Tag: Business Partnership

Business is another word for relationship.

And that is where things get interesting.

Like marriages, many business partnerships fail. To compound matters, there is also a greater likelihood that it will end in a legal proceeding.

As an executive, how can you sidestep both negative outcomes? Well, you can start by selecting better business partners. The next time you find yourself looking for a business partner, spend more time upfront asking probing questions that can reveal possible red flags for you in the long run.

Remember, the secret to better answers are better questions. Feel free to pull from the following to increase the chance of a successful partnership:

What can you tell me about yourself?

This question seems quite innocuous, but it is extremely strategic. The response will tell you how well the prospective business partner can communicate, which is an important factor in any successful partnership. The answer should be tailored to the opportunity, not a recap of the person’s life. In addition to communication skills, this question will reveal if the person conducted due diligence before the interview.

What is your “why?”

You never really know someone until you know what they want. Motivation is key, so ask about it early in the process.

What does success look like?

We all want to be successful, but what does that really mean? For some, it may mean growth or money. For others, it may mean more control over their time. These are different looks at success. Get clarity sooner rather than later.

A breach of the partnership agreement, for example, is a common cause of a failed business partnership. During the interview process, you must ascertain whether the prospective business partner has a vision of success that jibes with the partnership agreement, which typically includes insight into business operations.

What is your competitive advantage?

Learning about a prospective business partner’s strengths could help you determine the business structure. In the partnership agreement, you could spell out how each partner would be responsible for their respective areas of expertise.

What are your areas for development?

Identifying weaknesses is just as important as learning about strengths. This information will give you a more complete picture of where this person would fit in the organization—if at all.

Gross negligence occurs when a partner harms another by failing to provide a certain standard of care. Make sure areas of development for each partner are addressed from the onset.

How would you describe your management style?

Are you a visionary leader or a transformative one? Do you take charge yourself or delegate? Knowing the management style of all your business partners speaks to expectations, teamwork and, ultimately, business operations. Before profit and losses, it is about intangibles.

How would you describe your communication style?

You can’t be a leader without followers, and you can’t have followers without communication. Communicating tends to be the make-or-break variable in any equation involving a relationship. So, does the prospective business partner have a passive or aggressive communication style? Or is it more assertive? Assess the words, tone and actions during the interview. Now, ask yourself: How would this person fit in with other partners?

Unfortunately, failure to delineate authority is a common reason for business partnership breakups. To ensure the partners aren’t shirking their responsibilities or overstepping into another partner’s area, communicate in terms that all parties understand and reinforce in the partnership agreement.

What will you need from the other business partners to be successful?

From day one, it is important that your team members are put in the position to succeed—because when they win, you win. Learning about which resources they will need in advance will help you to determine the true cost of bringing this person on board. Do the requests logically align with the roadmap that was presented? Is it realistic?

Can you describe your current workday at your most recent firm?

Past behavior may not be a guarantee of things to come, but people tend to be creatures of habit. You should know in advance if the prospective business partner believes in working around the clock or four hours a day. This expectation could have a positive or negative impact on the rest of the partners.

Partnership abandonment happens, which can result in a breach of fiduciary duty. The partnership agreement should define partnership work and business operations to make expectations clear and concise.

What is your exit strategy?

This question is another way to ask about the person’s “why” in an inconspicuous manner. When you want an honest answer to an important question, make sure you ask for it several times in different ways. The composite will tend to be the real answer.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

Most business partnerships don’t last.

Harvard Business Review says the fail rate for corporate alliances ranges in the 60% to 70% neighborhood.

So, would a 50/50 business partnership improve your odds? Maybe. Fewer “voices” could make things easier or more challenging.

The reasons for the breakup, regardless of the number of partners, have remained consistent over the years:

• Lack of communication
• Different goals and expectations
• Lack of participation/inclusion

Knowing the five ways to break an impasse in a 50/50 business partnership could help resolve the issue in question as well as the outcome.

 

1. Mediation

Mediation is an effective way to solve disputes in business partnerships. Unlike litigation, which tends to pit one partner against the other, mediation is a collaborative process without winners and losers.

The mediator serves in the role as a facilitator who helps each partner contribute to the solution—not like a judge who passes a verdict.

Choosing mediation also keeps the matter private, protecting the company’s brand and reputation by not undermining public confidence in your operations.

 

2. Arbitration

Arbitration is a procedure both parties approve that delivers a binding decision on disputes. A private dispute resolution can be advantageous because it comes with a timetable that can be controlled by the parties involved. In addition, there are no appeals.

Besides finality and speed, arbitration also offers other benefits. The proceedings are confidential matters, and the financial cost can be set beforehand, which turns an otherwise expensive unknown into a number that is predictable.

 

3. Divide Company

One way to maximize a business relationship is to divide tasks and responsibilities among each partner based on their strengths and expertise. If one partner is stronger at marketing and sales, for example, then have that person concentrate on that area. This simple strategy allows the business partnership to create better results and efficiencies.

Well, the same can be said for breaking up the business partnership. If an impasse remains, dividing the company along the lines of each business partner’s existing responsibilities might make the most sense. It could allow each partner to start another venture with their “piece” or add their portion of operations to another business partnership so they retain a certain level of value.

Ideally, each partner should lay out this outcome in the business partnership agreement from the onset with guidance from their lawyer.

 

4. Buy-Sell Options

The business partnership agreement should spell out several exit options, especially for 50/50 ventures. A buy-sell provision could be a preferred choice among the two partners. Essentially, it means one partner would buy out the other partner at fair market value. To accomplish this option, a third-party appraisal would be required from a professional who was agreed upon by both partners.

A challenge could occur if both partners want to buy out each other. This type of contingency would need to be documented in the business partnership agreement.

 

5. Dissolve Business Partnership

If certain contingencies are not addressed at the onset of a business partnership agreement, such as what happens if both partners—or neither partner—want to buy out the other, then dissolving the partnership could be the last remaining option to end a 50/50 business relationship impasse.

Working with an attorney at the beginning of your business partnership would ensure that the agreement would be comprehensive so it would address—and therefore eliminate—many possible deadlocks and headaches before they happen.

 

What is a Partnership Business

 

Alliances are often created in the first place to capitalize on the skills, talents and relationships of others. A business partnership, for example, is an agreement between two partners or more with assets and liabilities on an ongoing venture.

Being part of a business partnership can create several advantages that an entrepreneur couldn’t do alone. For example, a partner can pool their time, talent and resources, fostering new thoughts and problem-solving approaches. In addition, partners can share the workload that matches their individual expertise to improve outcomes and efficiency.

These important details would need to be spelled out in a business partnership agreement to ensure everyone’s expectations are aligned. In fact, the business partnership agreement often turns out to be a make-or-break document, so don’t skimp. More substance upfront will only help support unity in the business partnership.

 

Partnership Business Examples

 

A general partnership is one of three common categories of business partnerships. Essentially, a general partnership means all the partners share financial and legal aspects equally, including debt for which each partner is personally accountable.

A limited liability partnership protects the partners from legal action. This type of business partnership, which is common among professional service providers such as doctors and accountants, limits legal exposure from one partner to another. So, if one partner is involved in a legal proceeding, the other partners are shielded from the outcome.

A limited partnership has one general partner personally liable for the business partnership’s debts and at least one silent partner with limited financial and legal liability based on the amount invested. Silent partners are not involved in the day-to-day management of operations.

Whether you are involved in a 50/50 business relationship or not, an impasse is bad for business. Move forward with invaluable counsel from your attorney.

 

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net

Whether it involves two parties or more, a business partnership has followed a certain convention of thought for decades.

Start with a comprehensive business plan and a business partnership agreement with clear, understandable metrics that capture the sense of accomplishment for your alliance. Systems and procedures should be part of the overall structure built for success.

That’s the winning recipe, right? Well, not necessarily. Researchers Jonathan Hughes and Jeff Weiss, who authored “Simple Rules for Making Alliances Work” in the Harvard Business Review, believe more rules are needed to improve the long-standing fail rate for business partnerships, which hovers around 70%. Although the research focuses on corporate alliances, it has implications for the intricacies of business partnerships.

Based on their findings, the researchers propose several complementary rules to elevate conventional wisdom.

 

Business Partnership Insight: Place more value on working together

A solid business plan and contract are crucial, but those two instruments alone are not enough. When it comes to business partnerships that fail, the paperwork is rarely called into question while communication and trust grind to a halt.

Diversity of ideas is one of the benefits of starting a business partnership. Aren’t two heads still better than one? More ideas often lead to more opportunities and improved efficiency.

The notion of working together implies two-way communications that can counter many possible negatives associated with business partnerships, such as confusion. Of course, the business partnership agreement would spell out areas of responsibility. But once you drill down to day-to-day activities, it can quickly become gray areas that fester. Is your partner really working as hard as you? Is he moving into my area of expertise, which could create further internal conflict?

Hughes and Weiss recommend that alliances, such as business partnerships, put less emphasis on the business partnership arrangement and more energy behind the working relationship.

 

Business Partnership Insight: Highlight Progress, Goals

Building a successful business partnership is a process. The wins don’t happen overnight, especially when the relationship is a new one.

Achieving desirable outcomes takes an investment of time, money and third-party resources that come in the form of more relationships, which most likely will be time-consuming and inconvenient—although worth it. In a practical sense, this effort, which could take 12 months or multiple years, could lead to barren monthly reports for the foreseeable future.

Blank reports can lead to lower morale and lost confidence. It would also feed a popular negative about business partnerships, which centers on personalities. When interacting with another person, you will have to navigate their quirks and emotional levels on a daily basis. In sports, it has been said that winning is the best deodorant because everything smells bad when you are losing. A slew of negative reporting, especially at the beginning of a project or relationship, could tip the scales in the wrong way.

Researchers urge business partnerships to place emphasis on “means” metrics as opposed to “ends” numbers. For psychological reasons, highlighting the road to success will go a long way to sustaining the effort so all partners feel the initiative is moving forward—although not complete yet.

 

Business Partnership Insight: Transform Differences Into Opportunities

Matching strengths and differences are often driving forces why two parties should partner together.

However, the difference in backgrounds and experiences can quickly turn into a negative for the business partnership. Assuming one way to solve a problem at another company would work in the current partnership may be naïve. Resenting the other partner without working toward finding common ground would be unproductive.

The researchers reference a real-work example of two companies partnering in an alliance when good faith and communications started to break down. Company executives created working sessions with team members from each company to address differences between the companies. Individual competencies and culture were issues that topped the list, which is why so few were initially open to joining the conversation. When the negatives were highlighted, the reluctance stopped and team members began to provide frank feedback, which ultimately turned the tide and allowed the two entities to work more closely together.

Eliminating differences and embracing collaboration serve as the third complementary rule from the researchers.

 

Business Partnership Insight: Find Collaboration Beyond Structures

In most situations, corporate structure is a framework that leads to positive outcomes. Sometimes, however, it can feed the blame game when surprises become negative.

There is nothing more draining to productivity than team members spending their energy pointing fingers and assigning fault to others. Instead, researchers recommend that the partners discuss how each contributed to the problem and what they can do to address it today and prevent it tomorrow. Refusing to tear down the other partner preserves the relationship, avoiding a situation where information could be withheld out of self-preservation—something that wouldn’t be positive for a company.

Reaching a stage of collaboration underscores the chief competitive advantage of any business partnership.

 

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

William Proctor and James Gamble figured out how to do it in 1837.

Ben Cohen and Jerry Greenfield found out that success could be sweet in 1978.

Larry Page and Sergey Brin started their own brand of digital domination in 1998 before most knew what they were talking about.

Today’s stock market is filled with prosperous corporations that began with a business partnership. Although those who succeed tend to grab the headlines, all the rest fade away.

According to BLS data, 45% of new businesses fail during the first five years and 65% fail during the first ten years.

Hiring an attorney at the onset of a business partnership can dramatically increase your chances of a favorable outcome. Lawyers can help partners decide the best corporate structure and draft documents that will add clarity and resolve disputes to keep the organization moving forward.

Unfortunately, business partnerships that don’t work with a lawyer as their first step bear more uncertainty.

Here are the five most common legal claims that cause business partnerships to fail:

Attorney Alert #1: Breach of Partnership/Operating Agreement

Don’t enter into a business partnership without a written agreement that clarifies many important variables, such as your responsibilities, compensation and exit.

In fact, negotiating the partnership agreement should be part of your process to determine if this company is the best fit for you. The time spent on this dialogue will be invaluable.

For example, how are profits distributed? What happens when one partner doesn’t want to take the distribution in that year? Will you have the right of refusal when your partners bring forward a prospective partner? How will each partner exit without harming the interest of the company?

A thoughtful partnership agreement will go a long way to building stronger relationships—and mitigate one of the most common causes of failure for business partnerships.

Attorney Alert #2: Breach of Fiduciary Duty

Fiduciary duties are included in business partnerships.

The interests of the partnership, for instance, should be held paramount compared to your own self-interests. This is referred to as the Duty of Care. You should also avoid self-dealing situations where you benefit at the expense of your partners—also known as the Duty of Loyalty.

Failing to account for company funds, sharing trade secrets or acts that benefit a competitor are also examples of a breach of fiduciary duty.

In an attempt to mitigate this potential cause for business partnership failure, partners could be required to review their fiduciary duties in writing and sign their names periodically to keep these responsibilities top of mind.

Attorney Alert #3: Failure to Delineate Authority

When partners enter a business venture, it is often assumed that each partner will work an equal amount. And that’s why issues happen.

Andrews Campbell, who published “Collaboration Is Misunderstood and Overused” in the Harvard Business Review, writes that success depends on three circumstances:  1) partners need to be truly committed to working with each other, 2) partners have high respect for each other’s expertise, and 3) each partner has the skill to bargain with each other over cost and benefits.

The last circumstance could be the sole reason to hire an attorney to draft documents to increase the odds that the collaboration will be a success. For instance, each partner should clearly understand their responsibilities as part of operations and the leadership team. Blurred lines will lead to disagreements and a waste of time of redundancies.

A semblance of hierarchy needs to be established so the company can move forward. Delineated authority would ensure that all mission-critical areas are covered by the partners.

Attorney Alert #4: Gross Negligence

Partners are responsible for providing a certain standard of care. When that doesn’t happen and harm is caused, a matter of gross negligence can cause irreparable damage and end the partnership.

Mismanaging partnership funds, failing to abide by contracts and hiring unqualified, key personnel could trigger a claim of gross negligence.

A court would apply the business judgment rule, which is a standard that examines if the action in question was done in good faith with the care of a “reasonably prudent person” and with the understanding the partner is acting in the best interests of the company.

If gross negligence can be proven, unfortunately, it would knock down that level of protection.

Attorney Alert #5: Partnership Abandonment

When a partner decides to leave, it could trigger dissolution almost immediately, depending on the partnership agreement.

However, if the departing partner has not acted in the best interest of the partnership, it could be grounds for a lawsuit.

It may make sense to review the partnership agreement before resentment and business losses kick in. Often, a buy-out option is stated in well-drafted agreements and incorporation papers to lay the groundwork for a soft landing for all parties.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or jpastore@pastore.net.)