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Partnerships can be a useful strategy, especially when one is trying to start a small business, and there is a need for varying skills and money.Partnerships can bring complementary skills and capital into a business to make it grow and prosper faster. The odds of conflict and financial risk, however, can increase when two or more people get together to run a business.
Lack of Written Agreement
Like any other business arrangement, a written contract solidifies and clarifies the parameters of a partnership. Written agreements cover issues such as the extent of each partner’s tasks and responsibilities, the division of net income, and the rules around changes to the partnership structure. Partnerships that start without a written contract run the very real risk of serious partner disputes ending in legal action or even the dissolution of the partnership. When two or more people choose to go into business together, they should map out their shared understanding of the arrangement, and hire an experienced business lawyer to draw up the contract.
Incompatible Long-Term Outlooks
In the beginning of a business venture, partners are often optimistic of the chances of success and buoyed by the excitement surrounding the enterprise. Sometimes this can lead partners to ignore some of the more mundane details, such as where each owner sees the business going and how he or she would handle situations along the road. Without serious discussions about the future of the business, partners may find themselves at odds with each other as challenges and opportunities present themselves down the road. Ultimately, this can gridlock a business if partners cannot agree on a plan of action to take the company forward.
Different Customer Service Protocols
In almost all long-term businesses, one of the hallmarks of success is that customers are happy with their interactions with the business. One measure of satisfaction is that the customer feels he or she is being interacted with the same way every time. For example, a customer at McDonald’s can expect a similar interaction with staff every time he or she enters the door. However, not all big businesses have quality service, and this negatively affects their business. The same goes for business partners. If business partners both interact with customers and have vastly different ways of doing so, it can lead customers to avoid the business because they do not know what to expect when they call or come in. Regardless of how many partners own a business, customer service should be standardized.
Lack of Exit Strategy
When you first go into business with a partner, the last thing on your mind is leaving it. Everyone eventually turns over their businesses. It may be either through sale, passing it to family or through death. If a partnership turns sour, understanding the rules around leaving the business becomes even more urgent. Written partnership agreements – signed before you open the doors for the first time – should contain rules around how and under what circumstances each partner can leave the business. For example, there may be restrictions around who you can sell your partnership interest to or what happens to your share if you are medically incapacitated or die. Like most business disputes, it can be difficult to agree on these issues as they happen if there is no provision in the agreement for them upfront.
The Bottom Line
Going into business with someone else can take it to the next level, but it isn’t right for everyone. Partnerships have the ability to create tension and harm the business if the partnership is not set up correctly, and this can result in costing the business and the partners a lot of money. Speaking with an experienced business lawyer can help you avoid making stressful and costly partnership mistakes.
This story was originally published by Investopedia.