My dad said: “Never take on a business partner.”

My dad was a smart businessman, even if not formally trained. He occasionally gave me advice that turned out to be more than wise, looking back at subsequent experience and events.  His personal teaching event was a typical experience, as I reflect now upon the tens of partnerships I have counseled over the years.  Most often, one partner remained active as another partner drifted away from the business, no longer carrying the weight anticipated at start-up.

So, what could happen with a partnership over time?

It’s just one – the most prevalent – of the many things that can happen to well-meaning partners after time changes plans, and after the business passes through phases of growth or contraction.  The assumption at start-up is that all partners will carry their assigned weight for the foreseeable future, as percentages of ownership are divided accordingly.

Rarely is there any formal written agreement memorializing these initial expectations and stating the consequences of non-performance or inability to make capital calls when required.  In fact, rarely are issues discussed involving downside protections, even including key-person insurance benefiting the partnership in case of an unfortunate event.  And how about a buy-sell agreement if one partner wants to sell their interest to a third party unacceptable to the remaining partner(s)? How about non-compete agreements?  Non-disparagement clauses?

It is always wise to have an attorney help memorialize a partnership agreement, even if painful conversations must take place to do so.  Here’s an example of what not to do…

A personal story about a partnership gone bad

[Email readers, continue here…]   I recall one very personal situation when I was young, that reinforces Dad’s advice. Through my college years, I managed a phonograph record production and manufacturing business that I created as a senior in high school, using independent contractors in local venues to record tapes from musicals and performances from schools, colleges, churches and organizations throughout the USA and Canada – and then to sell the records to the appropriate audiences.

Partnerships are strained with growth and troubles

The business grew to significant size during my college years, and I informally associated myself with an equally young partner, of course without any written agreement or discussion of downside throughout those years, ceding to him all recording work throughout the large home territory and other helpful technical work. The agreement was that he would retain all the revenues generated from those activities and that I would finance the company and manage it.  We received lots of press, even nationally, as we managed our teenage business.

Changes of circumstance often ignite pressures

A year after graduation from college, I left for six months to serve my active duty obligation in the US Navy, while others – not the partner – took care of accounting and customer relations.

And shortly after I left for my military service, my partner left the company without notice and set up a competing company in my absence, never saying a word to any of us.  I was bitter, but unable to do anything about it, since there was no written partnership agreement.  Luckily, after my return from active duty, my company flourished, even went public later, and his remained a small, one-person operation for the rest of its existence.  But, as they say, everything he learned, he learned from me.

Dad was right, even if I learned the lesson years later.

Have you a partnership story to tell?  Lessons learned to be never repeated? Or do you have a harmonious relationship to recall, one that could even be ongoing?  My friend, Rich Sudek called partnerships “a marriage without sex” and reminded us that we often spend more time with our partner(s) than with our family.

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8 Responses to My dad said: “Never take on a business partner.”

  1. Hi Dave. With the several partnerships I have had the most important thing I learned is that it takes two different personalities to create a successful business. One being the visionary and another being an execution master. Each business where I had a partner was more successful than any business I had on my own. And yes, there were issues of responsibility and as you suggested; an attorney drawn agreement is very important. It’s just like a prenuptial agreement before marriage.

  2. Jeff Koenig says:

    I see this prevailing wisdom often, but my experience is quite the opposite. Many partnership, lots of success. Partners don’t just add to your capability, but multiply it. So why do some seem to have bad experiences and others good ones? Well, you brought up the marriage example. Pick well and it’s wonderful. Pick poorly and not so much. Does that mean those who don’t pick well, advising the rest not to pick at all are right? Now then, *how* to pick well is a topic for my own blog.

  3. Peter D. says:

    I agree that one must choose there partners wisely. I have been in a consulting business with my partner for the past 21 years. We knew and worked with each other for 7 years before that, so we knew each other well and were friends. Our skills complement each other.

    Although there were a few bumpy moments at the very beginning, it has been a fun and rewarding relationship. We are still close friends. We never had a written agreement and have never had a problem; we trust each other and have always demonstrated that we were each worthy of that trust. Perhaps it seems corny or old school, but it has worked for us (while I don’t disagree with any of the wise points above). I think we both realize that we’ve been very lucky to work together. Now, partnerships with other companies, yikes! That’s another story completely …

  4. Bob Kelley says:

    As fate would have it, I’ve had many partnerships. So I wish to offer another couple of dimensions to your story. Different kinds of arrangements, and different levels of “researched trust”.

    Some of my “partnerships” were “strategic (un-papered) partnerships”, some joint ventures, some “business arrangements” and some were turned into papered formal corporations.

    Key was knowing which ring of my “rings of trust” to position the partner on, and then acting accordingly. At my outer ring were people whom I barely trusted, but saw a wide road to mutual benefit. At the inner ring were people whom I significantly trusted to pretty much drive on a “straight and narrow path”. Once I got a “good read” on people through appropriate due diligence, they generally followed their “expected driving styles” with 90+% accuracy.

    Biggest personal benefit was the ability to retire at 42, and live comfortably thereafter. And that was more than a couple of decades ago.

  5. Dave Berkus says:

    Bob: An excellent way to look at various types of partnerships. And thanks for your personal story!
    Dave

  6. Arthur Lipper says:

    Although most new enterprises require a Larry and a Barry, partners having different talents and areas of expertise, the advice is most easily reflected in a “Buy / Sell Agreement”. I make the recommendation of there always being a Buy/Sell agreement in any significant relationship where equity is involved.

  7. Mimi Grant says:

    Dave, as always another great blog. And I must comment on Rich Sudek’s calling partnerships “a marriage without sex.” I’ve had three partnerships, two without sex, and one with. The one “with” started out as a business relationship, then became a real marriage – that’s lasted over 45 years, and shortly thereafter, a business partnership that’s lasted for nearly 44. In between, I met my first “other” partner when I purchased two Vector Graphic computers from him, while I was running an ad agency, in 1979: he was a Great Salesman. A few years later, following sharp declines in both of our businesses, he offered to take me under his real estate wing teaching me “everything he knew” about the business – if I’d use my advertising and marketing skills to help him. Six months later, with a brokers license in hand, Frank and I became formal partners in “All- American Properties” with three other successful brokers. Fast forward to 1994, five years after launching the Adaptive Business Leaders for Healthcare CEOs in SoCal, I partnered with John, a highly respected healthcare luminary in the Bay Area in launching ABL of Northern California – a Very Well-Papered contractual relationship, that lasted until he retired in 2006. Meanwhile, Bob Kelley and I have continued not only our marriage, but have contributed to developing each other’s areas of expertise. What’s made our marriage – and our partnership – work is that we have areas of mutual exclusivity and tremendous respect for each other’s contributions to our businesses and our lives.

  8. Berni Jubb says:

    Hey Dave, I thought you were going to use me as an example when I read this “Here’s an example of what not to do…A personal story about a partnership gone bad”.

    I’d support most of the comments above even though the partnership I am referring to that you know well went quite quite bad. That partnership worked while it worked because my partner added a dimension I did not have – perhaps that is a selfish motivation but it worked and we together grew a successful business with lots of happy employees who also gained from the synergies of that partnership.

    Like 2 marriages before it was not true love and when an opportunity came my partner was not what I had hoped for. A business pre-nup might have helped the mechanics of a breakup but like in marriage it would not have made the partnership any more resilient. It would most certainly have failed in either case. Great partnerships (as I now experience) and long term friendships as yours is operate on a higher set of principles. They do exist.

    Berni
    p.s. nice to see Bob Kelley still kicking around :-))

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