On its surface, partnership presents a simple calculus: One is less than two or three. Partners, reason would say, can supply more capital than a single entrepreneur, plus more cumulative experience, more skill sets, more stakeholder incentive to drive the company forward.
Reams of data bear out that logic, says Paul Reynolds, a professor of entrepreneurship at Florida International University. “Larger, more successful [startups] are almost always a collective endeavor,” Reynolds says. “The more people, the higher the growth rate.”
No wonder then that in the remodeling industry, where even accomplished veterans succumb to burnout and sudden business failure, linking up with a partner or two can seem a panacea.
But partnerships harbor a whole universe of potential catastrophes. Disputes arise over just about everything, though they often involve a substantial conflict: compensation, division of labor, decision-making authority.
“There are so many problems that can occur and so many misunderstandings,” says Anthony Mancuso, a lawyer and the author of small business legal guides.
Blind Ambition The trouble, experts say, is that new partners tend to ignore or underestimate the likelihood that they will face these kinds of challenges.
“Most mistakes,” says David Gage, a psychologist whose company, BMC Associates, advises and mediates disputes between partners, “are made when people are setting up their partnerships.”
Partners fail to discuss potential conflicts at the outset, only to discover when those conflicts arise that each has a different understanding of how the partnership should operate.
“The biggest mistakes are to not cover enough ground and leave ambiguity in the arrangement,” Gage says. “There are a lot of sensitive topics to discuss, whether it's money, power and authority, time commitment. If you don't work all of these out ahead of time, you're putting your partnership at risk.”
Put it in Writing Small business experts urge partners to not only discuss potentially contentious issues but to draft a formal partnership agreement — a legal document that outlines each partner's role in and responsibilities to the business — before launching their businesses. A good partnership agreement determines the following.
- Contributions: how much capital each partner contributes and how much time each devotes to running the business day to day.
- Responsibilities: which partner oversees and takes responsibility for which areas of the business.
- Compensation: how the partners split profits and losses and the amount of and schedule for any regular draws.
- Authority and decision making: which partner is entitled to make decisions for which area of the business, and whether either has ultimate authority.
- Conflict resolution: how the partners arbitrate serious disputes.
- Adding or losing a partner: whether and how new partners are added and what happens if one partner leaves the business, willingly or for health reasons.
The partnership agreement, Mancuso says, clarifies the initial arrangement and mediates future disputes in advance of their occurring. “A partnership agreement gets people to agree to things they might not otherwise agree to,” he says.
This pre-emptive mediation is vital because even when partners begin with a clear understanding, change is unavoidable.
Mason Hearn, a remodeler in Manakin-Sabot, Va., recently split with partner Clyde Toms because ambiguity in their partnership left the two unable to reconcile simple differences of opinion.
Having failed to lay out who had absolute decision making authority in specific areas of the business, and whether either would have a final veto, the general understanding that Hearn would manage sales and Toms production wasn't enough to prevent conflict.
The differences between Hearn and Toms were slight, “not over global issues, but very specific things,” Hearn says — how to discipline an employee, for example, or whether to pursue a certain prospect. And though the conflicts were rare, the festering tension grew beyond the partners, crippling the whole company. “We spent a lot of time stepping on each other's toes,” Hearn says. “It was always, ‘I know you're in charge of this area, but it's half my company, and the decision you make affects my part.'”