Business Partnerships

Mistakes When Forming a Partnership

A partnership can solve a lot of problems for a business owner -- but it can also create new ones. Here are the common mistakes to avoid when you form your business partnership.

A partnership can be as simple or as complex as the partners want it to be.

Mistakes When Forming a Partnership

As the complexity of the partnership increases, so do the number of things that can go haywire. But don't let the simplicity of a basic partnership lull you into a false sense of security. Any partnership can go bad if it lacks the infrastructure to adequately deal with the demands of today's business environment.

Most partnership problems can be traced back to a handful of common mistakes that were never addressed or resolved during the formation stage.

  • No written agreement. Partnership agreements are designed to address the problems and concerns that can arise during the normal course of business. When there is no written partnership agreement, chaos will eventually break out and the continued viability of the partnership will be in jeopardy. Discuss your concerns with your partner and have a written agreement drawn up by an attorney at the outset of the partnership.
  • Wrong partner. Generally speaking, close friends and family members don't automatically make great business partners. When you consider potential partners, you're looking for someone who shares your business philosophy and your goals for the business. But you are also looking for someone who has something to bring to the table. If a prospective partner doesn't add anything to the mix, he's probably not the right choice.
  • No exit strategy. The future looks sunny and bright when you form a partnership. The problem is that it won't stay that way. Eventually one of the partners will want to leave the business to retire or pursue other opportunities. Or in a worst-case scenario, the partnership will implode and the partners will scramble for the exits. What happens then? If you've had the foresight to include an exit plan in the partnership agreement, a partner's exit will be no big deal. If not, get ready to lawyer up.
  • Wrong assumptions. Partnerships aren't for everyone. Over the years, more than a few small business owners have entered into a partnership based on wrong assumptions and regretted it later. Avoid getting caught up in the emotion of the moment. If you aren't completely sure that a partnership is right for you, keep exploring your options.

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