Jordan Hanes (who prefers to remain anonymous to protect his partner’s reputation) fell into his business partnership in the same way you fall into a quickie Las Vegas marriage: with very little discussion of long-term goals and without a pre-nup.

“I was looking to get out of the consulting business and he had a product,” Hanes said. “I had money and he didn’t, and our skill sets were roughly complementary.”

The two became 50-50 partners in 2007, but although they had a rough shareholder’s agreement, they never managed to hammer out details. “We just put it on the back burner,” Hanes said.

Things went well for the first few years, but when the economy tanked in 2009 and a client defaulted, Hanes contributed an extra chunk of his money to keep the business afloat.

“Mostly, it was to pay my partner’s salary,” he said. “He had a stay-at-home partner and was very reliant on that income. In retrospect, I should have renegotiated our respective equity positions at that time, but I was reluctant. We had to work together and I didn’t want him holding a grudge.”

As time went on, cracks began to form in the relationship, both in terms of their vision for the company and their respective skill sets.

Hanes became chief executive, with his partner’s blessing, but in spite of being slotted into a succession of roles, the partner floundered. “He had a narrow skill set and he seemed unable to move beyond that,” Hanes said.

Even worse, the partner tended to focus on non-strategic income opportunities, losing sight of the company’s core competency.

“I felt like I had to spend an inordinate amount of time managing him and trying to keep him focused,” said Hanes, whose frustration built over the years until “I simply did not want to succeed with him.”

The partnership finally dissolved earlier this year. Although it cost Hanes some cash and generated a great deal of stress, he now feels poised to build the company strategically.

His experience is hardly unique: about 60% of business partnerships fail, according to the CMO Council, a global executive organization.

The reasons are many, said Richard Reid, president of Argosy Partners’ The Shotgun Fund, an equity fund that invests in businesses wherein one partner wants to buy out the other. One of the most common is a lack of alignment between the partners on basic things such as the business’s goals, its strategy, how long it will take to execute and who they want on the team.

To avoid having a partnership crash and burn, Hanes suggests sitting down with a potential partner to have a no-holds-barred conversation about where you see the business going and the ultimate end game.

You should also try to address the differences between the partners’ financial and personal situations, and try to anticipate what would happen if something went wrong. For instance, if one partner invests additional money, perhaps her equity stake or share of the profits should also rise.

Another key, Hanes advises, is not to conflate equity or profit sharing with salary.

“If one person becomes CEO and the other handles support, their salaries should reflect market value,” he said. And partners should be subject to a salary review just like any other employee. “Be honest about the gaps that exist and how you will address them.”

Reid advises taking it a step further and formalizing what you’ve talked about with a written alignment agreement — an idea Hanes thinks is brilliant.

“I think if you have to write it down, it stimulates conversation about some of the issues and helps you understand each other,” he said.

On top of the alignment agreement, every business should have a shareholders’ agreement that outlines percentage ownership, the partners’ responsibilities and what happens if there’s a dispute or a partner is disabled or dies. It generally includes an exit clause such as a shotgun (wherein one partner can make an offer for the business, and the other partner has the option to take the money or match the offer).

But even if you sign a raft of agreements, Reid said, you won’t be able to anticipate every problem that might arise. To avoid veering off in different directions, he recommends holding a yearly executive retreat to hash out strategy, deal with issues and compare notes.

If there is a problem, he added, “Don’t let it fester. Then you lose alignment. And alignment is so crucial.”

Source: Financial Post