13 Reasons Why Partnerships Fail

Forming a partnership is like asking for a lawsuit. I strongly discourage anyone from forming a partnership. Most partnerships are informal and there is no understanding of who gets what. You might say, it is a straight 50/50, what is the problem ? The problem is that there is no way of making sure each partner shares equally in the risks, contributions of time, and contribution of value to the partnership. Each partner has different expectations and each partner has a different idea of what is fair. Some of the more common things to consider early on are as follows:

(1) You don’t put things in writing. Everything has to be in writing, if you are putting up some real money get a lawyer.

(2) You are not clear as to your role in the partnership. Decide specifically what the role of each partner will be, joint decision making is ineffective, so there has to be a decision maker, or a decision maker for each specific general part of the business. One can decide on marketing and the other on finances for example.

(3) You are not clear as to time to be invested. Specify how many hours each will work at a minimum.

(4) You are not clear as to how much money will be invested. Specify how much each will contribute in cash to get the business going and what each will contribute in office equipment and furnishings.

(5) You are not clear as to how income will be split. Specify how income will be divided and when it will be divided, is it daily, is it monthly ?

(6) You are not clear as to how much will be reinvested. Decide how much of the net income will be divided among the partners and how much reinvested in the business.

(7) You don’t have an exit plan for the partnership. Decide what will happen if a partner wants out or if the partnerships is dissolved.

(8) You are not clear as to how intangible assets will be valued. Decide how to value the goodwill of the partnership. Will it be based on gross income, net income, or will an appraiser decide ?

(9) You are not clear as to who can buy who and when. Decide who can buy who out and when.

(10) You don’t have a plan for disposition of assets. Decide who will keep domain names and phone numbers, and office, or what you will do with them, if the business is dissolved or the partnership breaks up.

(11) You are not clear on which partners will assume liability. Decide if it is a general partnership or limited partnership and who will be the general partner.

(12) You don’t have a continuation plan in case of a partner’s death. What if a partner dies, what do you do then ?

(13) You don’t have a compensation structure set up. How much will each partner get paid ?

There are so many issues, that are never addressed when forming a partnership, that leads to friendships destroyed and the inevitable lawsuits. So discuss these things long before the partnership is formed.

 

Wow great ideas and information for partnership,soo helpful.
Thanks for the share.
Cheers!

 

This is excellent advice. I have seen many family and friends business partnerships end in bad ways. An ounce of prevention, common sense and intergrity would go a long way.

 

Get it in writing is #1.

Every business changes as well as the individuals within them that run them. Don't feel uneasy about getting a partnership agreement or stupid enough to think you don't need one. If my mother or warren buffet wanted to partner with me I would seek an attorney before starting for an agreement.

I would say most partnerships without documentations fail far exceeding 50% of the time simply because as stated previously things change. While all business and individuals will most likely change, the damage happens because there are no rules or boundaries signed upon or consequences (or rewards) defined from the get go.

Don't go to legal shield and draw up a partnership agreement either. Seek advice from a professional business attorney to protect your interest, not both your interest

Experience: Many good businesses of mine failed because if this and would at least say I've spent $100k litigating against ex partners. That 2-5k to draw up an operating agreement before getting going is far less expensive than the alternative that if you don't have one you'll 50/50 end up spending many times more later on.

I don't care if it's your mother, brother, pastor, or best friend. God is the only one I would not ask to sign the dotted line.

 

Agreed. A written agreement it is money well spent. I have seen many instances where things shouldn't go wrong, but they do. Brother sues brother and son sues father, very common. When things go really well there are lawsuits because of greed. When things go bad, there are lawsuits because of blame.