28 February, 2019

4 Reasons Why Business Partnerships Fail

4 Reasons Why Business Partnerships Fail

Business partnerships can be fraught with danger! I have had two business partnerships - both have ended (luckily I have been married for eight years, and my wife is still supportive of me!).

While I have been lucky that they have been reasonably amicable towards the end (not too much spent on lawyers!), I now know what I would do in the future.

Business partnerships fail for four reasons:

1. Money: The role of a business is to make money for the benefit of its owners or shareholders. When there is a disagreement about how much money each party wants to make, then there is conflict.

2. Workload: Going into business takes much hard work. Some people enjoy the hard work; others shy away from it. Some business owners want to be hands-on, while others want to delegate everything. Some business owners think that the experience, knowledge or networks they bring to the business table count for more than the time and effort others are putting in. I.e. their time is more valuable than that of the other parties. Having a shared understanding of workload is essential.

3. Lack of clear roles, responsibilities and authority: Someone needs to run the business day-to-day. Going back to the other owners or shareholders for every decision is tedious and breeds mistrust. Having a RACI (Responsible, Approve, Consult, Inform) document with explicit delegations of authority is essential from the start. This document will change over time, but without it from the outset, you will feel like you are stepping on each other’s toes.

4. Lack of a Shareholders Agreement: When you set up your company or partnership, you have rose tinted glasses on how fantastic this opportunity is, what a great person your business partner is and how well you get along.
However, like every marriage, there are going to be rocky patches. You will have arguments, and at some time you might have to call in some third-party support to help navigate the challenges. And for some, you will decide that a business divorce is the only option. Without a Shareholders Agreement, you are exposing yourself to lose
everything and spend a lot of money on lawyers. Think of a shareholders agreement as a pre-nuptial agreement. I.e. if the shit hits the fan, how do we protect our interests and get out of this situation as easily and quickly as possible.

What should be in a Shareholders Agreement?

Now while I am not a lawyer (and I recommend you find one to help you formalise this type of agreement), there are some key things that I have realised should be in a Shareholders or Partnership Agreement:

  • Who is responsible for the day to day management of the business
  • What sort of decisions can only be made by the majority shareholders
  • What happens if there is a dispute between majority shareholders. What is the process that should be followed? Remembering to keep lawyers out of it as much as possible.
  • What happens if one party wants to be part of the business no longer? Do they have to offer their share of the company to the other shareholders? How is the business valued so you can agree on a price to pay?
  • If one party leaves the business, what conditions do you want to place on them so they can’t compete against you or use any confidential information they might have on how your business operates.
  • If you are a 50/50 partnership or shareholder (which I advise against) what happens if there is a deadlock? Who gets to decide what the next step is or how do decisions get made about the future of the business.

The Business Partnership Pitfalls

If you don’t have the above things in place, then the likelihood of the following occurring is increased:

You will reach a point where conflict happens.

This is just a natural part of life and conflict cannot always be avoided. Business owners are often strong willed people, they have a clear idea of what they want their business to be, but often not a clear vision on how to achieve it. When there are two or more strong-willed people in a relationship with conflicting views on the path to take, then conflict ensues.

Conflict brings out one of two types of reasoning in people:

  • Logical reasoning: Some people lead with logic and want to show the facts of the situation, they work in numbers and strategy. To them, the world is straight forward and they get frustrated with those who can’t see the trees!
  • Emotional reasoning: Some people lead with their emotions. These people have dreams and aspirations and connect with people through inspiration and energy. When approached with conflict they can have an emotional response that blocks their logical receptors!

If you have people who lead with conflicting reasoning principles, then the opportunity to get resolution is reduced. Often, depending on the depth of the conflict, then even using a third party cannot get past the point of conflict to reach a resolution. 

You will have trust issues.

Business partnerships are built on a foundation of trust. Trust that you both want the same outcomes, that you each will pull your own weight, that you will meet deadlines, that you will deliver quality work, that you are who you say you are!

But the thing in business is, that this trust is going to be tested at times. Trust is like respect - it is hard to earn but easy to lose. As soon as that trust is lost, then the mistrust in other areas of the business relationship creep in. It is not good, but it is natural (damn humans!)

You will have a complete breakdown in communication.

We all know that great communication in business is essential. Not only with our customers and staff, but between business owners too. What happens though if your business partner isn’t in the office every day or lives in a different city? What sort of communication methods do you use? Email, text, slack etc are all great ways to stay in touch and keep things moving. But they lack emotion and context. Video calling is an excellent substitute for face to face communication.

But, you have got to have a business partner communication strategy. This should link back to the RACI document you have and there should be a structure for the type of meetings you have, their frequency and how different decisions are made (with a clear delegations of
authority in place).

If there is a breakdown in communication, then likely the following will occur:

  • One party will be upset with the other party for not understanding their point of view
  • One or both parties will stop talking to the other for a period of time
  • This will bring about frustration and potentially some mistrust
  • What stemmed from a lack of communication, will lead to more poor communication!

Is there a solution?

So how should we solve this… It depends on where you are at in your business journey. You will likely be at one of three places.

At the start of the business partnership journey, do these three things:

  • Whilst not a nice thing to think about, but assume that the business partnership will fail. Have the discussion and make and implement decisions about the big four earlier in this article.
  • Do some personality testing like DISC testing so you better understand each other.
  • Set a clear business partners communication strategy. 

Things are starting to fall apart, but they are not quite frosty, do these three things:

  • Talk with each other! If there are elephants in the room, they are only going to get bigger over time.
  • Bring in a third party to help work through the challenges. Someone who is objective can help immensely.
  • Make sure any loose ends around shareholders agreements and communication strategies are all tidied up now!

Things are going from bad to worse and the walls are collapsing, do these three things:

  • Meet face to face, urgently and try to understand the root cause of the issues.
  • Go back to your Shareholders Agreement (if you have one) and understand the processes in there for dealing with conflict, shareholder buyout etc. If you don’t have one, then talk about some of the possible outcomes that could occur and understand where each partner sits. But remember, understanding is not agreement.
  • Be decisive in your actions and know when to walk away and for what cost. Know how hard you want to fight and if you are prepared to bring your own lawyer to the fight.

Being in business is bloody hard work. Being in business with a partner can be awesome as it is someone to share the load with and to provide that pick up when needed. But having someone else in your life, where you have conflict, can be draining and damaging to your business and personally.

So, learn from my lessons and if you are in that honeymoon period now, make sure you have good plans in place in case of a business divorce. If you are in the next two stages, then feel free to reach out to me for some support.

© 2019 Paul Mead