Ask any entrepreneur about their thoughts on business partnerships and you're likely to get widely dissenting opinions. There's very little middle ground on this subject.
Some will say it's the best thing they did for their business while others will tell you to avoid it at all costs. And the statistics seem to support the latter, with failure rates up around the 70 percent mark.
But I believe partnership can be successful, mutually beneficial and sustainable as long as structure is clearly defined before going into it. In fact, there was a study in 2012 (I believe this still holds true today) that showed companies that followed a structured approach to creating business partnerships and strategic alliances had an 80 percent success rate, while those that took an ad hoc approach only realized a 20 percent success rate.
Most partnerships fail because of incompatible objectives or visions, differences in culture, unspoken expectations, and a lack of leadership commitment. Structure eliminates these surprises.
Where do you start? Here's the litmus test I personally use when I'm trying to figure out whether or not a partnership is right for me and the other person.
Do you work well together?
Bruce Lee once said, "I'm not in this world to live up to your expectations and you're not in this world to live up to mine." Excellent words to live by, but we all have expectations --whether they're realized or not-- and if these are not verbalized, it can build a lot of resentment over time.
That said, you have to know one another's expectations and working styles. If you are a workhorse and your potential partner is more of a big-picture thinker, frustrations will mount if not discussed prior to.
By the way, having these different dynamics is a good thing. Every business needs a visionary and an executor, but you have to know what you're getting into first.
Just like dating, you wouldn't give a marriage proposal on your first date. So don't do this in business. Try testing out a small project together before jumping into the deep end.
Can you reach agreement on a fair equity split?
In an effort to achieve fairness and avoid conflict early on, a lot partnerships will form with each member having even equity split. But again, an ad hoc approach to a "fair deal" can lead to a lot of animosity down the road.
Often, a fair deal is not 50/50 equity split. It's weighted on who's doing what and this is what needs to be ironed out ahead of time. Yes, this can be a tough conversation to have early on, but it will save you a lot of frustration.
To help determine the equity split, create an accountability chart to get clear about who owns the major functions of the business and identify the primary roles and responsibilities they will be held accountable to. This process will make it more data-driven and help eliminate the emotion.
Who has ultimate decision making ability?
Within a partnership, there has to be one with ultimate decision-making authority. If both have equal say, it makes it near impossible to reach any kind of resolve when there is a difference of opinion.
Most often this will be the person with majority equity stake, but not always depending on the structure and how many partners are involved. Once this is determined, however, you have to be diligent about managing expectations.
The person who forgoes decision-making authority can grow frustrated if they feel their opinions and feelings are not being honored. But they also have to trust their partner is making the best decision for the company.
For instance, I'm a minority-stake partner in another SaaS company in which the founder is the decision maker. I have to trust that he knows the business and the industry better than I do and that he's got the business's best interest at heart. Going in with this mentality helps avoid resentment from building.
Bottom line -- don't rush into a formalized partnership. Test the waters, get to know one another (working styles, how you deal with stress and challenging situations, etc.), and have the tough conversations at the start. This will help you identify potential pitfalls before it's too late.
Finally, trust your inner voice. If you've got a nagging feeling deep inside, take time to explore it. It's there for a reason.