If you’re thinking about a partnership, consider the following list and avoid the potential pitfalls:
1. Sharing capital instead of expenses: Whenever you share your own capital–be it money, resources, information or property–you automatically give away your enterprise ability. In a perfect world, the person you are partnering with is upright, full of integrity, and not at all tempted to take this gift and run with it as his own. However, the world’s not perfect. So be careful. Instead, work out an arrangement where expenses are shared in an “associative” arrangement. It also makes it easier to walk away if things go wrong.
2. Partnering with someone because you can’t afford to hire: This is a partnership killer right from the start. The scene is always the same: Bob has a business idea and Fred has the business skills, but Bob can’t afford to hire Fred as an employee, so they decide to share duties, expenses and profits. What happens is both Bob and Fred end up working against each other, and Bob finds himself liable for Fred’s obligations (financial and otherwise) under the partnership agreement. If you’ve got the idea and someone else has the skill, simply hire him or work out an independent contractor agreement. Don’t give away what you don’t have to.
3. Lacking a written and signed partnership agreement: Due to the nature of partnerships, every detail and obligation must be clearly defined and written out, and agreed upon by all parties. This is best done with a written legal agreement drafted by a well-qualified, mutually agreed-upon lawyer. Just make sure the attorney is well-versed in business partnerships, and be sure to keep her card handy at all times. You may need that person again when things go wrong.
4. Overlooking a limited partnership: One of the main downfalls of a partnership agreement is the assumption of liability each partner makes for the other. A way around this is a limited partnership, where the limited partner is not liable for the actions or obligations of the general partner. Again, make sure an attorney well-versed in partnership agreements writes this arrangement.
5. Lacking an out or an exit strategy: Big-time marriages start with a pre-nuptial agreement. In business and contractual terms, a pre-nup is analogous to an exit agreement. In any partnership agreement, define the terms of an exit strategy that allows you or your partner to walk away from the partnership, or that provides options to buy out the other party. This can be done very clearly and simply–and without imploding the operations of a successful business.
6. Expecting the friendship to outlast the breakup of the partnership: Again, from the perspective of a marriage, how many ex-couples do you know who are truly friends? Not many, I suspect. So don’t go into any partnership with a friend expecting to remain friends after a partnership breakup. It may sound great to do business with your friends, but remember, in the business world, it’s always business first and friendships second. Also remember, most times when the business ends, so does the friendship.
7. Having a 50/50 partnership: Every business, including partnerships, needs a boss. If you decide to go the partnership route, make it a 60/40 or 70/30 split. Then you and the business have a point person for accountability and overall operational control. Also, keep your buyout or exit strategy clear and in your favor–benefitting you and saving problems down the road.