‘Two heads are better than one’, as the old saying goes. However, in the business world, there are undoubtedly many sole traders who are doing well, and many partnerships which are doing badly. Another proverb asserts ‘Too many cooks spoil the broth’. So what are the advantages and disadvantages of having a business partner?
Evidently there is a better chance of having sufficient start-up capital to run your firm if there is more than one person involved.
A sounding board for ideas
If you are operating alone, you make all the decisions. This can be excellent in terms of having the freedom to do what you want, but of course there is also no-one to tell you if your ideas are bad. In a partnership, one partner can often draw on their market knowledge, previous experience or just plain instinct to highlight that a particular idea is unlikely to work.
Wider range of expertise
The model of many a successful small firm is one ‘get-up-and-go’ individual with an entrepreneurial flair who has identified a market they would like to get involved with; and one other individual who may be less entrepreneurial in spirit but knows the target market well. Having a business partner who really understands your market can help massively in securing investment, or in obtaining customers via their business contacts.
Alternatively, you and your partner may have different business skills, e.g. one might be good at selling and one might be skilled in performing the back office functions.
Easier to network
Building a list of contacts is very important for some businesses. If there is more than one partner, you have access to both people’s networks.
Division of labor
Unless you can afford to employ others to perform these tasks, as a senior partner you will be responsible for: financial management, marketing, recruitment, human resources matters, ensuring compliance with applicable legislation and regulations, purchasing, inventory management, logistics and more. If you have one or more partners working with you, these tasks can be divided up amongst you, perhaps in line with individuals’ business background, e.g. one of you may have experience of finance while the other has experience of marketing and strategic planning.
Having a business partner effectively doubles the firm’s manpower, which can be invaluable if you cannot afford to pay staff.
Naturally, if you take on a partner, your ability to do exactly what you want will be reduced. Key decisions will need to be taken jointly.
To some, the obvious way would be to give all the partners an equal share of the firm’s profits. However, some partners may feel that their business experience, the amount they have invested in the firm or the amount they have done to grow the firm gives them the right to a larger share. This can be a recipe for conflict.
Different work approaches
Conflict can arise if two business partners approach their work in a different way, or have different personalities. For example, if one partner has an obsession with detail and the other neglects this, or one is naturally assertive and the other is more passive, it could lead to frustrations. Having a poorly organized business partner who forgets their deadlines and appointments can be particularly difficult.
Conflict over business decisions
It can be very difficult when business partners fundamentally disagree over the direction in which the firm is heading. Even when you can eventually reach a consensus, the decision making process has been slowed.
When making key decisions, you should always try and arrive at a unanimous decision, trying hard to win over dissenting partners using reasoned arguments, backed up by evidence. But where this is impossible, it can be very difficult to know how to proceed. The ultimate step is to conclude that you cannot work with your partner any more, and then the issue arises of whether it is possible for one partner to buy out another.
Operating in the business world can be stressful, and relationships can become strained. Remember that business partners often spend a great deal of time in each other’s company. It really is important to get everything formally documented regarding matters such as who has what percentage share in the partnership, what will happen if one partner leaves, etc. You may think that the people you are going into partnership with are your friends, and that gentleman’s agreements over a pint of beer will suffice. Unfortunately, friends can fall out, especially in a stressful business environment where significant sums of money could be at stake.
A salutary warning is provided by the example of the dispute between former Manchester United manager Sir Alex Ferguson and the Irish businessmen John McManus and John Magnier over the superstar racehorse Rock of Gibraltar. Sir Alex says he was informed by McManus and Magnier that he owned 50% of the horse, but later, after he had fallen out with the pair, McManus and Magnier insisted that the agreement was only for 50% of the horse’s prize money during its career. With nothing having been put in writing, Sir Alex was denied a share of the income generated once the horse had been retired to stud.
Legally, a partnership is not a company, even though you may operate in much the same way. Each partner is a principal of the business and an agent for the other partners. Each partner is jointly and severally liable for the partnership’s debts, i.e. rather than the debt being divided up between the partners, each partner is responsible for the entire debt. If your partner breaks the law, you could end up in the dock as well.
It is possible to establish a limited company as an alternative to the partnership structure. Unlike a partnership, the company is a legal entity and each individual is only liable for the company’s debts up to the amount of their individual investment. But many of the issues outlined above, such as those related to reduced authority and conflicts, are equally relevant to limited companies as they are to partnerships.
Keith Tully has worked in corporate recovery since 1992 and currently is a Partner with a leading independent UK business rescue firm www.realbusinessrescue.co.uk With 35 offices across the UK they have a wealth of knowledge and expertise to support and advise company directors who are facing financial distress.