One of the biggest mistakes made by new business owners is jumping into partnerships with others too quickly.
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The excitement of the deal and the activity that exists as part of the initial groundswell can often result in conversations that have all parties giddy with the potential of making money and doing business long term together. Unfortunately, this rarely results in what the initial vision was.
You see, many businesses fail…an overwhelming majority of new businesses never make it past year 3 and one of the reasons why is because of failed partnerships. Sure, the conversations were exciting in the beginning and everyone was in agreement, but when the real world aspects of sales, marketing, customer service, billing, etc. get in the way, these partnerships don't always last. The fact is, there are alternatives that can still make doing business together viable, but don't tie down either party to long term partnership arrangements. The goal is profitability AND flexibility…enter PROFIT SHARING AGREEMENTS.
A profit sharing agreement is simple. Basically, a business owner will give a share of the businesses profits to someone else based on how much money is generated by this person's activities. Oftentimes, these activities are marketing based in nature or could also be related to introducing the business to a large existing network a person has access to. Both of these attributes (marketing savvy, a large network of people) are the exact reasons that someone wants to partner with someone else. They see these attributes as a surefire path to their success, but, problems result when other factors are not taken into consideration such as personality conflicts, long term business decisions, etc.
Rather than rushing into a partnership arrangement, it is often best to look at defining a profit sharing arrangement that can benefit both parties but doesn't force the business owner to give up equity, nor force the other person into specific business duties outside of the realm of productivity. These arrangements can name specific duties, specific productivity benchmarks, or even be based on a specific length of time. Once that time has passed, the agreement becomes null and void unless it is proactively extended. These types of arrangements allow for maximum flexibility with minimum commitment. If the agreement is productive for both parties, neither would have a reason to end it. If it is not, neither party is tied down for too long. If the business relationship is incredibly productive, an equity sharing partnership may be entered into at some point down the road, but it is not a requirement.
If you own a business, or are looking to do business with someone else who does, you might think about sitting down with you, the business owner, an accountant and a lawyer to discuss the possibilities of a profit sharing agreement versus a partnership. Doing so might save you untold levels of stress and frustration while still filling your pockets with much deserved compensation. Choosing a partnership as the first option is often NOT the best course of action.