Business Partnerships Pros and Cons
Business Partnerships for entrepreneurs can be fruitful if a balance is met with expectations, risks, goals, responsibilities, and long-term thinking. That said, there can certainly be business partnership pros and cons to consider.
Partnerships can also be disastrous to any fledgling small-business and can cause great divides between existing friendships if not done right. Before you jump in with a partner or invite another entity to join your operation, here are some business partnership pros and cons to consider:
What are your expectations for the business?
These expectations must be aligned with your prospective partner, even if you think you need each other to start a business.
In our last post, we discussed the importance of knowing yourself. This includes understanding your individual expectations of your business.
Example: Your own entrepreneurial goals could be to open one store that sells and repairs surfboards by the beach where you have the opportunity to use flexible hours to participate and talk about your passion. This gives you the time to surf and keep the pulse of the trade by networking. All the while, you are enjoying the sun and the business structure that offers more flexibility in your schedule. Your model is based on making enough to live, stock inventory, pay taxes, and do something you love with people who are like- minded. Tourist season could give you a boost here and there, but you are not looking to expand into other markets or add locations.
Sounds cool, right?
You want to start this venture, but you think you will need a partner for capital investment, and one of your lifelong friends is interested. Their expectations are larger. They want to sell more: wetsuits, t-shirts, and surfing accessories. Maybe they want to stock the latest and greatest in boards, and would rather sell a new board to a customer than fix an old one. Last, they want to be open longer, have a bigger shop, expand into scuba diving over the next 18 months, and hire employees.
Are these expectations different? Yes they are.
Actually, these models are so different that one might suggest that these aren’t even the same business. They are simply in the same realm of interest or customer base, but the expectations on what the business will do for those involved are not the same. The goals aren’t completely aligned and the capital investment in time, energy, and cash would be way off.
Could this partnership still work and thrive? Maybe.
One party would have to either back down or charge ahead. Both would have to understand their own expectations as well as the goals of their partner. Their combined love of surfing and friendship could bridge the gap when real money is involved gets reduced as their expectations only begin to differ.
What happens when either model is successful? What if they fail? One partner can easily say “I told you we should have done it my way” or “…now that we’re making money, let’s expand the operation.”
Having the same passion and friendship does not guarantee success in business. The friendship will be tested, even in the most favorable of circumstances.
Risk thresholds are also important to discuss with regards to partnerships because not everybody has the same tolerance for risk. Some will bet their savings, their whole livelihood, on a business venture. Others will only risk a certain amount and liquidate once a storm is on the rise. Liabilities play a factor as well. If your partner has four kids and a mortgage, while you have a house nearly paid off and are single, your risk tolerance for a new business is going to be very different.
How much risk are you willing to take for your dream? What about your partner?
Often, individual versions of “I’m all in!” vary considerably.
Most never talk about reward threshold either. Will you be satisfied if the business simply stands on its own two feet, pays its own bills, and provides decent income for all involved? Or, are you interesting in expansion? Does your partner dream of a bigger business model but you are reluctant to take on larger roles and responsibilities?
Even success can cause tension in a partnership.
If short-term and long-term goals are not aligned, the partnership could be also be strained. These could limit or enhance the propensity for cooperation among the partners. Planning ahead is essential in any business, so if the goal oriented vision is not aligned, the business will suffer.
Delegation of Responsibilities is another key factor when starting in any partnership. Who will do what? What if one side doesn’t hold their end of the bargain? What if one person ends up doing all the work? For this, we recommend a tight Article of Organization and putting everything down on paper in the form of contracts.
Contracts are your best friend when it comes to partnerships. They should be as detailed as possible so that a common, legal understanding is reached for all involved. Contracts can define term limits between two entities, dispersal, equity, spousal issues in case of divorce or death, even who owns the furniture.
We will discuss legal business organization in a later post, but one of the best options is for two businesses to come together by contract. You have a start-up which joins forces with another start-up. That way, if things go sour or need to be adjusted, both entities have a business they can walk away with.