Starting a business with a like-minded entrepreneur offers many advantages to combine similar skills and share the costs as well as the risks with someone equally committed to success.
However, some of the positives can turn to negatives without a clear and documented partnership agreement. Going into a new venture on faith alone is one of the reasons why 70% of all new businesses fail within the first two years.
Common reasons for partnership failures
While some businesses fail for reasons beyond the partners’ control, many result from issues that need to be addressed before starting a business. Those issues include:
- Mixing personal and business lives: Starting a company with a family member or a trusted friend can seem like a good idea. But money can change everything, and crafting a comprehensive partnership agreement is vital to spell out roles and how finances are managed.
- Unequal contributions: Success requires both partners to make personal and financial sacrifices. If one partner puts up most or all of the money, how will the other person make up the difference? Or, how do you handle one partner’s inability to fully commit due to family obligations?
- Different values: Before starting a company, both parties should spell out why they want to start the business, their vision and their long-term objectives. If both of you agree, that can form a solid foundation. However, disputes over any of those core principles can destroy a business.
- Personality disputes: Disagreements happen. Having differing personalities doesn’t have to be a negative factor. However, both parties must respect the other, have a shared vision for the business and value the other person’s opinion.
- Lack of trust: Honesty is a key component for every successful partnership. Once mistrust exists, most business relationships are doomed to fail. Doing your homework in advance about a partner’s reputation, employment, financial and even personal history can identify any potential red flags.
Take steps to avoid a business divorce
Much of the heavy lifting for creating a successful business is done before starting the venture. Working with an experienced business law attorney is crucial for drafting a comprehensive partnership agreement, which addresses each owner’s responsibilities, how profits and liabilities are shared, buyout options, dispute resolution and exit strategies for one or both partners.