Business Partnerships — 8 reasons why they don’t work

“The most fucked up joke life will play on you is letting you meet the right person at the wrong time” — life quote!

I don’t love business partnerships! If you wanted just one big idea out of this article, that’s pretty much all you’re going to get, you can stop reading. Challenged? You see, the reason this article starts with a relationship quote is that no matter how you bend it, that’s what a business partnership really is. And my problem is…my heart is taken.

Over the past 15 years as an entrepreneur, I’ve started a lot of new businesses with partners. Some of them did well, others didn’t, but if I had to put a status on almost all of them, I’d go with the well-known “It’s Complicated”. Aside from individual partnerships I also got to sell part of my businesses to large corporations, taking them in as partners into my business. Now that’s lessons on lessons on lessons. And no, not all of it was bad. To look at the bright side, I now feel entitled to give this advice! Though my real advice is…never feel entitled.

I’m sure some of you out there have had great success in business partnerships and would like to challenge me on what I’m about to say. I welcome that. In fact, I salute your ability to have made it work for you, at least thus far…Pardon the irony and don’t take it personally, your partnership won’t last forever, but that’s because nothing does.

Enough fluff, let’s get on with it.

WHY BUSINESS PARTNERSHIPS SUCK (and what you can do about it).

Here’s the typical case I see every day… You’re an entrepreneur and you have a great business idea but very limited resources to bring it to life. You think the business has great potential but just to be safe, you’d like to “split the risk” with somebody because “who knows what can happen?” (it probably will!!!). So you take a friend, a family member or just someone you know, who has some skills that you lack and offer them to partner up on a great venture together. They LOVE your idea. You get excited, they get excited, “everyone gets a car”. And here’s the prestige, since you start with no capital, you offer them to split the equity in the business because “hey, that way I don’t have to pay them right away.”

Congratulations!!! You’re on your way. Except…

1. Everyone Has a Dark Side– You see when you and your partners get excited about a business idea, you’re all positive, optimistic and at least seem, like decent and rational people. You make estimates on what your revenues will be a year, two and three from now and everyone starts to secretly plan their lavish purchases. The atmosphere is good and you can’t believe how lucky you are to have such great partners.

But a year passes and then two and you’re not hitting the numbers. You need to put twice the effort to get half the revenues and every penny has to be reinvested to keep the business afloat. Usually, that’s when the finger-pointing begins. The rational partners you once had, turn out to be childish egomaniacs who seem to be convinced that it’s YOU who must be underperforming. The mood is somber and difficult times extract any ounce of joy that you had when you started the business. Your partners turn negative and become downright intolerable. You begin to question how could you ever get into bed with people like that? (metaphorically, of course).

Know this, everyone has a dark side and it’s one that is rarely seen in the mesmerizing mist of the success you all envision for your business. Real characters come out during times of difficulty and sometimes when that happens, you already gave away fifty percent of your assets. Now that’s HALF, Eddie (age test).

2. An Expensive Skill– If you decide to start a business with a partner, it will almost always be with someone who has a certain skill set you lack. You find this skill indispensable for your business at this stage, as you have little capital to get it elsewhere. That’s what made website builders, copywriters, salespeople and yes, the logo-guy, millionaires! You see, while I do buy the ideology of spreading equity like an item on the Oprah show, it’s literally one of the biggest wastes of capital there is. In the short term, the logo-guy might deserve 10% of nothing. But if your business starts racking in cash, he may be earning hundreds of thousands if not millions of dollars annually. I mean… it’s cheaper to kill the guy. You see, while in the short term it may make sense to you to buy services for equity instead of cash, in the long term it’s nonsense. Equity should only be reserved for people who have:

a. A rare skill that is hard to find anywhere

b. A strategic partner who brings in way more than just one skill

c. A financial partner who can secure you a steady stream of cash

d. The rest, should be yours to keep

To everyone else, pay cash! It may be an expense now, but it’ll save you a boatload of money later.

3. Full-Dependency Vs. Decency- It’s common that partners separate responsibilities in the business between each other to “get more done, faster.” You deal with sales, I’ll deal with suppliers. Sounds perfect! And you should fear perfect by now. You see, there’s nothing wrong with splitting business tasks, in fact, I say it’s the right approach. But if you’re fully handing off a specific part of your business to your partner, you’re making a huge bet on the decency of that individual. I bet you want a real-life example.

I once had a business with a partner of mine where we agreed that I’ll handle the sell side and he handles the buy side. All seemed to be well and we got a major contract with an international hotel chain. We go a prepayment from the client and then something snapped. For some reason, my partner decided the business would be better if it no longer involved me. Fewer mouths to feed, I get it. And so as he was handling the supply and we already had the client’s money, I was put in a position that I had to leave the business if I wanted the client to get their order. Now don’t get me wrong, Cash Rules Everything Around Me too, but my image, reputation, and name simply meant more. So I left. The client got their order. My partner got paid. I got my lesson. To this day, I don’t know why it happened. I only know that you really better know the people you do business with. Don’t ever hand full control over any aspect of the business. Delegate but, know your suppliers, your partners, your clients and every step and process of the business. Better yet, have it all somewhere in a software where you can have full access and full transparency.

4. Excuse Me Miss…Now they’ll never teach you this in business school, but when you start a business with your partner, you may actually be in businesses with their spouse. When you go into business, you have to find out who makes the decisions in the house because that’s who you will be ultimately dealing with. I’ve had situations where we needed to make a major decision in the company and I had my partner tell me he needs to think about it. That’s a fair request. But a week later we were out for dinner with the families and his wife is telling me what she thinks of our options and how she decided the best way would be to go with…wait what? I let it slide that one time but then it happened again and again. I realized some people are simply not able to make decisions independently and always need to get permission (roll eyes). That’s a dangerous partnership because you no longer have one unknown in the equation, you now add a whole family of unknown situations into the mix and that’s a toxic pot of chemicals you don’t want to stir. It’ll start to smell and rub off on you. Keep that in mind.

There’s another aspect to this most people don’t like to talk about. What happens if something terrible happens to your partner (sometimes it’s a blessing) and he or she is no longer able to perform their duties as a partner (due to death or illness). At this point, their shares would typically go to their children or their spouse. That means you may suddenly end up in a 50/50 partnership with someone who isn’t old enough to drink, someone grieving, or someone bat shit crazy. I know it’s not commonly talked about, but it should be. A solid business is meant to survive beyond the life of its original founders, so have a solution to this problem, before it happens (think about splitting shares from voting rights for example).

5. Take Me For Who You Are– Aside from the obvious loss of independent decision making, when you partner up with somebody, you’ll often (read: always) be responsible for all the shit they pull. I can’t tell you how many times I had to “look the other way” when my partners were making questionable transfers in and out of the company, making questionable expenses, going to suspect dinners, buying apology gifts to their wives (for buying others gifts to their girlfriends). I mean it’s a twisted world out there. The problem is, for the authorities and for the regulator, you’re one legal entity. One body of work. One masterpiece of disaster. If you’re into that kind of shit, you may actually enjoy having a partner. In fact, you probably deserve one. But it’s not my cup of tea and I don’t want to put dirt on my name, at least not for this kind of reward.

6. The 0/0 Deal– That’s what I call 50/50 partnerships because in difficult times or in times of disagreement you get exactly 0 work done with 0 results. I get that everyone wants to be nice and when you’re starting with nothing, splitting the business evenly is just “fair.” I’ve done it myself and I didn’t regret it exactly 1 time. Fair doesn’t fly in business. It certainly doesn’t help to get things done. As much as you cant, try to at least have one more vote than your partner in your company, or let him have one if you don’t accept that great power comes with great responsibility. Whatever the outcome in a 51/49 partnership, it’s better than a no outcome in a 50/50 split vote. If you can’t avoid a 50/50 deal ( or any equal share deal) then decide on a tiebreaker who is called to make a final, binding vote. A good idea would be to get a lawyer or a top business consultant to serve that purpose.

7. The Company Card– I don’t want to go into many details, but aside from individual partnerships, I’ve gained a great deal of experience with selling part of my company to a giant corporation. To me, it seemed like a ticket to the big league. A Hollywood budget for a promising adult entertainment movie…only in the end, the girls never came. Promises make the world go round and when you partner up with a big corporation, you will tend to get lost in all the new perspectives that open up to you. But here are the lessons I learned the hard way:

a. “Just cause you’re in — doesn’t mean you’re in.” The budget is there, but they will make you prove yourself first. This means your small business has to continue operating like a small business (an indie movie budget) until your concept is proven to be worthy of the big corporate bucks. But don’t get it twisted, you lose the independence and a major part of the profits right away, for potentially gaining something in the distant future (in a galaxy far far away..). Pay for Play, I guess.

b. You need a good team or lawyers or you better know your way around contracts because boy, there’ll be plenty of them. These contracts are invaluable as it’s your only means of protection, especially if you become a minority shareholder. But know that when shits hits the fan, even that won’t help you unless you have the budget to legally defend that contract.

c. You need a Shareholders Agreement — more on that later on

d. All is well as long as you stay in line. When I joined the large corporation, I had to change all my business processes to match theirs. Fight it all you want, but you’ll lose. They have their accounting rules, their reporting rules, their HR rules…Rules Rules Rules. Just what you wanted when you chose to become an entrepreneur.

e. It’s all about the money. Don’t think for a second that a large corporation, partners up with you because they like your vision or like you as a person. They see a strategic fit and that’s all you are. If that floats your boat, be my guest, but make sure you stay a strategic fit or wind will be taken out of your sails real quick.

f. Oh and about that — They don’t give a shit about you. Until your business isn’t doing well or is losing money. Then they give a lot of shit about you. Don’t worry, the contract termination will be delivered by e-mail. You’ll know.

8. THE SHA– No it’s not a new Mortal Kombat character, the SHA is what’s known as the Shareholder’s Agreement and if there’s just one idea you want to walk away with. Let it be this!!! Make a Shareholder’s Agreement. The shareholder’s agreement is the legal document of the conversation that NOBODY wants to have when they start a business. In fact, avoiding this conversation is exactly what turns me off from partnerships altogether. But avoiding something doesn’t make it go away so here are just some of the things you need to formalize in a SHA ( a detailed analysis of the shareholder’s agreement will be in the next article). In the Shareholder’s agreement, you decide on who will be on the board of directors, the decision making body of the company. You decide how many members and how many votes are required to pass any serious amendments to the company bylaws or any significant business matters. You agree on what happens if one of you wants to sell the company, you agree on preemptive rights to buy the shares of those who sell. You agree on a valuation for selling the whole business and you agree what happens to the shares if something, god forbid, happens to one of the partners. You agree on exit goals and you agree on what is the process of liquidation in case you need to file for bankruptcy.

It’s kind of like talking about the wedding and picking your kids’ names on your first date. I get it. But ultimately, that is the most critical point for the partnership to withstand difficult, unpredictable times if such times happen to come.

So just to avoid any confusion, I don’t love partnerships. In fact, I’m probably a difficult partner to have. I like to go all in, wall to wall when I believe I can get something done. I won’t sleep, I’ll light the place up and I’ll expect you to do the same, or more.

I hope you found my experiences useful, but if you haven’t learned anything new by now, you should have stopped reading in the beginning. But here’s the thing, even having read all of that, I’m sure many of you will still choose to go into business partnerships. And good for you. To be honest, I started a business with a close friend of mine and we’re going strong to this day. It wouldn’t be the same without him as it probably wouldn’t be the same without me.

As for doing business with anyone else — on to the next one.

M. Burich

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