mechanism to ensure that partners sorted out what was working and what was not working. 

“You need to have a formal docu­ment, it can be a piece of paper signed off between the two people,” she said. 

Ms Bickerstaff said letting a third person into the discussions might offer an objective view and they would think of things the starry-eyed partners overlooked. 

She said documents needed to cover all the “what ifs”. It needed to set out an exit strategy in case things did not work out or the circum­stances of the partners changes. 

Ms Bickerstaff said a typical sce­nario of people going into partner­ship involved two pregnant women. They decide getting into business can help them better balance work and family and avoid returning to corporate life. However, once the bouncing bundle arrives, Ms Bickerstaff said things often change. One partner may have more family support and cope better, one may want to return to their former job, or they may differ on how much time they want to put into the business. 

To complicate matters, Ms Bicker­staff said, sometimes one of the spouses gets involved in the business because they want to keep an eye on the money. The other partner gets annoyed because they feel they are not getting a say. 

She said it was also important to gauge how the would-be partner performed under stress in their lives and assess whether you would be able to work with them. 

DC Strategy executive director Rod Young said one of the biggest problems was that people did not ask themselves why they were seeking a partner.

He said they might be looking for someone with whom they could share the risk or bring some value to the business.

He said it was important that if a business partner had a spouse that people realised that the business would also have input from them. 

“You multiply the problem by four so there needs to be q bit of understanding how spouses are going to be involved,” he said. 

Assessing what skills each party brought to the business was crucial. 

Mr Young said rarely were skills and effort matched and resentment could grow. 

“The reality is that the partners never address what happens if it fails and what is the protocol if the partnership needs more money.”

He said a disparity in financial capability was often the source of discontent. He said that McDonald’s did not allow partnerships to buy franchises because it did not want to get caught up in acrimonious partnership breakdowns. 

He said that partnership needed to include a process in which each bidder could outbid the other to take over the business. 

Partnership pains: case studies 

Case 1

IT seemed like a great idea. A few mates investing in a bar. The idea was for some of the investors to be non-working shareholders while others were to have a hands-on management role. 

But after a few months the dream started to unravel. The non­-active shareholders felt they were being kept in the dark. 

“We just wanted to know how things were going but the managers did not want to give us any information,” one of the shareholders, Ross, said. 

He said they did not want to know every detail but it would have been helpful to know three figures - what was coming into the business, what was going out, and wages.  

He said the friends felt that he and the other non-active partners should literally be silent partners. 

Ross said there were plenty of lessons to be learned. 

“Think twice before going into business with friends, and family for that matter,” he said. 

He said that while you didn’t need to race to a lawyer it would be helpful to get a lawyer to cast an eye over a legal agreement. He said such an agreement could set out the entry and exit rules for the partnership. 

The agreement might specify that if a person wanted to quit the operation the other shareholders had first right of refusal on shares. 

While Ross said he did not lose any money in the deal long-term friendships were strained. 

Case 2 

Mums Sally and Jill struck up a friendship in a suburban park. 

They met regularly so their children could play together. They started talking about developing a range of baby products. 

As mums they were convinced that the idea would be a hit. 

They agreed on how much they would contribute, came up with a name, branding and the development of a website. 

Once they had developed the product they started cold-calling retailers to see if they would stock their goods. It was hard work but they started to get media coverage and some positive feedback. 

“We never expected to break even for at least a year,” Jill said. 

But nearly a year down the track, Sally started getting concerned that they were required to put more capital into the business. 

They also differed on a decision to enter into strategic alliances and marketing. 

“There were these ongoing issues and in the end we decided that we had to call it quits,” Jill said. 

She said they had to sort out a financial settlement and she had to pay out her partner. 

They have had no contact since. 

Case 3 

Growing up, Trish and her younger sister, Karen, were always close. 

Juggling young families, they came up with a business idea that would reconcile the competing interests of working from home and looking after children. The business, a range of complementary medicines and bodycare products, was to be sold by party plan and at markets. 

But Trish said that after a few months, cracks started to appear. 

Trish said it soon became clear that the days Karen was rostered on to staff the market the sales were negligible. The days Trish was rostered on sales boomed. 

Trish said during a difference of opinion with Karen the issues started to come up. 

Karen said she hated being a salesperson. 

“I did not see myself as a salesperson, I was passionate about the product and loved to talk about it to people,” Trish said. 

They talked through the issues and after some months decided they needed to go their separate ways. A few years down the track and Trish is running the business and Karen is still a minor equity partner not involved in the day to day running of the business.

Tips for a match made in heaven

DON’T be reticent, ask the tough questions.

MAKE it clear what the roles and responsibilities of each partner are.

WHAT skills are each of the parties bringing to the business?

DO a proper plan that can be revisited/refined regularly

HAVE a formal document outlining details of the partnership.

SET out an exit strategy.

BE honest about how much time you are prepared to put into the business.

ASK yourself if you are looking to create a business or a job to keep yourself occupied a few days a week.

BE clear about how much and when the partners will take out of the business and how much will be reinvested.

Souce: Julia Bickerstaff, Deloitte Growth Solutions      

Claire Heaney 

Herald Sun, Thu-19 October, 2006