During the past year, we’ve come across more and more breakdowns in business partnerships.
As accountants and financial planners for many businesses of different sizes, we know all too well how costly this can be.
Aside from breakdowns in personal relationships and the stress this brings, there are implications for shareholders, finances, and even the survival of a business.
We’ve seen partnerships limited by shares have a dispute when a director was leaving the business, and in another company, a business partner running away with the work after landing a large contract.
Witnessing first-hand what this can do to people and their businesses was the motivation behind writing this blog.
When you’re in a partnership or thinking of entering one, there are some important things to consider if you want to make sure it works and protect yourself properly if it doesn’t.
Before we go into that, you might want to know a bit more about partnerships, their advantages and why they’re worth the effort when done right.
What is a business partnership?
In the UK, when we say, “business partnership”, we’re normally referring to a general partnership (sometimes called ordinary). Other types include limited partnership, and limited liability partnership (LLP).
An ordinary partnership is a pretty simple way for two or more people to enter business, sharing in capital investment, skills, time, control and of course, profit (and losses). It offers less formality and potentially more flexibility than a limited company arrangement.
Because of this, it’s suitable for many different business types.
As an example, two self-employed tradespeople might enter into a partnership as an easy way to pool their resources and help promote growth. They’re also quite common among legal, financial and medical professions.
In terms of profit, partners are taxed individually as if they were self-employed. As the partnership has no separate legal identity, it does not require registration or filings with Companies House.
They involve at least two people, although sometimes more, and additional partners can often come on board further down the line, if agreed.
Establishing which type of partnership you’re entering – and the legal implications – is essential at the start of the process.
Advantages of a business partnership
Ease of setting up, flexibility, less formality, shared control – all reasons a general partnership could seem like the right option for your business.
Entering into a partnership with the right person, or people, can bring plenty of other advantages, too:
- Varied skills – having a partnership with people whose skillsets are different to your own means that you can each specialise and focus on what you do best.
If you’re great at ideas and marketing but terrible with sales and numbers, bringing in a partner to plug those gaps will only benefit the business.
- Experience and contacts – by pooling the expertise and networks of more than one person, you’ll immediately have an advantage.
This can open a range of possibilities for business development, supplier networks and problem solving.
- Sharing the load – self-employment has its pitfalls. By collaborating with others, you can share responsibilities.
Doing everything yourself can be stressful and even lonely. With mutual support, getting through tough times is easier.
- Decision making – when you’re deciding what’s best for a business, two heads are often better than one.
Having access to a second set of opinions and perspectives will help you to see the options more clearly.
If you’ve decided a partnership is the way forward, the next thing is finding the right partner. This is crucial, because if you get this wrong, those advantages can swiftly turn into disadvantages.
Maybe you’ve decided you’re going to share the profits 50/50. If your partner then doesn’t put in as much capital, time and effort, how would that make you feel?
You might have complimentary skillsets, but if your personality clashes with your partner’s, the business could be on the road to disaster.
How to find the right business partner
Whether it’s a family member, a former colleague, or you’re looking for someone completely new, there’s no guarantee that a partnership will be plain sailing.
You’ll need to do your research and take your time. Whilst a new business venture can be incredibly exciting, rushing into a partnership will mean that honeymoon period is over quickly.
Before you go into partnership, you need to get to know the person or people you’ll be working with. Trust doesn’t always come quickly, so giving yourself some time to build a relationship is important.
You’ll also be able to assess whether your prospective partner(s) shares your values. You could argue that this is even more important than any skills or investment they bring to the business.
After all, if you and your partner hold fundamentally different views on how a business should operate, what the objectives are and how you want to achieve them, it will undermine everything you do.
It’s often said that opposites attract. In business, having a partner with a different personality type and complimentary skillset could make you a formidable team.
What you look for in a partner might differ, so to get a broader view, we asked some other businesspeople for their opinion on what to look for and what to avoid:
“1) Compatibility of core values we stand for and if they align. Often when they don’t align, partnerships break after initial success.
2) A proven track record of expertise, and preferably variety in skills between both.
3) Trust: I have a business partner who is my childhood mate and can say trust in each other is everything, specifically when we have difficult conversations and feedback sessions. This really makes it or breaks it.”
“I think the problem is that a lot of business partnerships develop because two or more people who have the required skills and resources are heading in the same direction at the same time, so they don’t necessarily stop and ‘recruit’ business partners in the same way you would for an employee. It can lead to an imbalance in what people bring to the business, which causes problems in my experience.”
“I have entered a few, and one which I thought was going to be a partnership but gladly didn’t. Learning from my mistakes, I’d say start as you mean to go on. If initially, you aren’t doing what you thought you would be, stop and leave before it gets worse. Don’t be taken advantage of and it doesn’t matter what they are like socially. If they match what you are looking for professionally, then that is the focus.”
“I’ve done quite a few partners’ personality profiles looking at them individually – why they work and why they clash. Particularly interesting in a family business. Then they can look at strategies to communicate more effectively and head issues off at the pass. The feedback is always interesting.”
As mentioned above, one of the methods you could use to establish whether a potential partner is a good fit is to use a personality test.
Understanding your own strengths and weaknesses can be just as important. A lot of this comes down to emotional intelligence and self-awareness.
Just as in personal relationships, if you can communicate openly and honestly with a business partner, you’ll be starting with strong foundations.
Taking tests and conducting interviews might not be the right method for everyone, however. Some people advocate spending time with business partners in a non-work-related setting.
Sometimes, you can learn more about people and how they will behave in business by observing their nature and reactions outside of formal situations.
How to manage a partnership effectively
Once you’ve done your research and decided to go into business as a partnership, you’ll need to work just as hard to keep things on track.
Above all else, communication is key, and poor communication is often the root cause of problems between business partners.
Without good communication, you’ll struggle to manage the following:
- Vision & Mission – before you set out in a partnership, you need a clear plan for the goals of the business and as individuals.
Your motivations may be different, but you won’t be pulling in the same direction if your objectives, and methods of achieving them, aren’t agreed early on.
- Expectations – what do you expect to put in, and get out of the business?
If one partner wants to work 70 hours a week and grow as quickly as possible, but another is looking for a better work/life balance, it could be an immediate source of conflict.
- Strengths & Weaknesses – coming back to the issue of emotional intelligence, being open and honest about what you can. and can’t, do, is important.
If you can identify these early on and apply yourselves correctly, you’ll stand a much greater chance of success.
- Responsibilities – you’ll need to clearly define which of the partners is responsible for what. Think job descriptions. This will also introduce accountability.
We all have to do jobs we don’t like now and again, and you can’t just leave something in the hope your partner picks up the slack.
- Solve Problems Early – letting things fester is never a good idea. Identifying problems early and addressing them openly is essential.
Be open-minded and approachable when it comes to discussing business issues. If it’s something that can’t be solved between partners, seek external help.
- Have an Exit Strategy – you’ll need to know the end goal. Whether it’s selling the business or retiring, it needs thought early on.
A partner could decide to leave a business after huge success and growth, or because things aren’t going so well. Either way, you need to know how this would be managed.
The final point brings us onto another essential aspect of business partnerships, the legal bit.
Some business partnerships can form organically and more informally. This might work out just fine.
If it doesn’t (Facebook, anyone?), things can get very messy, as we mentioned earlier in the blog.
For this reason, we’d always advise setting out with a watertight partnership agreement.
This needs to be mutually agreed upon between partners, and ideally drawn up as an original document by a solicitor.
There are some options when it comes to online templates, however.
If the proverbial does hit the fan, you’ll be able to resolve things as smoothly as possible when there is a comprehensive agreement and legal framework in place.
Resources & recommendations
We’re great believers in doing your research and being open-minded to new ideas in business.
This is no different when it comes to deciding the best way forward for a partnership.
Two books that have had a great influence on how we approach business partnerships are:
- Principles: Life and Work by Ray Dalio, which highlights the importance of radical truth and transparency when working with people.
- Rocket Fuel by Gino Wickman and Mark C. Winters, in which the authors discuss the relationship between two personality types, the Integrator and the Visionary, in business. Specifically, how these two types work so well together, and lead to highly successful businesses. It includes assessments to work out which one you are, and advice on how each type can find one another.
For advice on the formalities of business partnerships, this article is particularly useful, and includes links to create legal documents.
If you’re looking for a partner that can bring investment to your business, there are plenty of online platforms, including the Angel Investment Network.