November 11, 2018

Professional Business Partnerships: Are Your Partners Just There For The Ride?

Partnerships are one of the oldest business models in existence. Over the centuries, it has proven to be an effective business model, particularly for the members of professionals, lawyers and accountants.

Partnerships are a good capital raising method. By providing an exit strategy for retiring partners and a buy-in mechanism for new partners, the partnership structure encourages continuity and clarity of purpose.

Partnership Growth Model

While partnerships can be both highly rewarding professionally as well as being quite profitable, as partner turnover increases over time, the firm’s founder’s entrepreneurial spark can be replaced by a focus on narrow technical skills.

The early years of any firm acquiring new clients is often a challenge as the partnership builds its reputation. To survive, those founding partners either possess innate sales skills or develop into potent presenters and salespeople.

As a partnership enters a growth phase, the founding partners often recruit technical specialists to round out their pool of talent. This allows the founding partners to leverage their time, whilst reducing the partnership’s reliance on themselves.

As professional employees demonstrate their value to the firm over several years, they are frequently rewarded for their performance by achieving partner status.

Trouble Brewing

As the partnership grows, there is often a mismatch between the growth in the number of new clients and the growth in employees and new partners. Naturally, profitability per partner often declines, as it is spread across a larger headcount.

This is where partnerships can encounter turbulence. While the technical skill base of many partnerships increases over time, that often comes at the expense of entrepreneurial vision and selling skills.

While the staff and newly minted partners may be working hard, they are often surfing the bow wave of the partnerships track record. Most new partners join the firm as employees with solid technical skills. They may lack the entrepreneurial instinct of the founding partners.

Where too many partners are relying on others to land new clients, the firm is in for turbulent times. All partnerships need rainmakers amongst its owners. That hard-to-find ability to generate new business is a key difference maker to a partnership’s long-term survival prospects.

Shared Vision And Purpose

A warning sign for many partnerships is where new partners don’t understand or appreciate the founding partner’s vision for the partnership. While complementary skills sets and personal styles make for a more resilient partnership, far too many partners fail to do their diligence before taking on new partners.

This is particularly so when investors are brought on as active partners in the business. Many partners fail to conduct effective due diligence on their new partner’s background or their business philosophy.

Instead, they rush into the relationship only to discover their new partner doesn’t share their passion for business development. Here are some fundamental issues to reflect on before you bring on a new partner:

Rule number one, only go into business with people you know well and trust. Conduct robust due diligence and vet prospective partners thoroughly. Vetting is the most effective means to protect yourself and your business before entering into a partnership.

Always discuss worst-case scenarios and exit strategies before you sign any partner agreements. If your prospective partner is unwilling to engage on these topics you have the wrong partner.

Read and ensure you understand your partnership documents prior to signing. Ultimately you and your business partner or partners need to take ownership of your agreement and share a deep understanding of how it governs both your business and your professional relationship.

Establishing Your Partnership

Drafting your partnership agreement and establishing an entity for the partnership are the two critical stages on the path to partnership. Understanding the day-to-day mechanisms of how your business will be managed is fundamental to creating a dynamic and successful partnership.

Here are ten issues to address to ensure your partner isn’t just there for the ride:

  1. Partner signing and authorisations: Clarify what the officers of the business are authorised to do on behalf of the partnership.
  2. Partner duties and responsibilities: Clearly describe each partner’s responsibilities and contributions together with the consequences for any failure to execute those duties so expectations are clear.
  3. Capital contributions: Outline each partner’s initial contribution to the partnership, be it time, money, or assets.
  4. Distribution of profits, compensation and losses: Clarify rights attached to discretionary or mandatory distributions, including a return of contributions.
  5. Dissolution or exit strategy: Indicate the events triggering the dissolution of the partnership.
  6. Execute a buy-sell provision or agreement: map out the processes to handle major changes to the partnership arrangement.

If you want your prospective partner to actively contribute to your businesses’ growth rather than just coming along for the ride, discuss the best and worst-case scenarios and address these often complex and confronting issues.

Final Observation

Don’t ever enter into a partnership without conducting your due diligence on your new partner and never take your partnership for granted. Get clarity around each partner’s duties and responsibilities, ensure you are fulfilling your partner’s expectations and check regularly on each partner’s perspective through open and continuous communications. These simple processes are the key to maintaining a healthy professional relationship and avoiding disputes, whilst ensuring all partners are contributing to the firm’s success.

Filed Under: Structure

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