A partnership company starts as a bright idea between at least two entities. The company may build on friendships that it proposes to extend into a new business agreement. You agree that it’s a good idea, you sign the agreement, you get started, and the partnership can work fine for a while, until the cracks start to show. The financial costs of failing to properly plan your partnership venture before reaching an agreement can easily be amplified by the costs of damage to friendships and loss of reputation. For some time now, I have been talking to people who have experienced failed partnership ventures. There were too many similarities and a few surprises. Based on these conversations with people who have experienced partnership failures, I have come up with a list of 18 possible reasons why 50% of partnerships fail in the first 2-3 years:
1 Too many chefs in the kitchen. When they get together, partners gravitate towards others with similar abilities. Trades with similar backgrounds working together are a good example. They may have different technical skills that formed the foundation of your partnership, but what they may have needed was a partner with business acumen. Gathering technical skills to increase market presence may seem attractive, but there isn’t enough diversity to add value to existing skills and experience.
2 Different (and contradictory) Values. In hindsight, conflicting values appear as a contributing factor to the failure of the partnership. A partner with a strong set of family values will eventually come into conflict with a partner who puts the business first. Which will it be: a workload of 80 hours a week for the company to make a lot of money, or a business structured around family time? These differences may go untouched at first, but they will quickly become a sticking point and potential deal breaker.
4 At least one of the partners is a control freak and treats the others as employees. The need to control is a common trait of business owners. Most business owners have it. So why do they forget about this when they get together? At first, the partners may try to reach a compromise and make decisions together. But for various reasons, at least one partner will break the silence and move front and center. There are several ways in which they take control. They may feel like they need to take control to get things done. Their ego can lead them to show their control in front of customers. If there is no clear delineation of roles and responsibilities, partners can extend their control over other partners and, in turn, confuse staff.
4 Effort imbalance. This is where one partner relieves himself by putting in more time and energy than the others, which may be the case whether he agrees or not. Much of this is due to the perceived value of the partnership venture and the time and resources available. A good exploration of partnership value, return on investment, commitment, and resource requirements early on will inform an agreement that clearly identifies the effort required from each partner to make the business work. Any conflict of these arrangements must also be dealt with through the terms of the agreement.
5 Partners are not being transparent, especially when it comes to money. This is an all too common association switch. A businessman affirmed, after three bitter failures in society, that the greatest learning from him was that “who controls the money, has the power.” While this statement is open to debate, his point of view represents partners who have been the victims of their colleagues’ lack of transparency. Too often, we hear about partners siphoning funds and leaving the remaining partners with significant debt.
6 Partners who bring hidden debts to the partnership company. You probably wouldn’t think it was possible, but we came across two partnerships where the partners had tried to add hidden debt to the deal. One was seen before the arrangement could go ahead. The other was not and the innocent partners found themselves in debt. We can’t be too careful when it comes to risk.
7 hidden agendas. It’s okay to enter a society with an agenda. That is a benefit. However, things turn sour when it later becomes apparent that there are other, less altruistic reasons for joining the partnership company. Be clear from the beginning. Agendas discovered later will inevitably lead to mistrust and a breakdown of the partnership.
8 Lack of communication. When communication breaks down, there is at least some recourse to find out what went wrong, but the lack of communication is a symptom of a lack of planning: who does what, reporting and accountability. Even with planning, a partner can take a leadership role and not maintain regular communication with partners, staff, and other stakeholders. Many cases of dissatisfaction and mistrust have their origin in the lack of definition and follow-up of a good communication plan.
9 Too much too fast. A partnership venture that moves too fast without the inclusion of internal stakeholders is headed for trouble. Without a good plan, change becomes bogged down in resistance compounded by fear. It takes time to integrate systems and resources. Moving too fast for no good reason slows down the process. A strategy that incorporates change enablers and a change management plan is more likely to be successful.
10 A job versus a business? Partners, especially when it is a two-person partnership, can approach the business from different points of view. One partner may be looking forward to completing the next commission or contract, while the other is thinking about the big picture and building the client base. While this could be a good combination, each partner needs to recognize the value the other brings to the business and take that into account when dividing the profits.
11 There is no current agreement or elements are missing from the agreement. There are many levels of association, not just a formal trade association. There may be strategic alliances, project-based partnerships, and joint ventures. Some will start in trust without an agreement, others will require an agreement in law. When trouble starts, the first logical place to look is agreement. Without the signed agreement, things may remain unresolved and may require legal intervention.
12 Management and priorities change: the partnership company becomes irrelevant. This is particularly true with strategic alliances. For many, the original negotiation would have taken place at a mid-management level. The concept may have aligned with strategic priorities at the time, but things change. Changes in policy direction. Financial positions change. Without continued commitment from the top, the partnership business may become irrelevant to the partners, who will take their interests and priorities elsewhere.
13 Differences of opinion: who wins the argument? This can also be associated with some of the other reasons that associations can fail. If there is a dispute between the partners, how do you deal with the problem? A good dispute resolution clause in the formal agreement should mitigate the issues and address the argument, but it’s not always that easy. The argument may be more fundamental than within the limits of the association. It can be personal. How does a partnership continue when the wounds don’t heal fast enough?
14 The balance of power shifts when family members are recruited to ‘help’ in daily operations. This is a common factor in the breakdown of a partnership. A partner will suggest a family member to help with some aspect of the business. This seems like a good idea at first. It may be the right move, but in other cases, a change in the balance of the association is perceived. Problems may arise about payment to the family member. One of the partners may find themselves competing with and alienated by the other partner and her family member over decision making.
15 There is no exit clause. One strong but obvious recommendation from people who have previously been burned by partnerships was to make sure there is an exit clause in the deal. This clause is one of the most important, but it can easily be overlooked or overlooked. It defines what happens to intellectual property, profits, debts, customers, and other considerations, in the event or when the partnership ceases. This is particularly important if the partners contribute assets to the partnership and wish to retain those assets afterwards.
16 There are no documented policies and procedures and/or system. This is also associated with the problem of too much too fast. The partners will bring to the company their existing ideas about systems and processes that need to be streamlined for the new company. The company can generate additional personnel and resources. If there are no documented policies, procedures or systems, as is the case with all businesses, the venture is high risk.
17 Not solving problems when they first occur. Examples of failed partnerships are alphabetized with issues that were not addressed as soon as they occurred. This could have occurred between partners who did not feel safe raising issues, especially in the early days. If left unaddressed, this practice can become toxic to society.
18 I didn’t need a partnership in the first place. What if you walk into a partnership and realize it’s not what you want? Over time you discover that you are not comfortable giving up some of your power. You begin to notice the irritating habits of your partner(s). He prefers to be his own boss and manage his own staff. You realize that you could have achieved what you set out to achieve in another way. For these companies, some investigative planning at the beginning of the partnership journey could have saved them from the experience. A partnership was probably not the right choice.
