The Potential and Pitfalls of Business Partnerships

Lately, Daniel has been feeling the strain of running his business. As the sole owner, he is responsible for managing the entire operation, and the sheer number of jobs on his plate overwhelms him on a daily basis. Daniel is considering bringing a partner on board to help his business grow to the next level and reduce his stress. But there’s risk in that too. What if things don’t work out between them?

How can he ensure that a partnership will be as successful as possible?

The Benefits of Partnership

When researching for his book, The Founder’s Dilemma, Professor Noam Wasserman studied a whopping 10,000 companies. Of those companies, he found that only 16% were founded by an individual. A partnership arrangement can provide the strong backbone a company needs to build its growth and success.

At the same time, there are horror stories of partnerships gone sour; in the worst cases, they take the business down with them, leaving bitterness and even dinei Torah and lawsuits in their wake.

What makes the difference between a power partnership and a problematic one? Wasserman provides some pointers in a previous Kosher Money podcast, “The Best Tips for Starting Your Own Business”.

Like a Marriage

One of the main reasons a business fails is the founder trying to wear too many hats. Many successful companies have partners at their helm specifically because many different capabilities are required to run a business.

An ideal partnership should be like a marriage in that the two partners should have skills that complement each other, with each one taking on the roles and responsibilities that align with their strengths. One might be better at finances while the other is great at connecting with clients. When a natural division of duties is in place, it leads to greater efficiency and productivity overall.

All in the Family?

Wasserman’s research shows that more than half of business partnerships are with family members or close friends. Yet, it has been demonstrated that, on average, these partnerships are the least stable. Especially in the frum world, it can be tempting to go into business with your brother-in-law or chavrusa, but if you choose to do so, be aware of the risks. It can be much harder to have uncomfortable conversations with someone close to you. And if the partnership doesn’t work out, you’re risking ruining not just your business but an important personal relationship.

Have the Difficult Conversation

Just like in a marriage, a strong partnership requires being able to work out differences and have uncomfortable conversations. So before you enter into a relationship, it’s essential that you sit down and hammer out the vital aspects of the relationship, from work expectations to division of profits.

Yes, it’s unpleasant to discuss such topics, especially when your instinct is to keep everything nice and friendly at the beginning. But, as Wasserman points out, if you’re too scared to have an uncomfortable conversation now, what makes you think you’ll be able to later on?

Here are some of the key things that should be discussed:

Division of Power

Who will have decision-making power? Will you have an equal say in every decision that comes up? (That can get unwieldy fast.) Or will you divide the power according to your roles and each assumes solo authority for their area?

Will one of you retain a greater share of decision-making power overall? While saying that both partners will share the power equally may be a feel-good way to enter a relationship, it might not be fair or smart, since one partner may invest more time and skill into the company.

Do the Personalities Jibe?

If one partner is highly structured while the other is more relaxed, or one is upbeat and optimistic while the other expects everything to go wrong, the personality mismatch can challenge the partnership. When two partners have such opposite work styles and attitudes, they may find their differences so abrasive that they won’t be able to work alongside each other productively. 

Or maybe not. The opposite personality traits might in fact be the perfect complement for each other. But this is something the two potential partners should acknowledge and discuss before entering into the relationship.

Sharing the Profit

Perhaps the stickiest decision is how to divide the company’s profit. It’s easy and pleasant to decide that earnings will be split 50-50, but it’s not necessarily the smartest move. According to Wasserman, 80% of partners who make a quick decision to do an equal split regret it afterward.

Why? Because very often, one partner proves more valuable to the company than the other. If one partner is putting in 20-hour days hitting the streets to drum up investors, while the other clocks out at 5 p.m. every day, the first partner is going to get resentful very fast over the 50-50 profit split.

Sometimes, this difference in productivity can be determined during the initial conversation. (“How much time do you expect to invest in building the business? Which particular skills and value can you bring in?”) But there are other ways to ensure the profit is divided equitably.

Achievement-Based Profit Split

One option is to make profit sharing based on achievement. For example, the partners can decide that they’ll each earn a certain amount of equity in the company based on a prespecified number of sales they bring in, a certain amount of investment money they fundraise, or when one partner reaches a predefined operational target. While a partner’s level of productivity can be hard to quantify, establishing clear milestones as the basis for profit sharing is fair and demonstrable.

The Importance of a “Prenup”

Good contracts make good partners. Once you and your partner agree on what the partnership will look like, put it in writing. A contract should clearly state the nature of the partnership as well as a good, clear exit strategy in case things don’t work out. This includes designating a shlish—a third party, such as a rav, beis din, or trusted adviser, that the partners will turn to for arbitration as needed.

The importance of a contract cannot be overstated. Some people think they don’t need a contract, especially if their partner is a friend or family member. But the closer the relationship, the more essential a good contract is. There’s a lot of money at stake, and without a contract, you’re setting yourself up for machlokes. While it may be awkward, formalizing things legally at the start can save you and your partner untold heartache later on.

Chacham Einav B’rosho

As with everything else in life, the more foresight you use in setting up your partnership, the more successful it will likely be. As an added benefit, learning to navigate a partnership effectively can carry over into many other areas of your life as well. Many of the interpersonal and management tools needed to grow a successful business overlap with the tools needed to live a successful life. So build your business, and build yourself.

Want to dig deeper?

Try these related articles

LinkedIn For Business: Hype, Help, or Hurt?

Pivot or Perish: Saving Your Business in Perilous Times

Entrepreneurship: Do You Have What It takes?

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