Why Most Business Partnerships Fail: Scaling or Failing, Part 4
The Tale of Two Partners
Ah yes, the backbone of every successful business partnership: the partnership agreement.
Whether you’re dreaming of scaling to new heights or just trying to avoid awkward, lawsuit-inducing misunderstandings, a solid agreement is non-negotiable.
Here’s the thing:
If you and your partner don’t define your roles, responsibilities, and decision-making processes clearly, you might as well be playing darts in the dark. Sure, you might hit the target eventually, but it’s far more likely you’ll just break a window.
A Familiar Story
You and a partner dive headfirst into an exciting venture. At first, it’s all sunshine and shared visions. But as the business grows, disagreements creep in—who’s contributing more? Who gets the final say? Before you know it, your thriving business feels like a battleground.
Sound familiar?
Maybe you’ve lived this, or maybe you’ve seen it happen to others. It’s a cautionary tale we’ve all heard before.
Here’s the good news: the right partnership agreement can keep you on the scaling path—and far away from the failing one.
The Blueprint of a Strong Partnership Agreement
A partnership agreement isn’t just a formal document; it’s your business’s insurance policy. Let’s break down the must-have elements:
1. Ownership Split
Who owns what?
Decide upfront and put it in writing. Whether it’s 50/50 or 55/45, everyone needs to know their stake. For instance, imagine Partner A is investing $50,000 in startup costs, and Partner B is committing to full-time operational leadership. These contributions aren’t equal, so the ownership split might reflect that difference—let’s say 60/40.
2. Contributions and Responsibilities
Who’s doing what?
Spell out each partner’s financial contributions, time commitments, and roles. For example, if one partner handles day-to-day operations while the other focuses on investor relations, document it. This way, you avoid the “Wait, I thought you were doing that” moments.
3. Decision-Making Processes
Who has the final say?
Establish a clear process for decision-making. Will significant decisions (e.g., spending $10,000+) require unanimous agreement? Who’s authorized to sign contracts? For example, a tech startup might decide that the CTO handles all product development decisions, but financial approvals require both partners’ consent.
4. Rights of Survivorship
What happens if a partner passes away?
If Partner A tragically passes away, does their ownership transfer to their spouse? Or does Partner B have the right to buy out that share first? Specify these terms to avoid future legal or emotional entanglements.
5. Adding New Partners
Thinking about bringing someone else on board?
Define the process for introducing new partners, including buy-in amounts and how ownership will be divided. For instance, a marketing agency may agree that adding a new partner requires unanimous approval and a minimum $50,000 buy-in.
Compliance Alert: The Corporate Transparency Act
Here’s a curveball: by January 1, 2025, small businesses must report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). This means sharing names, birth dates, addresses, and ID numbers.
Why care? Non-compliance could result in $10,000 fines or even jail time. And yes, this applies even to inactive entities.
Pro Tip: Start gathering this info now. Logistically, it’s simple but tedious. Get ahead of it to avoid scrambling at the last minute.
Let’s Get Real: Disputes, Loans, and Termination
Even the best partnerships have bumps in the road. Here’s how to prepare:
1. Dispute Resolution
Disagreements are inevitable. How will you handle them?
A mediation clause can save time, money, and relationships. Think of it as a safety net for when emotions run high.
2. Loans vs. Contributions
Is additional funding a loan or equity?
Say Partner B needs to infuse $20,000 into the business to cover unexpected costs. Decide if this counts as a loan (to be repaid) or increases their ownership stake. Treating it as a loan can maintain equity balance while ensuring fairness.
3. Termination Clauses
What if someone wants out?
Document how partners can exit and how the business will be dissolved if necessary. For instance, if Partner A wants to leave, Partner B might have the right to buy their shares first at a predetermined valuation.
Example: The Dinner Receipt Debacle
Let’s bring it down to earth.
Say Partner A takes a client to dinner and charges it to their personal card because the business card hasn’t arrived yet.
Without proper record-keeping, that $200 dinner might get lost in the shuffle, creating frustration later when Partner A feels unreimbursed.
Solution: Keep meticulous records from the start. Even small expenses like this can add up and cause tension if left undocumented.
Your Homework: Building the Foundation
Ready to future-proof your business? Here’s what to do next:
- Define Ownership: Who owns what percentage of the business?
- List Contributions: What is each partner contributing (money, time, expertise)?
- Rights of Survivorship: Who inherits ownership if a partner passes away?
- Plan for New Partners: How will you bring on additional partners?
- Decision Framework: Who makes decisions, and when is unanimous agreement required?
- Set Record-Keeping Standards: Invest in tools like QuickBooks or Xero to track every financial move.
Keep the Agreement Alive
A partnership agreement isn’t a one-and-done deal. As your business evolves, so should your agreement.
Schedule quarterly reviews to ensure it reflects your current reality.
A strong partnership agreement is more than a document—it’s your business’s roadmap to success.
By tackling the hard conversations now, you’re setting yourselves up for smoother scaling, fewer conflicts, and long-term resilience.
Want more insights? Check out S5E5 of the “Cash Flow with Pam Prior” podcast on YouTube, Apple Podcasts, and Spotify.
Pam Prior
Author, Virtual CFO, and Finance Coach
“Your First CFO: The Accounting Cure for Small Business Owners” on AMAZON
“Founder to Exit: A CFO’s Blueprint for Small Business Owners” on AMAZON
