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Are Business Partnerships a Good Way to Grow Businesses?

By February 13, 2017 No Comments
Are Business Partnerships a Good Way to Grow Businesses?

Business PartnershipsTwo heads are better than one. There’s safety in numbers. The clichés about the benefits of working together rather than alone – whether in love, life or business – are manifold. But is a business partnership a sensible way for a smaller company to innovate, grow, and increase its influence? You might be able to share ideas, contacts, stresses, and success, but a good number of business partnerships do fail. What are the potential pitfalls, and challenges of this kind of professional marriage?

What is a partnership?

A business partnership is a legal entity registered with HMRC, which has the advantage that the business’s details don’t have to be filed at Companies House, which itself means less paperwork. But many people don’t realise that simply by going into business with someone in England and Wales you’ve effectively set up a partnership, according to the 1890 Partnership Act. This states that a partnership is ‘between persons carrying on a business in common with a view to a profit’. Essentially, measures of a business partnership are co-ownership of property, sharing gross returns, and sharing profits. Some business owners could be in a partnership, and not even realise it.

Who’s your perfect match?

Assuming you’re one of those consciously seeking a partnership, you want to find someone with whom you can build a productive, and mutually satisfactory future. And just like a romantic union, recognising the qualities that will ensure you’re still with your partner in ten years’ time isn’t always easy.

  • Friends and family. Just because you’re already close to someone, it doesn’t mean a good professional relationship will naturally follow. Try working on a small project with a friend, sibling, or other family member before committing to a full-blown partnership. You may not be as compatible as you thought, or spot areas you need to improve if you’re to work together successfully. Friends can be even worse than family in partnership, as often relatives have a level of underlying trust that can survive disagreements. Friendships can falter quickly under such strain. The Family Business Institute has some tips on establishing codes of conduct, shareholder agreements, and key policies that could apply to friends-run businesses, too.
  • Chemistry and skill sets. The ideal is bringing together business partners with complimentary skills, and personality types that co-exist happily. Two very head-strong characters could permanently battle. At the same time, you don’t want to pair yourself with someone who dominates, and steamrolls your ideas. Of course, you want to work as a team, but it’s also sensible to measure the different qualities and experience you each bring to the business. One person may be great at marketing, while the other is good on financial detail. Try to look objectively at your respective strong points – and weaknesses – both in terms of personality, and abilities, as well as analysing how you communicate. You might go as far as paying for personality tests, such as the famous Myers-Brigg Type Indicator, which identifies psychological traits, and areas of compatibility, as well as possible conflict.
  • Team player or lone wolf. It’s possible you like the idea of the support a business partner will give you, but in truth you’re not good at working alongside others. If collaboration comes naturally to you, and your proposed partner, things could go well. But if one or the other of you is likely to withhold information, or make unilateral decisions, think again. Be honest about how you work, ask the same of your would-be colleague, then decide how to proceed.

Understand your motivation

What do you both want to achieve? And what are your reasons for pursuing a partnership in the first place? It’s essential to have a shared vision for the business. Talk about what this might be, plus what your respective short, medium, and longer-term plans are for the company. Once you’ve agreed a common path, compile a written mission statement that all parties agree to. This should be your blueprint for the business, though, of course, it can be revised. Your mission statement should:

  • Be focused, and attainable. Having too big or vague a goal makes it less likely you’ll achieve it. Equally, you can aim for the moon, but you’ll probably fall short, so set yourself smaller, realistic objectives along the way.
  • Address the needs of your business. Don’t tackle the obvious, and easy things – recognise where there are weaknesses, and gaps in your operation, the areas that require greater focus. Make improving these competencies one of your top priorities. And utilise the skills that you already have in the company to best effect.
  • Be inspirational and memorable. The plan is to motivate yourselves, and your staff, so give a sense of why what you’re doing matters. Come back to what you’re trying to achieve overall, and then paint the picture of how you plan to get there.

Practical matters

You will need to ask each other some tricky questions before you opt to work together. What are your respective credit histories? If you’re linking up with an existing business or sole trader, you’ll need to have a proper look at their accounts – or get your own accountant to crunch the numbers – to be confident that you know what you’re getting into.

It’s also a good idea to write a formal, written partnership agreement. A hand shake isn’t enough to see you through the years, challenges, and professional wrangles ahead. This document will cover:

  • How much you’ll each commit to the business at the outset. It’s also wise at this point to discuss how you might go about raising money should you not be generating a profit. Are you prepared to borrow capital for your business? Will you both commit more money out of your own savings if necessary?
  • Division of duty. Be clear about who will have responsibility for which aspects of the company, plus how you will tackle difficult decisions. You won’t always agree on everything, but if you’ve devised a way to thrash out difficult points, it will make life easier in future.
  • How will you get paid? Are you to be salaried; will you pay yourselves dividends; and when – if you have any idea – might you want to take your investment out of the enterprise altogether?
  • Where will it end? Similar to the point above about when you wind up the business, you also need to think about what might happen if one business partner dies, or wants out of the company before the other. In the case of death, might the deceased person’s family have any say in the business, for example?

Finally, ask yourself if you really need a business partner at all. It can be a great thing when it works – just look at the huge success of the real duo behind the Ben & Jerry’s ice cream brand, or the three founders of Twitter – but teaming up with others professionally also comes with a high risk of failure. If you need new skills in the company, it’s possible you could hire them in, or even outsource aspects of the operation to an external provider. Plus, you wouldn’t be giving up equity in your firm. A business partnership can be wonderful way to grow your business when it works, but it’s not always necessary. Do your research, lots of preparation, and a good degree of soul-searching before committing to this intimate union. Because, just as in love, breaking up is hard to do.

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