We are not all equal, and neither are our companies. In a business, not everyone makes the same contribution, but through careful planning and application of best practices, we can advance not only our businesses but also the careers of the people who work for us.
5 Ways Business Partnerships Can Be Unequal
Business partnerships are a tricky subject. There are many ways they can go wrong, but there is also a lot of value that can be created.
It’s easier as a sole proprietor because you make all the decisions yourself and don’t have to abide by a uniform partnership act or agreement, and there are no partnership distributions. But it’s also harder because small business owners often have to use their personal asset(s) because there are no partner contributions to help in any area.
The right partnership can help a business grow, expand its reach and influence, or create new opportunities for growth. Business owners can also provide additional resources, contacts or capabilities that may not be available internally.
As with any relationship, business partnerships should be entered into wisely. In most cases, you will have more than one potential partner to choose from. Make sure you choose the right partner for the long term!
Here are five ways a joint venture can be unequal:
1. Unequal Financial Partner Contributions
If you have a stake, you need to decide how much that stake will be and how the company will eventually buy you out of your stake.
If you and your partner put unequal amounts of money into a business, it can create a serious imbalance in your relationship.
The partner who puts up most of the money may feel that he has more control or say over what happens in the business than the other partner or partners. He may feel he has the right to decide how the money is used, where things are bought, what kind of equipment is needed, etc.
When this type of challenge arises (e.g.: business debt, lack of profit, breach of business law), it can be challenging to talk to your partner about it, and perhaps you will need professional help to mediate the situation.
Make sure you both have enough time to work through the issues before building a joint business structure.
Start by talking about why each of you wants to start a business together, and how the partnership assets will work. This will give you both a clear picture of what each of you wants for your future and the future of your partnership, and help get started .with your business partnership agreement.
2. Time Commitment
Many partnerships are based on an unequal time commitment between the two general or limited partners.
For example, one partner may work 80 hours a week while the other works 10. At first, this can be fine, but over time it can lead to problems.
Often, the one who works more feels undervalued and burned out, and the one who works less can become resentful of their partner’s demands.
In some situations, this imbalance can be addressed by hiring staff or delegating work, but if you and your partner do not give equal time to the business, it’s important to address the problem before it becomes a habit, unless it was part of your agreement.
When you enter into a business partnership, it’s important to consider the skills that each party brings to the table. Some skills are more important to the operation of the business than others. For example, one partner may be very good at marketing while the other is a numbers person. If you are deficient in certain areas, there are ways to fill those gaps.
Before committing to a general partnership, limited partnership or limited liability partnership, consider what skills and resources you and your partner can bring to the table.
Some of the most common skills are:
- Business management
- Development of products and services
I think it’s important to remember that we should not enter into a business partnership agreement just because the other person is good at something. That’s a common mistake. It happens when you have no other choice, but it’s still dangerous.
The downside with relying on skills only (especially if you are not that good at it yourself) is that you make your business dependent on one person and one skill only. If that person leaves, the company has a big challenge.
You can not even decide what to do because your partner probably has an opinion on everything and maybe even more opinionated than you.
It can get even worse if the partnership is based on friendship. It is not uncommon for such partnerships to end up in a bad situation due to miscommunication or ego conflicts (and sometimes both).
I am afraid there is no easy way to avoid such situations. You could try to find someone who has complementary skills (which may not necessarily match yours). However, it would be best if you acquire these skills yourself so that you do not have to urgently rely on someone else when your partner leaves you.
In a startup, experience is often considered the most valuable asset that partners bring to the table.
And in many ways, this is true. Experience can be a good indicator of how well someone will do their job. It can be a good way to filter out candidates who are not a good fit for your company.
But there is another side to the story that I think needs to be told: Experience cannot always be used as a measure of value in business partnerships and equity investments.
I have seen co-founders argue about who brings more value to the company because of their “experience.” For example, you may definitely have more sales experience than your co-founder because of your previous job. But does that mean you deserve more equity because you’re better at sales? What if someone else is better with technology or written communication, could your business survive without it?
An individual partner with fewer sales experience can bring just as much value in areas like marketing, PR, design, and customer support.
For a startup to succeed, each member of the team needs different skills and experience. The last thing you want is two founders with the same skills arguing over who deserves more equity because they have more years of experience in that particular area.
5. Different Visions
As a business owner, you may have one or more partners. You probably have a vision of what you want the business to be, where you want it to go, and how you want it to get there. But you may not share that vision with your partners.
In any business partnership, it is possible to have a shared vision, but not always exactly the same vision.
If you are starting a business now, or expanding or restructuring an existing one, take some time to make sure you and your co-founders agree on the direction you want to go – and make sure your ideas are clearly put in writing.
When I decided to start my community organization, I had a vision for the kind of organization I wanted to run. But once I got started, I realized that when I said what I meant, my words got lost in translation, and I had to clarify my vision several times before I got it right.
We have all had this experience in different areas of our lives – maybe your mother told you something a certain way when you were growing up, but as an adult, you realized she meant something completely different. Or maybe you said something to your own child as an adult and later realized that they did not understand what you said at all!
It’s the same in business. You can have the right idea in your head and communicate it effectively. Also, things change and occasionally your company’s vision needs to be re-evaluated based on new needs or trends. You should make sure that you and your business partner are always on the same page.
Getting Started With Business Partnerships
There are many advantages to having more than one owner in your business. It’s not uncommon for multiple people to start a business together, but it can be a little more difficult than you might expect. Below are some tips to help you and your partners avoid the pitfalls of an unequal partnership.
Understand each other’s expectations.
From the beginning, make sure you know what each of you expects from the partnership.
- What is each of your responsibilities?
- What time commitment is expected of them?
- Who will make the initial investment?
- What happens if one individual partner wants to drop out later?
You should try to resolve these questions before the money changes hands.
Create a Business Partnership Act Draft
This should address at least two issues: how profits will be divided and how disputes will be resolved. If everyone agrees that things should be “fair,” it will only lead to endless arguments about what “fair” means.
If you establish a system for dividing profits and resolving disputes from the beginning, it will be much easier to keep your partnership on track when disagreements arise later.
The Most Common Mistake
Even if you think you know your potential business partner, there are aspects of a person’s personality and habits that only come to light when money is involved.
Most people have a default setting in which they behave in predictable ways. That’s why it’s so easy for us to live with ourselves. We always know what to expect from ourselves.
The same is true for other people, but we tend to focus on the differences we see and overlook the ones we don’t.
The most common mistake is to believe that the only differences between you and your business partner are the ones you can see.
Another mistake is to choose a friend or relative because they belong to your comfort zone. The qualities that made them an ideal friend or relative may not make them the best business partner for your company. This doesn’t mean they’re inefficient in their work, sometimes it’s just a different perspective on business or simply different priorities.
Before you make an agreement with another person, you should know exactly how they think, especially if they’ll be running their own department or territory.
I’ve seen dozens of partnerships fail over the years because one person thought they knew their prospective partner’s strengths and weaknesses, and then was surprised by their behavior when the partnership was finalized. This not only damages the business but also the friendship.
Business Partnership Agreement
A joint venture can be very tricky and complicated, even for a small business.
You should hire a professional attorney (which I am not) to get legal advice and draft a general partner or limited partner’s agreement that you can sign with your business partner that clearly outlines all of your rights, responsibilities, and obligations with respect to the venture.
An attorney will be able to tell you whether you should consider a limited partnership, limited liability partnership, or general partnership, depending on the type of written partnership agreement you want and the type of business structure you currently have (e.g., limited liability company, sole proprietorship).
Your attorney will also explain business law, such as whether there is some personal liability risk or unlimited liability, depending on what liability protection you are seeking. He or she will also help you with the legal partnership structure of the business, clarifying the terms of partners’ contributions to partnership assets, partner contributions, partnership distributions, how to handle partnership debts, and more.
The lawyer will advise you on business law for your business entity, while the financial advisor will advise you on the financial side of your small business.
Therefore, it is also advisable to additionally consult a financial advisor when it comes to partnership income, profit, corporate debt, etc.