Partnerships don't work, or do they?

So many times I've heard that the saying that partnerships don't work. And judging by the list all businesses that we have acted for over the years where there are former partners name is still shown in the business title, perhaps it's true.

But most partnerships fail because the partners entering into those partnerships have different expectations of how the business will operate and walks each person's responsibility will be. When businesses begin the partners concerned often view having a partner as being safety in numbers. Starting a business is scary enough as it is without having to do it all on your own. Finding someone who shares a common vision of where the business could be in the future is often the reason for beginning.

But the problem is that the next step is then to get up and running whereas perhaps the next step should be to sit down and agree a five-year strategic plan for the business and set out the terms of the partnership in a partnership agreement.

Unfortunately, this is rarely done. Most people have so many things that they need to get started on that day rarely have time to undertake this exercise. And that's where it all goes wrong. Because often in many partnerships there is one partner who undertakes all the responsibility, who worries about the things that the business needs in order to survive and who takes it upon themselves to make sure that all those things happen. This is a concept that is explored in more detail in that well-known business book “the one minute manager meets the monkey”. In that book the one minute manager is trying to advise somebody who makes other people dependent upon them. And this is sometimes what happens in a partnership where one partner takes responsibility and the other partner becomes dependent upon them. The one who takes the responsibility then starts to feel resentful that they are doing more of the work.

This resentment can then manifest itself in a lower performance of the business or eventually result in a breaking down of the relationship between the two partners. And that's when the lack of the partnership agreement becomes a real problem. Because nobody considered what would happen if the partnership ended. When it began, the only thing that was considered was how the profits would be apportioned.

Partnerships take many forms. A true partnership in the legal sense is where two or more individuals join together to operate a business. But of course a limited company with two shareholders is effectively a partnership as well. And thrown into the mix are limited liability partnerships which are similar to an old-fashioned partnership but have the legal protection offered by a limited company. Whether the partnership is limited or not, its operation is governed by the partnership agreement sometimes known as the partnership deed. And when one doesn't exist reference is made in law to the partnership act which was written in 1895!

For a limited company the rules are set out in the memorandum and articles of association but these are normally standard documents prepared by whoever forms the company and it is very rare that shareholders have any idea what is in such a document. Besides, it will probably only include standard items. Best practice is for shareholders to produce a shareholders agreement which sets out what would happen in different circumstances.

Partnerships can be incredibly flexible and if agreement is reached at the outset can achieve everything that each partner wants. A4G have a 17 page partnership questionnaire that is given to clients free in order to allow them to consider be issues that should be addressed in any partnership. If you're a client with A4G and you would like to receive this questionnaire please e-mail nigel@a4gsolutions.co.uk