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HOW TO INCORPORATE

Why Partnerships Break Up
 

If he'd observed these three principles, says the author, his own partnership might still be alive.
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Two and a half years ago, four of us started out on a great adventure together -- our own consulting partnership. For six months, we struggled along with no clients. Then we hit the big time: a $1.3-million contract. But somehow our success at attracting clients was greater than our ability to work together harmoniously. This April, our original partnership broke up. The experience was one of the toughest I've ever gone through -- but it taught me some valuable lessons about what makes a partnership succeed.

When it became apparent, after several attempted salvage operations, that there were irreconcilable differences in our partnership, we called in our attorney. "Splitting up a partnership," he said, "is just like a divorce without the kids." He meant to reassure us with the comment about kids, but I found that the dissolution of a partnership can be just as emotional as a divorce. Like ours, many partnerships consist of friends and former colleagues, and many other partnerships include relatives. Couple these personal relationships with the intense involvement required to run a small business, and you can see why a failing partnership creates misunderstandings, bruised egos, bitterness, hurt feelings, and anger.

Of course, no one puts together a partnership thinking about the unpleasantness of breaking it up. The key is to recognize that a partnership arrangement is subject to some stresses that are not found in other corporate structures. After our partnership broke up, I began to analyze our experiences and, I found that there were three basic rules that were responsible for our successes when we heeded them, and for our problems when we didn't.

RULE 1: SHARE AND SHARE ALIKE

Very simple, right? Most partners have every intention of doing just that. The problem is to make reality conform with the intent. Unfortunately, as George Orwell pointed out, some of us are more equal than others. Human nature being what it is, some people are more exploitative or manipulative, and some are more easily exploited and manipulated.

Because of various backgrounds and experiences, partners may have different opinions on what risk is justifiable, how money should be managed, and what the work ethic really means. Before you sign your name to a partnership agreement, assess just how everyone views such questions. This will provide a good indication of how equal everyone is likely to be three months or three years later.

Also ask if each partner can contribute enough money. Our experience confirmed that there are those months when the cash flow slows to a trickle or does not flow at all. When that happens, the partners may have to do without. Most partners may agree to such a sacrifice in the excitement of beginning a new venture, but when it comes time to actually go without pay, some partners simply may not be able to do so. The ledger sheet may eventually be brought back into balance, but the psychological effects of unequal sacrifice will probably remain.

Set aside at least one meeting to discuss nothing but the personal ability of each partner to persevere through periods of reduced income. This is not a time to be timid or to worry about being "impolite." Spell out what will be expected of each partner (and it had better be much the same for each) if the worst case occurs. If you have the time, continue to talk about personal financial positions on a regular basis.

The need for the partners to contribute themselves equally to the company is even more important than how much money they can contribute. In many cases, partnerships are formed because one partner can contribute something that the other partners cannot, and that's what a good partnership is all about. But a merger of disparate specialists, no matter how good they are in their particular areas, has a distinct disadvantage. In young, small businesses, everyone has to do a little bit of everything. In our case, the four partners were the entire company for the first six months. That meant that each of us had to raise money, keep the books, research and produce our services, type, make coffee, get the mail, and sweep the steps. If your partners will not share in such tasks -- especially when everyone's personal hard work is the only thing that will earn money -- friction and failure are inevitable. The only safeguard is to spell out from the start who is going to do what, making sure that the tasks and levels of effort are reasonably equitable.

There is no secret of success: It's hard work. If your partners don't see it that way, beware. If everyone is committed to lots of hard work, determine exactly how hard it is going to be. Is everyone going to do his share of overtime? If one of your partners loves golf, sailing, sking, or even church or service organizations more than anything else, does that mean more than the company? Remember, your partners are not likely to change their characters or habits just because you are now a partnership.

But if recreation and outside interests are recognized by the partnership as desirable aspects of the partners' lives, spell it out so that time legitimately taken away from the company is available to everyone in equal portions. One week for a partner to serve as a counselor at scout camp should be matched with one week for the other partners, whether it be for running marathons, lying on a sunny beach, or working for the United Way.

RULE 2: GET IT IN WRITING

In each of the cases mentioned above, your best bet is to get it in writing. Write down who is going to do what tasks. Write down how much everyone is going to work. Write down how much money each partner will invest and where that money will come from. Write down how much money in wages will be given up when there is limited income. Write down your goals and expectations for marketing, production, and routine management. Write down a plan to monitor progress. Write down who will go to training sessions, seminars, and conferences. Write down who will get what perquisites.

All of this writing serves three related purposes: planning, record keeping, and protection. Writing everything out will allow you to encounter and solve many of your problems before they jeopardize your company or destroy your friendships. Once you get going, you should continue to plan on paper. A record of your agreements on goals, policies, and procedures protects the company in general and the partners in particular. If you have agreed to limit spending on a particular marketing target, and the marketing partner exceeds the limit with no results, a reprimand is in order. It's especially important to keep written records because, if worst comes to worst -- if the partnership falters and the separation is contested -- the record will protect the partners who are not at fault by showing exactly who did what.

Let's say you have three basic goals. You want to hold administrative costs to 20%, you want to produce three handmade bamboo fly rods and 150 flies per week, and you want to double the demand for your products within three months. Develop and write the plan in outline fashion, in as much detail as you can imagine. Start with the goal: three rods and 150 flies. Decide who will be responsible: Partner A. Decide who will do the work: Partner A (75%) and Partner B (25%). Allocate the time to accomplish the task: one week. Plan what will be done if the target of doubling your demand in three months is not met; record at least five options. When each goal is developed and addressed in this fashion, write the whole thing up formally, and have each partner sign it. If this is done for each main goal, no one aspect of the business should get so far off the track that it endangers the other aspects of the company itself.

These written plans are the basis for the overall operation of the company. They provide the focus for the management meeting you should hold at least once a week. To make these meetings worth anything, a recording secretary must keep complete and objective minutes. These minutes must then be reviewed at each subsequent meeting so that everyone is satisfied that interim operating procedures are mutually acceptable.

Like a report outline, company plans provide frameworks for action. Don't deviate from them capriciously. As circumstances dictate change, review your plans with all of the partners. Some seemingly simple change that you're sure is appropriate may be seen quite differently by another partner.

While this may all sound ominously formal, structured, and time-consuming, it is much more costly in both time and dollars to proceed on an ill-defined course or, worse, to operate at cross-purposes with your partners. If you fail to write everything down (and there are always plenty of good excuses for not doing it), and things start to go wrong, be assured that no one will agree on what was said six months ago.

RULE 3: DON'T LIE

Generally, none of us tells big lies that lead to fraud or other criminal acts. But there are those little white lies -- more pleasant ways of putting the truth, or simply lack of candor -- that can occur, and they can be devastating to a partnership.

There is a great deal of pressure to dismiss, ignore, or avoid bad news. Bad news, however, is not necessarily a sign of personal failure, nor is it usually the result of some totally external factor inflicted on the company by unknown agents. Instead, it is information that must be addressed in the context of your company plans. Only if you get sound and adequate information can you overcome problems.

If one partner is responsible for raising money, and all of the partners have agreed that a certain action is dependent on raising $30,000 from normally acceptable sources, it is not really a favor to the company if the money-raiser gets $10,000 from selling his car, $10,000 from his kindly old aunt, and $10,000 from a loan shark, and neglects to tell you that it didn't come from the bank. The consequences of such efforts, even if they happen to have some short-term advantages, are deterimental to company planning because they are based on false premises. It is always possible that the banks are refusing your loan request for a good reason, a reason that the company should be aware of. If the company is going beyond conventional sources for loans, it had better be a partnership decision. In this eample, there is the additional danger that personal concerns will adversely affect company performance. Your company should not be forced into making decisions based on a partner's having to walk to work, getting into disputes with relatives, or being threatened with bodily harm.

It's particularly easy to lie to yourself about employee relations. If the employees are not producing, you must find out why and face the consequences. Most people find it difficult to fire employees, and many managers have trouble urging, cajoling, or demanding the required work from employees. Use the style that best suits you when it comes to supervision, but don't lie to yourself. In most cases, you simply can't afford to "wait three more months" for an employee to get the hang of it. And, in fact, it does the employee little good to assume that his work is acceptable when it is not. Employees must understand clearly what is expected of them and then be given adequate opportunity and support to meet those goals. If the person is not suited for the position, send him on his way with suggestions for more appropriate employment. Delay only compounds the problem and your level of stress.

You may also notice a tendency to oversell yourself or the company. This is lying.Some people can work 112 hours a week, but most of us can't. You can't plan effectively if you don't assess your capabilities realistically. The same is true at the company level. You really don't gain anything by selling what you can't deliver, and there's no better method for shutting off the flow of contracts.

Lying or not confiding in your other partners is harmful mainly because it denies your business the chance to benefit from all your partners' experience. You are partners because each one of you is bright, talented, and full of useful contributions to the company. Don't fail to use your own resources by hiding unpleasant situations from your partners. They may not think the situation is as grave as you do.

Partnerships are a great way to combine resources, and much of their effectiveness comes from a merger of human and intangible qualities. Your accountant, attorney, or banker can be invaluable with corporate and financial concerns, but it is your partners who are your greatest assets. Choose them wisely, ask hard questions, and don't take them -- or yourself -- for granted. You have to work at your partnership as much as you do at your business.

Last updated: Jul 1, 1981




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