The benefits and pitfalls of having a business partner

By: Chris Barling

Date: 21 October 2010

Finding the right partner to help you start up your business more than doubles your chances of success.

Benefits

First there's resource. Your business will have more financial resources and a wider network of family and friends to help.

Then there are strengths and weaknesses. Very few of us have all of the talents needed to succeed in business. If you think this isn't you, watch the X Factor for an object lesson in over-confidence in one's own ability. With two people, you have a greater chance of covering all the things that matter.

Then, there's morale. It's hard to start a business, and with two there's always one to cheer up and urge the other on.

Finally, growth is easier. The biggest first step in growth is usually recruiting your first employee. When there are two of you, the recruit only increases the wage bill by 50 per cent, which is much more manageable.

Challenges

But there can be problems. Let me give you some real life examples. A friend of mine went into business with a partner and after several highly successful years, the relationship became strained to the point where both hated going to work.

My friend offered to buy out the partner, but with the relationship broken, the other party was uncooperative. Feeling desperate, my friend upped the price in an attempt to close the deal. Finally, all was agreed, but he had to put all of his assets on the line and take a loan from the other party. Unfortunately, the long period of wrangling had undermined the business. Unable to meet the loan repayments, my friend ended up losing everything – his job, his house and the business.

In another example, a different friend split from his business partner. The partner, again after much wrangling, took most of the existing business with an agreement to make payments on a percentage of sales. However, the business partner set up a subsidiary; made sales to the subsidiary at a highly discounted rate; then the subsidiary sold the products to the end customer. The result was the ex-partner effectively stole from my friend, although it was probably legal.

Two tips

The problem with partners comes when you fall out. Of course, in the heat of enthusiastic start-up this seems a distant prospect, but it eventually happens in many cases. So I would offer two pieces of advice.

The first is to make sure your potential partner has integrity. If they don't, were you to split, they will try to defraud you. I parted ways with my business partner. It wasn't easy and it wasn't a happy time. But because he had integrity, he didn't try to “do me down”. In fact, despite the tensions, I still trust him.

A quick way to check if a potential partner has integrity is to ask them about the cleverest things they've done in business. If they boast about how they outsmarted (defrauded) other people, you can expect the same treatment if you ever seriously fall-out.

The second recommendation is to draft a “shotgun clause” between you. This allows, at any time, one partner to offer to buy out the other. The recipient of the offer can then choose to either sell or buy at that price, but they don't have the right to refuse. This is a great way to get to a fair valuation of the business.

Despite the horror stories, partnership is still more than worth the risk. It's better to have a problem sharing the pie, rather than have no pie, it just pays to take care. After all, you will probably spend more time with this person in the next few years then you will with your personal partner.

Chris Barling is Chairman of ecommerce software supplier SellerDeck

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