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It isn’t friendship here: How to avoid a bad business partnership

  1. Kat Haylock

    Kat Haylock Community Editor Staff Member

    Posts: 337 Likes: 144
    8 |

    You don't have to spend too much time on this forum to find plenty of examples of people who have gone into partnership, only for it to go horribly wrong. And that's starting with the best possible scenario of already being known to each other and having the same goals.

    It’s difficult to remember the last time we heard the tale of a successful business partnership. Of course, the old internet adage goes that happy people are less likely to write about it online, but the number of horror stories found from a cursory search of the forums is enough confirmation – business partnerships are an area to tread with caution.

    Of course, a business partner has its perks. It’s an opportunity to share decision making, balance out a professional skillset and reduce the level of early financial commitment.

    Yet for many members, the advantages haven’t been enough to sustain successful partnerships. Matt Ranger posted last week, concerned he was being ripped off by his business partner. separation45, who teamed up with a friend, is now looking to exit his business because he “can’t stand” the guy. For Seasider32, his business partner wants out and has demanded her seed money back, threatening legal action.

    A partnership can be the best of times – or the worst. As AllUpHere advises, it’s important to recognise the value of being solely in charge of your business. Equally, don't underestimate how much of a giant pain in the backside even the most seemingly perfect partner can be.

    If you’re thinking of entering the battlefield of a joint business venture, here’s some of our community’s best advice.

    Don’t go into business with a friend

    The sentiment involved in going into business with a spouse or a friend can make a business idea seem thrilling and suddenly tangible. An ongoing joke in How I Met Your Mother involves the main characters’ enthusiasm for starting a business each time they’ve had beers. “We should buy a bar!” Ted announces. Barney responds by sitting bolt upright; “We should totally buy a bar!”

    Falling in love with the idea of running a business with a friend, however, can lead to poor judgement on their suitability as a business partner. The examples are numerous: one member excused their partner’s bankruptcy and poor credit rating. Another went into a partnership with a friend from church, only to discover he was spending company funds on alcohol and trips abroad.

    You need to be able to focus on the realities of your business, which can be hard when dealing with personal relationships. “Never go into business with a relative,” Paul Norman says. “Especially a husband, wife or partner. Without the emotional ties, you would have walked away a long time ago.”

    Be thorough in your background checks

    A common caveat on the forums is to take more care in choosing your business partner than you would your spouse.

    UKBF member webgeek recommends an enhanced disclosure, credit check and police report. And that, he says, is just scratching the surface. Talk to their previous employers or clients, ask for documentation to support each claim they’ve made and look at their accounts. If they’ve lied – or exaggerated – about their history, what might they fabricate in future?

    Regardless of whether your potential partner will be involved in financing your business, a poor credit rating and other evidences of financial mismanagement should raise a red flag. Similarly, question their ethics: what do they get from the partnership? Is there anything stopping them from taking your idea and setting up as a direct competitor?

    “Why not take the lead and tell your proposed partner that you'll be declaring to them your own background check, and suggest that they do the same?” splashweb advises. “I'm sure they'll have equal doubts and the same questions as you have. Start as you mean to go on.”

    Get your agreement in writing

    Situations, ambitions and people can change, and even the most promising of partnerships can become messy and unpleasant. Though a gentleman’s agreement may seem adequate in the thrill of starting up, entering a partnership without a formal document is likely to increase emotional and financial stress later on.

    “I've been involved in a few business ventures,” Ozzy says, “and I've always had a professionally drafted shareholders’ agreement. I've seen too many cases on the forums and in real life where people have gone into business together and then fallen out, and it’s then got very messy because they didn't have a shareholders’ agreement.”

    While template agreements are available online, remember that one size may not fit all. As Ozzy puts it: “I like to sit down with a lawyer and talk through my business venture and have a bespoke agreement drafted for that business’ objectives, exit and resolutions.

    “Yes it costs few bob, but I personally see it as a worthwhile investment.”

    Setting out clear business expectations and partnership responsibilities in your agreement can help to avoid everyday conflicts. As Paul Norman advises, you need to discuss exactly who does what and who gets what in the business arrangements. This will include what happens if one of you wants out, or wants the other one out.

    Plan an exit

    Planning an exit for your business is a day one decision, our resident business valuation expert Clinton says. The excitement of a new business often drives founders to focus on generating revenue and making profit, rather than recognising that a partner may wish to leave or sell up in future.

    Businesses can lose their entire value because of a lack of forward planning and, without exit plans already in place, it can entirely come down to what you and your partner can agree on.

    “Some precautions that can be put in place cost absolutely nothing, yet founders are too busy chasing rainbows,” Clinton warns. “Owners almost invariably take a big hit for their lack of foresight, lack of strategic thinking and lack of recognition that the game has to end at some point.

    “And the default plan, which tends to be the unspoken wooden box plan - ‘someone else will sort this shit out when I'm in a coffin’ – isn’t a very bright one, because circumstances might require you to leave before you're dead.”

    What advice would you give someone looking to enter a business partnership?

  2. The Resolver

    The Resolver UKBF Ace Full Member

    Posts: 2,865 Likes: 931
    All agree and sign up to a Shareholders Agreement.
    Posted: May 3, 2017 By: The Resolver Member since: Mar 31, 2006
  3. Clinton

    Clinton UKBF Ace Full Member

    Posts: 2,720 Likes: 867
    As @The Resolver says above, get a SA.

    But also, plan for the exit right from day one. People sometimes laugh at this idea ...but there are numerous decisions you take in the early days that can impact on the price you get when you finally sell. In fact, some of them could make your business completely unsellable no matter how successful it becomes! If health or other reasons require you to leave, your business could die and you lose all value you've built in it.

    Areas of particular concern:

    Lease and assignment clause: If the terms of your lease don't allow for transfer, even an eager buyer can't take your business on.

    Personal guarantees: Hand out PGs to bank, hire purchase providers, landlord etc., and you may find that you can't extricate yourself even when your liability under the contract drops to near zero.

    Key person discounts: Build the business to be reliant on your personal skills / contacts / management and it'll be very difficult to ever leave. Buyers don't want to take on businesses where the main assets walks out of the door on day one. If you do get a buyer the KPD (Key Person Discount) to your price could be 80% or more!

    Social and other accounts: Seller accounts at eBay, Amazon (and various social media accounts) can't be transferred from one person to another. You need to register all these accounts in a Ltd company name from day one or you will eventually lose all value you build in those accounts (feedback / reputation / followers / likes / whatever).

    There are several good reasons to think exit right from the start ... unless you like flushing money down the pan.
    Last edited: May 3, 2017
    Posted: May 3, 2017 By: Clinton Member since: Jan 17, 2010
    The Byre and Kat Haylock like this.
  4. Steve0077

    Steve0077 UKBF Newcomer Free Member

    Posts: 11 Likes: 1
    You can only do so much checking I would've thought. For example, isn't an enhanced disclosure only applicable for jobs that involve working with children and vulnerable adults? Also, these are usually run by employers on employees I had assumed.
    Posted: May 4, 2017 By: Steve0077 Member since: May 13, 2014
  5. maryward

    maryward UKBF Newcomer Free Member

    Posts: 0 Likes: 1
    I think it's important to not take things personally. Even if your business partner pushes for an issue that you disagree with, remember that he/she’s only pushing the issue because he/she believes it’s going to be best for the business.
    Posted: May 5, 2017 By: maryward Member since: May 5, 2017
    Kat Haylock likes this.
  6. Dan Shaw

    Dan Shaw UKBF Contributor Full Member

    Posts: 40 Likes: 2
    We see this type of background checking lots. Have to agree with others Get everything in writing and make sure that everything is set out very clear from the start. Be very considered when involving family/friends and business...
    Posted: Jul 10, 2017 By: Dan Shaw Member since: Jul 8, 2017
    Kat Haylock likes this.
  7. Steve WebStudio

    Steve WebStudio UKBF Newcomer Free Member

    Posts: 7 Likes: 3
    Even with the best will in the world and agreements, business partners will not always meet their responsibilities. Even if you dont take things personally and and try to work through issues in a sensible manner, doesnt mean you business partner has the best interests of the business at heart. It is a common thing in partnerships where one carries more weight, and the other partners are quite happy to sit back and watch. I would just advise be careful, in partnerships theres no such thing as a good exit stratergy.
    Posted: Jul 11, 2017 By: Steve WebStudio Member since: Jul 2, 2017
    Dan Shaw likes this.
  8. Michael Loveridge

    Michael Loveridge UKBF Newcomer Free Member

    Posts: 9 Likes: 0
    There's an old but very true saying - "A partnership is the only ship guaranteed to sink!"
    Posted: Jul 12, 2017 By: Michael Loveridge Member since: Aug 2, 2013
  9. Chris Ashdown

    Chris Ashdown UKBF Legend Free Member

    Posts: 7,878 Likes: 1,625
    Agree the hours of work as far as possible and what happens if one partner then decides on lesser hours, as this often comes up "I am doing all the work"

    Understand that a silent partner is only responsible for giving the company the money and that as you grow the company he will still do nothing but will own a share in the company which he is under no obligation to sell
    Posted: Jul 13, 2017 By: Chris Ashdown Member since: Dec 7, 2003