Avoiding Partnership Problems

Column by Steve Strauss

Growing up, I watched my father and his partner grow their small, single carpet store to a chain of 13 stores. My dad's partner also happened to be his best friend and they had a lot of fun in that business. Yet, it all ended fairly badly. After 17 years, my father's partner bought out my dad and they dissolved the partnership. The two never spoke again.

A business partnership is a lot like a marriage. You need to pick a good partner because you will be spending a lot of time together and trusting each other. Legally speaking, this is where a partnership differs the most from a sole proprietorship. Each partner has the legal right to make decisions and enter into contracts on behalf of the whole partnership. The danger is that your partner can make some dumb decisions, get the partnership into debt, and you will be personally responsible for that debt. On the other hand, although partnerships are more complicated, they have the added bonus of giving you someone to bounce ideas off of and another pair of hands to get the job done.

Picking a good partner

Since a partnership chain is no stronger than its weakest link, you need to pick smartly when picking a partner. Some questions to ponder when choosing a partner are as follows:

• What are the financial resources of your prospective partners? Are you contributing equally to the formation of the business?
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• Does your potential partner have the financial ability to withstand possible financial reverses?
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• What is your age and what are the ages of the other partners? (Note that death dissolves a partnership.)
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• Are your partners trustworthy? Do you trust them to handle large amounts of capital, including your own? Do you feel comfortable allowing them to borrow funds for which you may be held solely accountable?
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• What is their business acumen and skill? Do not confuse business smarts with enthusiasm, which though commendable, is not a satisfactory substitute for competence.
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• Do you believe that you and your partners have the personalities required to get along? Can you tolerate dissent? Many partnerships are formed with the best intentions only to dissolve when dissent is viewed as disloyalty to the financial goals of the partnership.

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