America's Best Business Practices

My topic today was inspired by the fact that the week of May 23-29, 2010 has been declared by the U.S. Small Business Administration (SBA) as National Small Business Week. The SBA defines small business generally as having fewer than 500 employees for manufacturing and less than $7 million in annual receipts for non-manufacturing businesses. What is interesting to note is that 99.5% of all businesses fall into that category. And what is outright amazing is that 78.6% have fewer than ten employees and 60.8% have fewer than five employees. What is also worth noting is that all large businesses started out as small businesses.

Think about it, Proctor and Gamble, Sears and Roebuck, Johnson and Johnson, and Hewlett and Packard all started out as small businesses. And, they had something else in common. They are an example of partnerships that succeeded far beyond what their founders probably ever dreamed was possible. This is not a coincidence. According to research by Marquette University’s Kohler Center for Entrepreneurship (see page 7), more than 90% of America’s fastest growing companies were partnerships.

As a serial entrepreneur, I have started several businesses, some with a partner and some without.  Looking back on those experiences, I learned some very important lessons. The upside of flying solo is that no one can tell you how to run the business or what to do with the money generated by receivables. The downside is that no one can help you run the business or cover the debts represented by payables.

Since the odds seem to be in favor of partnerships, but, there are serious downsides to both, which one is better for your business? Many small business owners only want to fly solo, only to end up with a partner. Other small business owners prefer having a partner, only to end up flying solo.

If you are considering a partnership you may be worried about the latter. And, there is plenty of evidence confirming that your worries are valid. Almost everyone knows about business partners who could not get along and ended up fighting for control of the company. When a business partnership goes bad, it can be devastating for both parties; causing irreparable harm to the relationship as well as the business. For these reasons, entrepreneurs who do not need or want a partner may be better off avoiding one.

On the other hand, having a partner to share the financial and time investments required to launch and grow a business can expedite progress. Partners usually have different skills and knowledge (or they should to keep the boat from listing to one side). Unless an entrepreneur is exceptionally gifted, they are bound to run into situations where they lack the required knowledge and skills. In a partnership, one partner may be great with sales and marketing while the other is good at operations. If partners have complimentary skills it can propel the business to success more quickly.

Another upside of a partnership is that you don’t have to register with your state and pay fees as you do with a corporation or limited liability company.  Filing taxes is easier because in a general partnership there is no need to file separate tax returns for the corporate entity and its owners unless you specifically elect to be taxed as a corporation.

The downside of a partnership is that, just like in a marriage, conflicts are inevitable. After the partners launch the business, if they can’t resolve their conflicts effectively, the business suffers in all kinds of ways, not the least of which is poor productivity and profits. And, just like in a marriage, sometimes the actions of one partner legally bind the other.

In a business partnership, all parties are personally liable for debts and liabilities. So, if wannabe partners are not sure they can trust one another or if they anticipate debt problems down the road, they may be better off forming a corporation or limited liability company.  In spite of the potential for success and associated risks of partnerships, it is surprising that more business schools  don’t teach anything about how to form and sustain successful business partnerships.

George Gage is a business mediator and partnership expert with BMC Associates in Washington, DC and author of “The Partnership Charter: How to Start Out Right with Your New Business Partnership (or fix The One You’re In)”. George has worked with many feuding partners and suggests that seven issues be considered:

1. If you think you are not “partner material,” don’t take the partner path.
2. Use extreme caution when selecting a partner.
3. If you don’t really need a partner, don’t get one.
4. If it doesn’t feel good before you start, follow your gut and don’t do it.
5. Don’t be fooled into thinking that legal agreements and documents will keep you out of trouble with one another.
6. If you currently have a partner, and it does not feel like a positive working relationship, don’t just ignore it. Try to fix things.
7. If there are unanswered questions or vague boundaries and responsibilities with current partners, address these issues while you are still getting along.

Gage also suggests that partners share the same goals and vision for the business, define roles, responsibilities, and contributions, determine the percentage of ownership and decision-making power in the business, hold regular partner meetings to address and resolve issues, and form a legal agreement.

The Small Business Administration (SBA) suggests that partnership agreements include:

• Amount of equity invested by each partner.
• Type of business.
• How profits and loss will be shared.
• Partners pay and compensation.
• Distribution of assets on dissolution.
• Provisions for changes or dissolving the partnership.
• Dispute settlement clause.
• Settlement in case of death or incapacitation.
• Restrictions of authority and expenditures.
• Length of partnership

One way to obtain some of the benefits of a partnership without giving up a large percentage of control over your business is to form strategic partnerships with people and firms that offer products and/or services that are complimentary to your business. Partner Up offers an easy online resource to identify people and firms that might make good networking partners or strategic partnerships.

In summary, a small business has an excellent chance of succeeding as a partnership as long as the owners understand, accept, and are prepared for the downside of a having a partner. And, a sole proprietor has an excellent chance of success if they understand, accept, and are prepared for the downside of going it alone. In either case, business owners can increase their odds of success by continually building their base of knowledge and skills, hiring the right employees, securing a good mentor, and forming the right strategic alliances .

How do you feel about partnerships?

If you would like to contact me, you can do so by visiting my LinkedIn page or emailing me at mike.clough@bestbizpractices.org.