How to Build a Successful Partnership
Posted Apr 28, 2011, Published 2003-03-01
It's been said that a business partnership is a lot like a marriage: both take chemistry, common goals and an ability to compromise.
When a business partnership really works, the results can be outstanding. Together, partners have more resources, a greater diversity of skills and someone with whom to share the ups and downs of ownership. But when a partnership goes sour, the resulting fallout can destroy the very thing you've worked together to build. That's why a partnership isn't something you should enter into lightly. The fact that the other person is a friend or family member doesn't necessarily mean that the two of you will be a good team. Nor should you decide to take on a partner merely because he has the capital or skills you lack. "Don't make the mistake of rushing into it; take the time to be sure it's equitable for everyone and that you're both entering the partnership for the right reasons," says Tom Moore of CenTex Dental Laboratory, Waco, Texas.
While nothing can guarantee a trouble-free partnership, careful planning for your venture can certainly reduce the risks. First, experts say that you should be sure you really know the other person. While every situation is different, here are some questions you should ask yourself and your potential partner:
Do you have the same goals? Be sure to discuss your priorities and your vision for the business. "The most important thing my partner and I determined was the type of laboratory we wanted to be. We had both owned our own small laboratories and essentially our name was on every product that went out the door," says Allen Weinbrecht. "We both wanted to grow, but we also agreed that our priority was to be sure that our joint venture would continue to produce the quality that our clients had come to expect." Weinbrecht merged with nearby competitor Ken Bailey 14 years ago to create Den-Tech Dental Laboratory in Pasadena, California.
Do you complement each other? Ideally, the two of you will be able to play off each other's strengths and weaknesses; for example, maybe he's introverted and you're extroverted. This worked out well for Moore, who is in the process of merging his C&B laboratory with a nearby removable laboratory owned by Tim Frenzel and David Atherton. "The three of us make a good team," he says. "One partner is a production-oriented, get-it-done kind of guy. The other partner excels in client relations and spends a good part of his day on the telephone. Then there's me--I'm the one who's always pushing for change."
Are your personalities a match? It's not only the other person's professional qualities that you should think about. Consider whether or not your personalities "click." Do you have similar values and personal priorities? This was important to Jim Zumini and Mike Shelley, co-owners of Creation Dental Arts in University Place, Washington. "We're both Christians and felt that the fact that we shared that basic foundation was key. It's part of our personal philosophy and, therefore, part of how we run our business," says Zumini.
Do you have a similar work ethic? If not, this is a common reason partnerships fail: one partner isn't contributing the energy and hours that the other person is investing. Resentment is bound to grow. "You don't want someone who's going to come in and read the newspaper all day while you're sitting at the bench cranking out the work," says Diane Sharron, who worked with her partner, Tim Blackburn, for 17 years in another laboratory before they opened Custom Craft in Pearl, Mississippi five years ago.
Are your financial philosophies in sync? Like a marriage, money-related disputes can be a source of tension between business partners. Sharing similar attitudes about finances--such as how you spend money, handle debt or stick to a budget--goes a long way toward minimizing that stress.
Another area to consider is the stability of the other person's financial background. "You need to know each other's personal finances rather intimately and you have to be more open than you might expect," says Moore. "You should both disclose debts, investments and other financial information in advance."
To be sure they were covering all the bases and to get unbiased feedback on their plan to partner, Zumini and Shelley formed an advisory council. Each of them brought in three people whom he knew and respected and held periodic meetings over two months. "We said, 'here's what we plan to do; what red flags do you see?'" says Zumini. "Once we all agreed that we had what it takes to be successful as partners, they encouraged us to consult a lawyer for a legal agreement."
A written partnership agreement, drawn with the help of an attorney, is imperative. It not only protects the rights of each partner, but can act as a guide when questions arise. "It just makes sense to try to answer all the 'what ifs' in advance," says Marc Daichman, co-owner of Asteto Dent Labs in Maplewood, New Jersey. [(See What to Include in a Partnership Agreement below)].
Also, in a partnership you're financially liable for the actions of your partner(s); a formal business structure can limit your liability. Ask your attorney which structure--corporation, limited liability company (LLC) or limited partnership (LP)--best suits your situation. (For more information, see Cover Your Assets)
Roles and responsibilities
Many laboratory owners say what makes their partnerships work is a clearly defined division of responsibility. This requires each partner to step back and take an honest look at his strengths and weaknesses--as well as those of his partner--and decide who is best equipped to handle a particular aspect of the business.
When partners are able to pool their talents effectively, the laboratory can flourish; Daichman and his partner Peter Solomon are a classic example. In 1984, Solomon was operating his own one-person laboratory but disliked the administrative work. Daichman, on the other hand, was a sales representative for a dental manufacturer but was eager to put his marketing and sales skills to work in his own business. After working together on a trial basis for several months, they formed a 50/50 partnership; over the years, they worked together to grow the laboratory to 16 employees.
"It was a perfect match from the start. Peter was very experienced technically and wanted to work at the bench. I loved visiting dental offices and marketing our services. Now, Peter still manages the technical end and I manage the business end; we both do what we're best at and it maximizes the productivity of our laboratory."
Weinbrecht recommends deciding on the division of responsibilities right from the start--something he and partner Ken Bailey did not do. "It became a problem, because employees would get one answer from me about a case and then another from Ken. It was very frustrating for them," he says. "Two years into it, we realized we had to make a change and decided that Ken would run production and I would manage the lab."
As logical as it sounds to have clearly defined roles for each partner, it can be difficult to give up responsibilities you've had in the past that are no longer part of your domain. "In the beginning, it was sometimes difficult not to say, 'I wouldn't do it that way," says Zumini. "However, you need to know where and when to let go and trust the other person to handle it well."
Partners inevitably disagree or have to deal with a crisis, and how well they debate issues or work through a challenging time says a lot about their chances for success down the line. The key--as in any relationship--is honest communication and compromise. "You have to address a problem immediately because if you stew over it, it will just get out of hand," says Blackburn. "Like a marriage, it's all about give and take."
The ability to compromise plays perhaps an even more important role when partners are merging existing laboratories. "You're used to constantly having the "buck" stop with you and then suddenly there's someone else with whom you have to confer. It can be a culture shock," says Moore. "But if you agree on where you want the laboratory to go and keep reminding each other of that goal, you can get through it."
Even when things are harmonious between the partners, times of transition in the business--growth spurts, losing employees, adding a new department--can potentially introduce stress into the relationship. For example, when Zumini and Shelley recently built a new facility, Zumini spent all of his time on the project. "Not only did that leave Mike to run everything at the laboratory but because I was so focused on the new building, it was sometimes difficult to keep an open mind when he stopped in with a suggestion," says Zumini. "But now that we're in the new facility, we both agree that it was all worth it."
Zumini also recommends that partners occasionally spend time outside of the lab together. "A couple of times a year, we go away for a weekend together with our wives--we call it our corporate retreat," he says. "The first few times, we talked a lot of business; now we just enjoy the friendship."
What to include in a partnership agreement
The objective of a formal agreement is to define the nature of the partnership and make provisions for any foreseeable changes that may affect the business arrangement. It may be difficult to anticipate problems when you begin a partnership, but that's exactly what you should do to be sure the solutions are agreeable to both sides.
You should enlist the expertise of an attorney; many laboratory owners use one attorney instead of having each partner get his own. "We discussed getting separate lawyers but in the end decided to use one and let him know that our objective was to draw up the fairest, most equitable agreement possible," says Tom Moore of CenTex Dental Laboratory in Waco, Texas. "If at any point, any of us felt like something was unfair, we discussed it from all perspectives."
Although your agreement will vary depending on your situation, here are some areas that experts say you should cover:
Definition of each partner's investment, whether it's cash, property, equipment, etc. This can be especially tricky when partners are merging laboratories since there's likely to be a disparity in the amount of equity each one is bringing to the new venture.
Determination of each partner's compensation, including how profits and losses will be divided.
The responsibilities of each partner, including their specific functions, day-to-day duties and management rights, if this is clear in advance.
Procedures to follow in the event of the death or disability of one partner. Most partners invest in "key person" life insurance so that in the event their partner dies, they have the finances to buy out his share of the business from his estate.
Procedures to follow if one partner wants to withdraw from the partnership, including how assets will be liquidated and distributed. "You never know down the line what might change in someone's life that necessitates having to get out of the partnership. It's a lot easier to figure it out in advance and avoid problems down the line," says Jim Zumini, co-owner of Creation Dental Arts, University Place, Washington.
Transfer of ownership. You might want to prohibit each partner from selling his portion of the business without the consent of the other partner; otherwise, you may end up in business with someone with whom you'd prefer not to be. This clause is sometimes used in case one of the partners gets divorced and his interest in the business becomes part of the settlement.
An arbitration policy for handling disputes.
Retirement plans for both partners.
Provisions to amend the partnership agreement if necessary.
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