Partnerships, do they work?
Partnerships, do they work?
Partnerships are a tricky business. When they work well, they are wonderful. One can consider the monster success of Apple (Steve Jobs and Steve Wozniak) or Microsoft (Bill Gates and Paul Allen). For those of us with an entrepreneurial spirit, the thought of finding a business soul mate is alluring and enticing.
However, in reality, business partnerships are fickle. First, a partnership must survive as a small business. According to an Industry Canada Report, 30% of small businesses fail within 2 years and half fail within 5 years.
Secondly, a partnership must survive the partners’ relationship to one another. Now, before I go any further, I am using the term partnership very loosely. Legally speaking, a partnership in Manitoba is regulated by the Partnership Act. A partnership is a different legal entity than a corporation.
The act states that a Partnership is: “the relation which subsists between persons carrying on a business in common, with a view of profit“.
If two individuals incorporate a company, legally speaking, they are not partners. They are shareholders in a company. However, practically speaking, if they are running the company together, they are often referred to as business partners. So for the purpose of this article, I am referring to partners in the general or practical sense, which includes co-shareholders or co-founders of a company.
Anatomy of a good partnership
When I read about successful partnerships a familiar theme develops. Really successful partners have skills that compliment one another. One will be a technical wizard, while the other will have business foresight – think Apple or Microsoft. I found this interesting infographic outlining how different personalities can compliment each other. I recently read an article (sorry, I couldn’t find the source the author referred to, so I can’t categorically stand by these statistics) where the author cited statistics from the Small Business Administration in the U.S. According to him, partnerships which managed to survive experienced a higher rate of growth in revenue. So the theory that complimentary personalities can lead to success certainly seems to be grounded in statistics (provided they are accurate!)
Success not guaranteed
However, we all know that individuals with different skill sets see the world differently and may disagree on a path forward. When disagreements pile up, and egos get bruised, a partnership can take a turn for the worst. For every Jobs and Wozniak, there are multiple partnerships that fail. I expect this number to be in the tens of thousands, but I am just guessing.
In my practice, I have seen many partnership fail. When they fail, they fail spectacularly. Feelings are hurt. Business partners who were once friends, cannot stand the site of one another. Having represented parties in failed business partnerships and spouses in separations, I can assure you that the emotional atmospheres are almost identical. Failed partnerships evoke the same feelings as failed marriages (or common-law relationships).
Unfortunately, the law does not offer any tools to assist partners in overcoming their differences. For repairing damaged relationships, partners must resort to the same tools available to couples who experience difficulties. When attending university, I worked for a small business that used mediation to resolve conflicts between partners.
In reality, the law can only provide a means to unwind a bad relationship. Just like co-habitation agreements (prenups), which provide a road map for couples who need to separate, partnership or shareholder agreements can set the stage for an eventual break-up.
Why is this important?
Because, when partner relationships deteriorate, the business suffers. Partners or co-founders cannot agree, so no new decisions are made. In the case of corporations, funds may be stuck in the business, with no means of getting it out to the share owners. Capital expenditures are frozen. New business is not developed. I have seen businesses suffer and value evaporate. It doesn’t take long.
In my next article in a couple of weeks, I will discuss in more detail, the anatomy of a good partnership or shareholder agreement. A good agreement will prevent partners from making unilateral decisions that can affect the other partners’ interest. It will also provide a means to unwind the partnership in a efficient (but drastic) way.
I always tell my clients that these agreements are like insurance policies. Hopefully, the agreement will sit in the bottom of a drawer never to see the light of day as the parties roar into the sunset enjoying the fruits of a wildly successful business. But, should the relationship sour, or something unforeseen occur (like the death of partner), the parties will have a road map to move forward. Not everyone will be happy, but at least the value of the business may be preserved.
Philippe Richer is President of TLR Law Group. TLR has been located in the St. Boniface neighbourhood, in Winnipeg, since 1996. The office serves the middle class and small business within the province. With a focus on estates, wills, real estate, and corporate law, he leads his team in providing accessible legal services. Philippe also authored the business law course for the Knowledge Bureau and instructed the français juridique class at the faculty of Law at the University of Manitoba.