Partnership Pitfalls

PitfallWe have worked with hundreds of very successful clients over the years and have been fortunate to participate in successful transitions to new owners.  However, there have been a few tough ownership/partnership situations that have made transitions difficult. Partnerships can be a very good way to get into business if documented properly. They can also be a curse if there was a lack of preparation and foresight.

David Seitter with Spencer Fane in Kansas City has had quite a bit of experience assisting new owners writing partnership and operating agreements and has also been involved in cleaning up the messes caused by improper partnership planning.  David and I recently spoke about partnerships pitfalls.

Doug:  “David, What do you see as the leading causes of partnership disputes?”

David:  “The joy and enthusiasm in starting a new venture becomes, at some juncture, a challenge to fulfill the expectations each individual has for the relationship. Like all great “marriages” the ability to lay out clear terms of understanding up front on “why” [and see Simon Sinek’s book “Start With Why” in this regard] this partnership makes sense is, in my experience, the clear starting point that is often not fully developed.

Some of the success stories I have seen have occurred when folks working together as employees for a company declare one day…. “hey, we have a better model for customers because we will build it for the following reason which is__________”. And so begins the “why” conversation. It is not the “how” or the “what” but why the two parties should work together that is the most telling. And if that is not discussed up front…well then, disputes will occur.”

David: “Doug, what do you think are the leading causes of partnership disputes?”

Doug: “Over time, it seems that people grow apart in a couple ways. One partner feels that they are putting more effort into the business without proper compensation, or one owner wants to grow the business more aggressively while the other is satisfied with status-quo.  People change over time and sometimes the partnership doesn’t change with them. There needs to be ongoing communication about personal and business developments so that the partner’s visions are in sync.”

Doug: “David, What could have been done, if anything, to avoid those disputes?” 

David: “Well…disputes cannot be avoided.  You know you can have a great conversation with a partner, but it doesn’t have to be pleasant…it is about getting the issues to the table and using resources internally and externally to resolve problems.

My clients know much better than I that there will always be problems that have to be dealt with. The question is how to handle the disputes which will always arise. Some of the best functioning companies I have had the pleasure to be around have owners who have amazing abilities to handle each other at the highest gentleperson level through great communication and better listening skills, along with unbelievable patience and desire to mutually solve problems. And I call those folks “owners”.
First, when starting the conversation of building a partnership, start with why. Then determine what each partner brings to the table. No two people are alike which is great! Some have great entrepreneurial bents…some are excellent in following through on projects, some are good at details and some will execute any decision. If I have learned anything from Dan Sullivan of “The Strategic Coach”, it is that business owners have to determine what they do well and do just that – sharing power and authority to those who can add bring other skills to the ownership table.

In summary, do not avoid disputes, but embrace a mechanism that will allow you to effectively deal with the same. During one of our next blogs we should discuss the “phone book” theory of entrepreneurial problems.”

Doug: “Can partnership contracts or agreements help to avoid problems?”

David: “Yes. Anytime you can lay out the terms by which you will do business together, the better off you will be.  But remember, a good contract cannot keep together a bad relationship.  The paper is only as good as the people who wish to live the terms of the agreement!”

David: “How do you counsel folks on dispute avoidance?”          

Doug: “Probably similar to what you mentioned, but when we see them at Apex, it’s usually too late. They have already skipped through the tips you just mentioned, avoided the tough conversations early, and now are just angry and ready to file suit (in the extreme).  What we would prefer is dealing with companies whose owners are not ready to kill each other. They don’t have to be happy and ready to spend the next 10 years together, but they should still be cordial, professional and working for the best interest of the company. After all, if buyers sense a problem with the leadership, it will only hurt business value.”

Talk to your Apex Business Advisor or reach out to David Seitter to discuss partnership planning or existing issues. We are happy to assist!