Business Partnerships – Top 5 Mistakes Often Made and 3 Structures That Work
Over the years I have had a lot of partnerships, some have worked out extremely well building friendships and achieving success for everyone… others have ended in failure and disappointment.
Many people say they like to avoid partnerships because they are always messy! This would be much less fulfilling for me since much of the satisfaction I get from the companies we run is winning together.
It is true partnerships are often messy, but here are some of the lessons that I have learned and structures that have seemed to work for me and some of my business partnerships. Hopefully if you’re putting a partnership together or adjusting one you already have- this might help you avoid these mistakes.
Most Importantly – There is no ONE system that is best for everyone. The key is to understand the motivations of people involved and find a solution that has everyone’s incentives aligned.
I have had my share of painful discussions, but fortunately- I haven’t had any disagreements that I haven’t been able to solve with people.
In the news in just the past 2 weeks and just in Canada there have been a couple examples of partnerships going off the rails publicly impacting in some cases thousands of people!
- Roxodus Music Fest Cancelled – Life long friends no longer on speaking terms – https://barrie.ctvnews.ca/i-was-shocked-like-everyone-else-roxodus-co-creator-breaks-silence-1.4499510
- Lawsuit Between Dining Empires and Partners – https://www.cbc.ca/news/canada/british-columbia/cactus-club-earls-joey-restaurant-war-1.5210465
Here are 5 of the most common mistakes I have either made myself or seen others in the online world make…
- Mistake – Not separating capital and management. This is one I see often! Two people come together and say to each other Person 1 “I have an idea” Person 2 “I have money”… boom a business is born. Person 1 is going to run the business and person 2 is going to provide the capital they each get approximately 50% of the business. The result is if the business is successful Person 1 without a management agreement and compensation structure in place will struggle to justify why he will continue working on the business he only has a partial ownership of vs deploying his efforts and now his money into another project. The solution is the person “managing” should be compensated primarily based on results.
- Mistake – Misalignment on goals – Most commonly this shows up as a cashflow vs growth discussion. If one partner has cashflow from another venture while another is relying on that cashflow to pay the bills this can create a lot of stress. Similarly if the goals for the exit of the business are not aligned it can cause problems.
- Mistake – Simple Structure Everyone Understands – Over-relying on lawyers to layout the plan and then no-one except the lawyers fully understands is too common. Rarely does it come down to the words on the agreement as often things get sorted out from everyone’s understanding. The best way I have found is the partners layout the partnership structure (typically in a spreadsheet) and then get the lawyers to make it official.
- Mistake – Not updating the agreement as the years move on. Things change in people’s lives and there is always a need to check in on some frequency and make sure the incentives are correctly aligned.
- Mistake – Communication and Stewardship Execution Not Disciplined – This is one that is easy to slip! There needs to be a consistent execution discipline to managing partnerships involving communication and stewardship.
Below are 3 of the structures that have worked most consistently for me.
Structures That have Worked:
- Base Salary with Revenue Share & No Equity
- This one is the simplest and the one I have often started with. If there is a business idea that a manager/partner needs to run with this structure is clean. Typically a below market base salary followed by a solid % of revenue. The benefit is it is simple, has one number to focus on and the emphasis is on fast growth early on. The downside is that the long term enterprise value is not the priority due to neither profit or equity being tied into the compensation.
- Profit Share + Vesting Equity
- This has been a fit when I want incentives to be aligned with a longer (ie 5yr+) time horizon and the business is already validated. Profit sharing without any understanding on the expected profit can be tough as people may end up disappointed so this has been a better fit for either acquired businesses or growing internal ones. The benefit is this optimizes for value creation, the downside is it adds significant complexity.
- Base Salary below market to Validate Idea with Equity Attached to KPIs
- When there is no initial revenue and it will be a number of months to build the business before potential revenue shows up how do you align incentives with a partner? The solution that has seemed to work in a couple cases has been a below market salary building up a “sweat debt” to bring salary in line with market and then an equity kicker attached to KPIs that will be triggered once the business hits break even. The up side is it has incentives nicely aligned if the business hits its goals… the downsides are it is both complex and the $ risk is squarely on the capital partners shoulders. The decision to reinvest/continue etc can be a challenge.
Stewardship / Structure
No matter how good the partnership is setup there is a need for ongoing stewardship and management. The way this has worked well for me is the following…
- Weekly meeting with the manager/partner to review business KPIs
- Monthly – PnL done monthly and reviewed in detail Monthly and then discussed at the weekly
- Quarterly – review laying out the major tasks for the next 3 months
- Annual strategic review
This is a work in process and I try to follow the guidance from the book Traction.
Standardized Business Stack
Having some standardization across the different businesses when it comes to the business systems has been helpful
- Quickbooks Online
- Same bookkeeper, lawyer, accountant, bank/banker
- Google Suite (gmail, google docs etc)
- Not 100% Consistent but Software – Jira, GitHub, Trello, Slack, MailShake, Grashopper, ActiveCampaign, WordPress, ThriveThemes Suite of tools, Zaxaa or Chargify, Stripe/PayPal