A business partnership can be one of the most fulfilling experiences in your professional career.
Together, you will share the long hours, the stress, and responsibility of a new business. They will become your greatest support, not to mention the satisfaction you will feel from a strong creative collaboration. When it works, it can be the best thing in the world. But when it stops working? It could turn into a living nightmare.
Ken Burgin, hospitality expert and founder of Profitable Hospitality, is realistic on the success rate of partnerships. He has seen plenty of business partnerships turn sour, and says that the key to avoiding unnecessary heartache comes down to preparation and transparent business goals from the start.
In this blog, we’ll look at the main signifiers a partnership isn’t working, as well as the legal considerations and possible outcomes when the partnership falls apart.
Signs your partnership is done
Business partnership is a lot like marriage, says Ken. Once the communication breaks down and there is a sense of irreconcilable difference, it is near impossible to repair.
“Marriage is the best analogy I can give,” says Ken. “You should be so close with your business partner that you can finish each other’s sentences. You should be great friends.”
The main reason a positive business dynamic will end is because of financial disappointment, says Ken. Feeling as though you are underachieving as a business, or held back from achieving more by your partner, creates mistrust and a depression regarding the future.
“A lot of business partnerships will end because it doesn’t meet their original expectations,” says Ken. “It is a sense of, ‘We thought the money was great’, and it’s not. Or, ‘We thought it would be the easy life’, and it’s not.”
One of the key signifiers that your time as business partners finished is when your staff become affected.
“All business owners should be neutral in front of their staff - they are an emotional leader,” says Ken. “So when there are disagreements or pettiness in front them, it’s bad.”
Once it reaches this point, it’s time to cut your losses and move on, says Ken. “In the same way a holiday won’t fix a marriage, a break won’t fix a business.”
He says this is the moment you need to address why the partnership isn't’ working, and how you will choose to move forward.
One person stays, the other leaves
The first option when ending a business partnership is that you will remain in the business, whilst they will leave; or vice versa. This option is best considered when the business is turning over enough money to remain financially viable and you see your own personal skill set as key to its future growth. Opting to buy out a partner can only come if you believe the business is too good to leave, and the only reason change is occurring is due to your interpersonal relationship.
However, it’s not a simple process.
“You can’t just pack your suitcase and leave,” says Ken. “You can’t just walk out and drive off. There is a lengthy legal process that you must go through.”
The legal separation will need to take into account anything and everything that your business touches. This means shared real estate, vehicles, cash profits, joint bank accounts and credit cards, suppliers - everything. Bank loans that you may have taken together will need to be refinanced, whilst any shared collateral will need to be split evenly - which may even include your branding or logo.
Whilst it can be a drawn-out process to make the business your own, it’s overall a necessary process.
“It’s a positive thing,” says Ken, “as something that was a constant stress is gone. There’s a real relief for people who finally feel like they can run the business alone without being held back by a partner.”
You both sell up
If the main problem was a lack of profits, the better solution may be to sell the business. Taking on the stress of an underperforming business is a huge responsibility, with no guarantee of it improving. So, it could make sense that you both walk away in search of a new project. However, this will still take time.
“Deciding to close down a business also is quite a lengthy legal process,” says Ken. “You have to terminate your lease, sell your assets, and divide the expenses.”
For this reason, it is a cheaper - and more straightforward - option to sell the business to a new owner. This would be avoiding the hefty fees for early termination of a rental agreement, and not having to sell heavily devalued items such as furniture or equipment.
Of course, deciding to both sell the business means another legal process of untangling what you are owed.
“Like a divorce there’s a lot to be unpicked and pulled apart,” says Ken, adding that this can be a time where both parties can become quite emotional and even nasty as they seek to protect what they believe is rightfully their own.
Preventing damage from the start
There are several steps you can take prior to entering a new business partnership that will set you up for safety in the future. Like a marital prenup agreement, this might seem dramatic and even negative in the early days, but will be a godsend if the business partnership turns ugly.
Here are some of the more important issues to be covered in a Partnership Agreement.
- Duration of the partnership - when it commences and when it will finish
- If there is real estate involved, how will it be held - lease, trust, rental agreement?
- Using separate accountants and solicitors for each partner
- Is there any prohibition on partners assigning or changing their interest in the partnership, such as shares?
- In what proportion will profits and losses be shared?
- Can partners draw money on account of profits? If work is not performed of equal hours, how will the difference be compensated?
- Financial control - what cheque signing arrangements are there? What are the cash protocols?
- In what proportion will capital be contributed and belong to the partners? Will capital carry interest?
- If a loan from a partner is contemplated, what will be the terms of the loan?
- Will majority decisions of partners cover all decisions, and if there are only two equal partners, is there away that deadlocks can be overcome?
- What insurance is taken out for the protection of the remaining partner in the event of the death of a partner?
- How can this partnership agreement be changed? For how long does it last?
- If one partner leaves the business or sells their share, what restriction will there be on any other business they may want to carry out? This also includes restrictions on the use of confidential information.
- What happens to the ownership by the business of any patents, designs, copyright or know-how that is the work of one of the directors?
- What right does each director have to do outside work?
- How will assets be valued in the case of the business being sold?
Sitting down and legally documenting how you plan to deal with these issues is a crucial step to embarking on a business journey together. Yes, it may feel like a dark cloud on an otherwise very exciting stage in your business career - but it is also an important step to talk. If nothing else, it will highlight any potential disagreements that could crop up further down the track.
Ken is frank about the reality of taking on a business partnership.
“Most partnerships don't work in hospitality,” he says. “It doesn’t mean they all end up in a blazing bonfire - for many, they just end in disappointment.”
Whilst this may seem a little dark, it’s important to be realistic. The chances of forging a lifelong business relationship is unlikely - so go into the partnership with an open mind and mutual goals. This means having really clear expectations of what the financials are going to look like, so take the time to create accurate projections of your income for the future. Is that going to be enough?
People will always have different ideas of what a partnership will mean to them. How much they work, how much they get paid, and how long they are committing for will invariably be in contrast to your own. Put in the legwork to prepare and discuss before you sign on the dotted line, however, and your partnership will benefit.