Millions of people co-own privately held companies, family businesses, and business partnerships, but establishing them—and keeping them together—is never easy. You might want to read this before you say “I do” to your next partner

The rewards and risks of forming a partnership: millions of people co-own privately held companies, family businesses, and business partnerships, but establishing them—and keeping them together—is never easy. You might want to read this before you say “I do” to your next partner

David Gage

“PARTNERSHIP” IS A SEDUCTIVE BUZZword in the business world today. My phone company wants to be my “partner in communication,” and my doctor at Kaiser Permanente wants to be my “partner in health,” Company owners heat constantly about the virtues of becoming partners with their” customers, their employees, their vendor’s and even their competitors The overuse of the term partner has stripped it of traditional meaning, which in business has been two or more people joining together, pooling their money and talents, and taking a risk. Partners are people out to create or build something–together. They are putting something at risk in the hopes of creating a sustainable venture.

This book [excerpt] is about business partners, for the most part without regard to their legal status as partners. They may be in a partnership or a corporation. They may own property together or be co-producers of a Broadway musical. What matters is that they have a duty to one another, and the actions of one partner affect the others. In this sense, partnership is a state of mind. Partners sink or swim–together.

The enthusiasm for partnering is rooted in a down-to-earth fact: You’re much more likely to succeed in a business with a partner than without one. Entrepreneurs who have succeeded by pooling their strengths far outnumber those romantic figures, the lone entrepreneurs who have triumphed over all odds.

Academic studies confirm the importance of partnering. Researchers from the Center for the Study of Entrepreneurship at Marquette University investigated a sample of nearly 2.000 companies and categorized the top performers as hypergrowth companies and those at the bottom as low-growth companies. Solo entrepreneurs founded only 6% of the hypergrowth companies. Partners founded a whopping 94%, and many of those companies had three or more founders. In stark contrast, solo entrepreneurs founded nearly half of the low-growth companies.

Founding partners are memorialized in the names of some of the world’s most successful and visible businesses: William Hewlett and David Packard, for instance, or Charles Dow and Edward Jones (who actually had a third partner, Charles Bergstresser). Sometimes partnership origins are less obvious. EMC, the world’s largest data storage manufacturer, was founded in 1979 by Richard Egan, the “E,” and Roger Marino, the “M.” (“C” was a third person who did not make it to the actual founding.) The company that employs more people than any other on the planet, Manpower Inc., was founded by Elmer Winter and Aaron Scheinfield. Compaq Computer Corp. was the brainchild of three Texas Instruments engineers. Intel was co-founded by Gordon Moore and Robert Noyce. Home Depot was started by Bernie Marcus and Arthur Blank. Even Microsoft, which for years many people thought was founded only by Bill Gates, was co-founded by Paul Allen. The list goes on and on.

THE ATTRACTION OF OWNERSHIP

People usually form partnerships because they want to own a business. In a partnership, you don’t own 100% of course, but for most partners, owning part of a business is much better than owning none at all.

Having partners is often what makes ownership possible. Partners provide the missing link–the money, expertise, ideas, skills, connections, facilities, patents, whatever it happens to be–that an entrepreneur needs to make a go of a business.

What is it about owning a business that is so appealing? One answer is freedom. People are not flee when they work for someone else. Freedom may be limited in a partnership (partners are accountable to one another), but there’s a world of difference between being an employee and being a co-owner when it comes to freedom.

For many people, too, the desire to own a business stems from a creative impulse. Ownership is a way for some to build something of their own. Others see ownership primarily as the path to a less-elevated goal: wealth. Wealth as a goal is potentially troublesome in a partnership. Partners who define their goals in terms of personal financial enrichment have a special obligation to be explicit about their motives, because focusing on one’s own financial gain won’t necessarily lead to decisions that benefit the business or one’s partners.

ADVANTAGES OF PARTNERS

Being a partner gives people more than ownership. Many people prefer to share the responsibility for the business. Some businesses by their nature require that more than one person be available and accountable. For example, doctors band together for the practical purpose of sharing on-call duties. In addition, being able to divide tasks along lines of interest or ability can make an enterprise not only more successful but also more enjoyable.

Partnerships offer people a chance to do things that they would not be able to do on their own, or to do them more successfully. Opportunities open up when people combine forces…. If you pit three co-owners against a solo entrepreneur, the three co-owners are going to out-think and out-strategize the single owner in most cases, as long as they don’t devolve into interpersonal conflict, or what some researchers call “affective conflict.” Partnerships also allow people to exploit opportunities more quickly, and in business today, speed frequently means the difference between success and failure.

From a psychological perspective, having a partner means having someone to share the emotional burdens of ownership. A partner can provide feelings of safety and reduced risk, a sense that “we’re in this together.” One of the biggest complaints of solo entrepreneurs is that no one understands the tremendous demands made upon them. Even spouses who try to be as empathetic as possible cannot truly understand all the complexities of starting and running a business if they’re not part of it. For some people, the fears that have kept them from starting a business become manageable with a partner.

For other people, having partners is simply more fun than owning alone. If the only option were solo ownership, they wouldn’t do it; the cost, in stress and worry, wouldn’t be worth it. Being on equal footing with someone else in the business, someone you can’t dominate and who can’t dominate you, makes for a more stimulating relationship than yon can have with any employee.

THE PERILS OF PARTNERSHIPS

With so much riding on the success of a partnership–the partners’ day-to-day happiness, security (often their mortgages), reputations, comfort in retirement, not to mention peace of mind–it’s easy to see why partnerships are considered perilous. In a poll taken a few years ago, [entrepreneurs were asked] if they thought partnerships were a bad idea. Two-thirds of the respondents said they were. When asked why, the majority said they disliked co-ownership because of the partners’ “inevitable conflicts” and “unmet expectations.” A poll by researchers at the University of Minnesota uncovered similar misgivings inside family businesses. About half of the second-generation family members working at such companies had doubts about being there. The main source of their unease was, again, interpersonal conflicts. Failed business partnerships–and their attendant broken promises, financial ruin, and litigation nightmares–litter the business world and leave a deep impression.

Countless conversations with professional business advisers have convinced me that most of them are similarly against the idea of having partners. The reasons they offer are always the same: It’s too difficult for partners to get along, partnerships are too hard to get out of, and when a partnership fails, the cost is enormous. (In private, some advisers jokingly admit that their own unhappy partner experiences have something to do with their skepticism.)

Of course, no one ever enters a partnership expecting serious conflicts. Advisers rightly point out that even when the probability of conflict is low, the risk may still be unacceptable if … the cost of a failed partnership will be high.

THE COSTS OF FAILURE

People often jump blithely into partnerships because they are unaware of the costs of failure–and no wonder, since nobody contemplates failure when starting up. It may be difficult to assign hard numbers to these costs. Still, they can be enormous, and prospective partners should look at them carefully.

Every conflict among partners exacts an emotional toll. These conflicts can destroy lifelong relationships. They can consume partners’ every working moment, and sometimes every waking moment, for extended periods of time. They exact a toll not just on the partners themselves. I’ve heard partners refer to the stress on their spouses as “collateral damage”; some say it was that kind of strain that forced them out of their partnership.

Conflicts need not be profound or dramatic. Low-intensity wars can be costly, too, because they often make partners under-perform. Nagging dissatisfaction, perhaps a feeling that the partnership’s terms are not fair, can result in a partner’s dragging his or her feet. Underperforming can become chronic, so that for months or years the partners achieve less than they would have on their own. Not only is synergy absent, sometimes there isn’t even basic cooperation.

SOMETHING TO THINK ABOUT

Considering the many advantages a successful partnership bestows and the horrendous costs a failed partnership can exact, you might assume there is a large body of research on what makes partners tick and what makes them stumble. Surprisingly, there isn’t much written on the subject, even though business partners’ success is tremendously important, not just to the individuals and companies involved but to the whole economy.

Advantages of having Partners

* Your partner shares the burdens and responsibilities

* Someone else can do jobs that don’t play to your strengths or interests

* Partnership opens up opportunities that otherwise could be beyond your grasp, including greater success

* You can move faster to take advantage of opportunities

* You can enjoy camaraderie with an equal instead of feeling alone at the top

* There’s the potential for synergy and better decision making at the very top of the company

The Cost of Conflict Among Partners

* It can take an emotional toll on the partners, their spouses, and others close to them

* Partnerships can strain a healthy relationship

* There’s a risk of having a partner underperform, sometimes for extended periods of time

* Buying out a partner’s interest can be costly

* Losing a partner can mean a loss in revenue

* Litigation after a breakup between partners can be costly

From The Partnership Charter by David Gage (Basic Books). Copyright 2004 by David Gage. Reprinted with permission from the publisher.

COPYRIGHT 2005 Earl G. Graves Publishing Co., Inc.

COPYRIGHT 2005 Gale Group