Business breakups are painful and costly. These are the factors that cause them, and know what you can do to avoid them.
Founding a start-up with a partner sounds like an excellent idea. After all, you're more secure with someone sharing risks with you. You'll also feel significantly more confident brainstorming with them because you're both invested in the company.
However, dealing with other people means you have to consider differences. After all, no two people are the same. While most can compromise over disagreements, there just might come a time when it's too much, leading to a business breakup.
So, before diving headlong into that new business venture with your friend, know what factors affect partnerships and how to mitigate them.
A Generational Gap
If you're partnered with someone that's a generation ahead or behind you, you run the risk of having a mismatch in priorities. Because when you have a partner at a different stage in life than you are, it can create difficulties when significant decisions have to be made.
For example, if you're single and in your early 20s, you're more likely to grab the opportunity on risky projects that offer a greater possibility of return. On the other hand, if your partner is in the mid-40s and has two kids, they'd probably prefer a client with a lower return but has less risk.
This gap can also lead to different priorities when it comes to the future of the business. An older partner might be thinking of retiring or reducing the time and effort spent on the company. They would want to get their chips off the table and prepare for their next stage of life, which can be retirement or taking it a bit easier.
At the same time, a younger partner would probably want to invest more energy and resources to grow the business. They might have this vision of growing the company to be acquired by a much bigger enterprise or even going public themselves.
These differences in goals can lead to conflicts in the boardroom, leading to decision paralysis.
Another factor that can affect your business relationship is when both parties' efforts in the company don't match. Cases like this happen when one partner invests more money into the business while the other invests less but puts in more effort.
This mismatch happens when one party invests more money into the venture while the other spends less but puts in most of the effort. Unless both parties have come to a mutual agreement of their share of the income, the one putting in more effort would most likely feel resentment towards the other partner.
This feeling is further compounded if one partner invests a substantial chunk of their net worth while the other party puts in only a fraction of what they have. The one with greater liquidity is relatively taking less risk, yet they're taking the same return as the one with less cash, especially if they have a fifty-fifty split.
One other primary reason that causes friction among co-founders is if they see things differently. Partners with different skills, personalities, and characters are great for businesses. This lets them have a holistic approach to the company and even let one partner focus on a particular facet of the business while the other focuses on another.
However, these differences can come to a head when making major decisions. When the founders have to pick which direction to take their company, their differing perspectives can lead to an argument that could stall a business's progress.
These differences can stem from diverse specialties—like when one partner is an engineer while the other partner is an artist. It can also come from divergent political, religious, and even traditional beliefs. So if you're partnering with someone, you have to consider these things as well to avoid future issues.
When Trust Isn't Enough
When partnering with anyone, you must have a measure of faith in them that they have the company's best interests when they're making a decision. After all, if they don't put their interests right alongside yours, then you'll always be doubting their intentions with whatever business decision they make.
Your business partner's personal issues can definitely affect their performance when running your company. Things like bankruptcy and debt, an unstable family life, legal issues, and even their reputation in your industry and community could negatively impact your operations.
So before you commit to any partnership, you should conduct due diligence and research their background. This is especially true if you're associating with someone outside of your social circle. Because although you can never predict how someone will react in the future, you can at least mitigate risk by looking at their past and checking for repeated behaviours.
Protecting Yourself, Your Partner, and Your Company
Before you enter into any partnership, the best thing you can do to protect everyone involved is to set clear expectations. When you have a Shareholder's Agreement written down on paper, you have something solid to fall back on whenever you run into an argument or scenario you cannot resolve.
And as you construct this document, you should have an end-game in mind: are you planning to exit the business after ten years? Are you staying in this venture for life? What if you get better opportunities elsewhere?
When each partner lays down their goals and expectations clearly, you can have something to fall back on every significant decision your business will go through.
When preparing this document, you shouldn't just rely on your experience. Instead, get an expert on board to guide you and your partner on how to best plan for contingencies. Professionals like these know the various challenges businesses face and can help your company prepare to meet them.
Don't Trade Relationships for Business
Many relationships have been tested, strained, or even destroyed by business disagreements. Steve Grace, the founder of several successful recruitment companies, has already gone through a couple of breakups with business partners—one of which cost his relationship with a dear friend.
He says, "It's like a divorce: it's messy, and the kids, as in the staff, don't enjoy it…If you see a scenario where you can see that coming, you need to start planning and work out a nice way [to exit]."
If you are interested in getting more insights from Steve regarding partnership breakdowns, be sure to listen to Steve's interview on the Buy Grow Sell Podcast.
By planning for any contingencies and setting everyone's expectations right at the very beginning, you can avoid professional disagreements turning into personal animosity—because all the money in the world isn't worth losing the relationships you have built over one lifetime.
And if you're looking for guidance on how to prepare for contingencies, the experts at the Exit Advisory Group will help you navigate these deep waters. You can check out their webinar, Breaking Up With Your Business Partner, to know more about what you can do to prepare for a partnership. Or you can contact them directly for more personalised advice.
At Exit Advisory Group we help entrepreneurs maximise company value and exit at the top of their game.
We do this by giving business owners the tools and strategies to design more profitable, efficient and enjoyable businesses to own - that are also less dependent on them. When they choose to exit, they are in the best position to unlock the wealth in their business and be rewarded for their hard work.
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