It seems to me that Partnerships are destined to fail. It has been my experience that approximately 75% of partnerships are concluded within 3 ½ years of start-up and close to 90% don't make 7 years.  

No doubt they all start out enthusiastically with all the passion and energy necessary for success, so "Why is the failure rate so high?"

Usually the passion, enthusiasm and commitment is so focussed that the participants forget about the real world.  As a result they do not take the appropriate measures at the outset to deal with the real issues that will confront the partners as time progresses.

  Let's take a moment and quickly define a partnership: simply stated ...........it is where two or more parties enter into an agreement (formal or informal) to start, acquire, inherit, takeover in some manner, a business or venture for gain that the parties will operate together.   Other terms for this activity can be found in any thesaurus and would include: a trust, a syndicate, a joint venture, an enterprise, a corporation, a company, a firm, a business, a conglomerate, an organization, a family ...........

We need to take a few moments to understand people; one thing that is for sure is that most people change over time. Their likes, their goals and aspirations change as they grow older and mellower, but not everyone changes at the same rate or time, and as a result conflicts begin to arise.  Spouses also have a lot to say and can significantly impact the activities/attitude/ambitions of one of the partners. They come to the table with different skills and attributes that are not equal between the partners and one feels the other doesn't work as hard, care as much or contribute equally to the other. Communications between the partners is poor resulting in insecurity and mistrust arising. This paragraph could go on forever............

One of the things to be aware of is what I call a "Forced Partnership". Some of the most difficult partnerships are created from a well-intentioned father leaving the family business equally to two sons, virtual disaster waiting to happen. Another comes from a well-intentioned business owner selling to two or three "key employees" the salesman, the production manager and the comptroller (also known as the CEO the CFO and the VP of Marketing). They probably work well together under the watchful eye of the owner, but when they no longer have him on the scene, the fun usually begins. Then there are the ESOP's (employee stock ownership programs).

So how do you ensure that a partnership being contemplating has all the attributes to be successful?   Let's start with the partners themselves:

 ·        Are they psychologically compatible? Have they taken the time with a professional to determine if they can in fact work together and get along?

·        Have they established a clear and concise list of duties and responsibilities for each?

·        Is there a clear line of authority?  ie: who is the president and who is the vice president. There needs to be an understanding between the partners who is in charge. I have run into a number of firms with "co-presidents"... resulting in neither being in charge or both being in charge at the same time. Ego feeding time.

·        Do the parties have compatible short term, medium term and long term goals?

There needs to be a shareholder agreement in place before the venture is started which clearly addresses some of the foregoing as well as:

·        A termination provision (buy-sell agreement).

·        A formula for valuation of the business.

·        A need for an annual valuation by a third independent party.

·        A clear outline of what happens in the event of death or permanent disability of one of the partners.

·        An insurance policy to fund that unforeseen event.

·        An independent board of advisors, who has complete access to all company information and that meets quarterly or as needed.

·        The ideal board would have a competent business lawyer, the company accountant, a senior highly experienced business person, two or three people with experience/knowledge in the type business having sales/marketing knowledge, production service skills and administration skills.

·        The call for an annual independent valuation of the services provided to the company by each of the partners to set the remuneration of each partner based on a fair market value of their productivity to the company.

A day to day operating program should carefully be constructed and put into place:

·        A formal business plan looking at least five years out with a detailed line by line, month by month budget for the first year, quarter by quarter for the second and third years, that is reviewed and updated annually.

·        Monthly preparation of financial statements alongside the budget showing variances, and comparisons to previous years.

·        There should be an established partners meeting program:

o   I like to see a regularly schedule weekly, preferably off premises morning breakfast at 7:00 because first thing in the morning is when most people are at their best and  so nothing interrupts the meeting (Tuesday is a good day).  The meeting should be utilizing a revolving agenda with the flexibility to add to the agenda at any time, preferably with minutes kept (lest we forget). One of the greatest values that come from this meeting is the simple fact that a meeting has been scheduled at which time the partners can virtually discuss anything. This prevents or reduces the tenancy for frustration to build up and get blown out of proportions due to poor communications between partners, and it is held in a public place so voices ought not to be raised)

If a partnership is well thought out before getting into it, with a clear set of goals and objectives, and it has professional advisers from the start, a well-balanced remuneration and equity program, including exit strategies and a buy/sell agreement, then its chances to be successful will significantly improve.

To learn more about partnerships, or to order a copy of Doug Robbin"s book "There's Always a Way to Sell Your Business" please go to www.robbinex.com

Next issue: How to deal with/terminate an unhappy partnership