We discuss how to select the right business partner and avoid divorce later on.
Business partnerships are the stuff upon which dreams are made or nightmares begin. There are many parallels between business partnerships and love matches: some marriages last for years, others end in a nasty and expensive divorce. The early days of a start-up company are exciting and fun, but soon the cold, hard reality of running a business seeps in.
Revenue is the answer to most woes, although sometimes even that can’t be enough. A wounded ego or a big change in personal circumstances can often lead to a rift between founders. The united team can turn into warring parties, the lawyers are drafted in and progress ends. Boardroom bust-ups make exciting headlines, but are traumatic for those involved. Mark Zuckerberg, founder and CEO of Facebook, might be the world’s youngest billionaire, but his empire came close to crashing down before him due to an ill considered early alliance with the Winklevoss twins. Some entrepreneurs go to the other extreme and try to do everything themselves. This too is laced with problems, as few business people can get very far by always flying solo.
However, entrepreneurs should think carefully about who they go into business with. Spending quality time with prospective partners at the outset can avoid lengthy and costly disputes later on. Some of the best business partnerships are created by people who have worked together before, and spent time getting to know each other’s strengths and weaknesses. The founders of Innocent Drinks (Richard Reed, Adam Balon and Jon Wright) all attended the same university, had worked together on various enterprises and spent six months on their smoothie project before starting trading. Their example also shows companies don’t have to have ‘a leader’; other types of management are possible. However, getting the leadership mix right is as much art as it is science.
Love is blindness
As in any relationship, business partnerships require the perfect mix of personalities. Husband-and-wife teams are common and often highly successful, probably because the two principals know each other so well. Yet entrepreneurs often make the mistake of entering a union, without the appropriate levels of courtship. Even if you know your business partner fairly well, spending extra time together before an agreement is made is a smart move. Yet it is also worth asking how well you know yourself, your own strengths and weaknesses, appetite for risk, business ethics and emotional drivers. A good business partner covers for your weaknesses, understands your blind spots, knows what makes you tick and vice versa.
Some entrepreneurs undertake personality tests to uncover their true identity and better understand their partners. Penny Moyle, CEO of business psychology consultancy OPP, works with businesses looking to bring in management level members. “We worked with an entrepreneur that was looking to bring in someone who they didn’t know at all,” she says. “We discussed with them the type of skills they wanted and also did a personality assessment. This helped them to both know who the other person was and to go into the deal with their eyes open.”
Moyle says the partners in this case weren’t necessarily the types of people who would have been great friends. However their personalities, attributes complemented one another to form the basis of a strong partnership. The company in question went from start-up through to exit and they are now running a second business. “People who are similar will often share the same blind spots, but a company cannot afford to have too many of these,” says Moyle. Businesses need visionaries, but they also require someone who likes to do the details.”
Thorough HR practices are a must when bringing in senior management or starting up with someone new. However, entrepreneurs must also think about further down the line and plan for eventualities they hope will never occur. An individual’s circumstances will change over time and so can relationships, business or otherwise. Key life events such asbirths, marriages, deaths and serious illnesses can all potentially impact upon a business partner’s ability to perform and the priorities in their lives. You and your business partner may see eye-to-eye on all key matters now, but what about in 10 years’ time?
Anne Hughes, a senior associate at law firm Fox, says it is essential for businesses to get key agreements or a ‘pre-nup’ in place before they start trading. “I advise businesses to get an agreement from day one, which covers all of the big issues,” she says. All too often Hughes meets business owners after they have fallen out and the results can be financially ruinous. “Disputes are costly. Sometimes they are so expensive the bill is greater than the assets the business is left with,” she explains.
Hughes says entrepreneurs must think about key decisions, which they might have to make several years into the future. “A lot of businesses make agreements and then put them in a drawer and forget about them. They only pull them out when there’s a dispute,” she says. Nonetheless, it is better to have formal procedures in place, rather than paying for representation later.
Entrepreneurs should think of business partnerships as if they were a celebrity marriage. You need to see the other as good for your career, someone who will support you and make you look good in public. However, should it all go wrong, there’s nothing better to have in your back pocket than a well-written pre-nuptial agreement crafted by an experienced lawyer. Get to know your partner well, discuss all relevant matters and be open and honest with one another. By doing this you will not only get to know them, but also yourself. Hopefully, it will be the start of a beautiful relationship and the paperwork can remain unused in the bottom drawer
Your Business Pre-Nup
Anne Hughes, senior associate at Fox Lawyers, highlights some of the big questions entrepreneurs should consider before going into business with someone else. Preferably, it is better to get these agreements in writing, she says.
- Can one partner/director veto a decision? Is unanimity ever required?
- What are the rules about adding a new board member/key team member?
- If a partner/director chooses to leave can they withdraw all their capital immediately?
- Should the partners accept any restrictive covenants?
- What happens if one of the team dies? Is there an inheritance issue?