Twice as Nice

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.

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.”

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.'”

At their core, Gage says, partnerships revolve around individuals and their personal values. “We always said we're very like-minded in vision,” Hearn recalls, “but the realization was that we have different ways of getting there. And if you don't share the vision of implementation, you don't share the vision.”

Partners have to assess the compatibility of their values before the business launches. “Personal values are the underpinnings of people's decision making,” Gage says. “Faced with adversity, that's when some people learn, ‘Hey, we have different values.'”

Personality assessments and personal reference checks are among the efforts that can accompany the frank discussions that would-be partners should always hold about deeply held motivations, values, and beliefs.

These preventive measures aren't any less important when the partners are friends or close acquaintances, Reynolds says.

Hearn and Toms had worked together for years before Hearn's original partner, Hunter McGuire, decided to sell out to Toms. The two got along personally and Hearn trusted Toms' integrity. But even knowing Toms' temperament and work habits didn't allow Hearn to see the underlying differences in the way the two approached remodeling.

Regrets about entering the doomed partnership don't weigh heavily, Hearn says. But his experience begs an important question: Was the partnership really necessary?

Hearn says at the time he felt he needed Toms' partnership to provide the reassurance that “there was somebody in the boat with me.” He had never solely owned a company and lacked confidence in his ability “to drive a company and single-handedly ensure the livelihood of 17 employees.”

But given the difficulty of maintaining a viable partnership and potential repercussions of a split, the decision to enter a partnership demands a more calculated weighing of benefit and risk. As a starting point in the decision making process, assess the need and consider the alternatives. Are you interested in partnership because of a personal need? Could your need be met by better financing, the aid of a consultant or business coach, or by a new hire or two?

Following are profiles of three companies that provide examples of some of the various reasons why and ways in which partnerships succeed.

Dean Brenneman and Peter Pagenstecher are the orderly exception to the messy rule of remodeling partnerships. Their thriving, multimillion dollar design/build venture proves that, where partnerships are concerned, it doesn't hurt to mind the details.

After a run of successful collaborations in the early 1990s, Brenneman, an architect, and Pagenstecher, a contractor then partnered with his father, saw potential in a permanent arrangement.

Resisting a headlong rush to partner, the two engineered a gradual merger. For two and a half years the partners exhaustively studied one another through both a personal and a business lens. They met at a weekly lunch to discuss ideas, opportunities, potential obstacles, and exchanged paragraph statements outlining their motivations and professional goals.

They even opened their books to one another. “You're exposing yourself to another person's liability,” Brenneman says. “It's important to have an understanding of each other's financial stability so you know you're making decisions for the right reasons.”

Once they took the final step of signing an agreement, the partners clearly outlined their respective duties and determined that Pagenstecher would serve as the company's president, and Brenneman as vice-president, giving Pagenstecher a final call in the event of an insoluble dispute.

By far the most essential preparatory step, both partners agree, was discovering one another's personal tendencies through a personality profile and analysis. The two used the results to clearly demarcate the roles and responsibilities each would take on in the new company.

The profiles also served to pre-empt any tension that might arise due to personal idiosyncrasies. “We don't worry about each other's mistakes,” Pagenstecher says. The two understand that shortcomings are inevitable. “We don't keep score.”

Pat Burke and Jason Asmar's partnership was born, as much as anything, of serendipity. When he hired Asmar, Burke thought he'd landed a production manager. He didn't plan for Asmar to become a partner, much less the president of the company. But that's what happened, all in a short two and a half years. Today Asmar comfortably steers the company, having completed about half of a five-year buyout, while Burke has retired.

Asmar's succession highlights another utility of partnership: that ownership stake can be used to retain and develop key employees and potential successors. When he hired Asmar, neither partnership nor succession had entered Burke's mind. But he quickly recognized that talent of Asmar's caliber is scarce.

Andrew Zacharachis, a professor of entrepreneurship at Babson College, endorses Burke's decision to first offer a small ownership stake as a retention tool. “It's often best to let your partner earn in over time, gradually reaching a level of equity you deem appropriate,” he says. “That way, if it turns out you don't work well together, you can still legally extricate yourself.”

Asmar attributes his and Burke's ability to forge decisions to a set of shared beliefs about the direction of the company. “We always had the same goals in mind,” Asmar says. “We always had the same vision of what we wanted the company to be.”

The owners of Construct Associates ask you politely not to call them partners. It's an IRS thing. And in fact, though partners in spirit, Messrs. Bob Reckman, Bob Walker, and Hobey Islen are each sole proprietors, running their own independent remodeling firms — with an unlikely angle.

After working together on projects in the early 1980s, Iselin, Walker, and Reckman created Construct Associates in 1985 as a way to reap the benefits of a larger company without the responsibility and headaches of sole ownership. Their arrangement seems to have reconciled the potential benefits and maddening complications of partnerships.

Construct Associates, the company co-owned by the three, provides each individual's firm with labor, equipment, administrative needs, and an office space. The three remodelers each “buy-in” to Construct Associates' resources by contributing 5% of yearly gross sales. Each sole proprietorship pays a marked up labor rate. When the company produces profits, Reckman, Walker, and Iselin receive rebates based on their individual contributions.

The most significant benefit, Iselin says, is that Construct Associates “provides us all with a name we use in common. And that's given us substantially more exposure than any one of us could get individually.”

But while, like partners, each of the three receives a benefit he couldn't generate alone, the arrangement severs the shared liability that typically burdens partners.

As far as the law is concerned, any co-owned business is a partnership.

Nolo, a publisher of self-help legal information, lists the following key facts in its Partnership Basics guide, available at www.nolo.com.

• Excepting a sale of all business assets, any individual partner can bind the business to a deal.
• Partners are personally liable for all business debts and obligations. In other words, if the business can't pay a creditor, any individual partner's personal assets are fair game.
• Each individual may be sued for the full amount of any business debt.
• If any one partner contributes personal property to the business, any debt attached to that property becomes a business debt.
• If your partner dies, his heirs may be entitled to company assets.

• Anthony Mancuso, a lawyer and Nolo author, recommends that partners create a limited liability company (LLC) to protect their personal assets. Partners in an LLC need only register with the appropriate state agency. The partners' tax status remains unchanged as well.