PARTNER UP? PART I OF MISTAKES I’VE MADE IN BUSINESS
WRITTEN BY SHERRY DEUTSCHMANN
This is Part 1 of a series about the biggest mistakes I’ve made in business—and what you can learn from them.
OK, HERE’S THE SHORT VERSION OF MY STORY
I started a company in my basement – funded by a week-long yard sale and cashing in my 401K. Grew it to $40M…and sold it. Sounds so simple and easy. But it wasn’t. It was often messy. I made a ton of mistakes! Especially since I had only a high school education and no formal business training. But here’s the thing: I only regret a few of those mistakes because I learned from them and that made me a better leader. And, it made the experiences I can share with you very valuable. So, I started this series of blogs to highlight some of the worst mistakes I made in hopes my stories will keep you from screwing up too!
I’m writing this blog just as the world is slowly beginning to open back up post-COVID-19. In fact, most retail businesses mandate face masks and are limiting the number of customers allowed to be in their space. I was so excited to see that one of my favorite spots, a consignment store, was open for business! I pulled on my face mask and did a quick turn through the store – looking for that one-of-a-kind “must have.”
I rounded a corner and there ahead of me, just 10-12 feet away, was a woman also shrouded in a mask. But I instantly recognized her…first with excitement…and then, head down, hurriedly moved in the opposite direction. I was flooded with emotion and random thoughts: “OMG – She never ages!” “So happy to see that she is healthy and happy.” And: “Yikes, does she recognize me too?” “I guess I should move on so she can look around and enjoy her day without me ruining it for her.”
SO, ARE YOU WONDERING ABOUT THE BACKSTORY?
Why am I avoiding someone I obviously care about? Well, she used to be my best friend…and my business partner! Let me explain how we got to a place where we don’t even speak to one another.
Most people don’t know that my first company, LetterLogic, was actually begun as a partnership, a company I started with my best friend. In fact, if it weren’t for her, I probably wouldn’t have started the company. She is the one who pushed me and gave me the confidence to quit my job and move on to becoming an entrepreneur myself. We were both single, middle-aged women with kids and grandkids and we helped each other with everything. We were inseparable. Well, until we went into business together.
WE STARTED OUT AS 50/50 BUSINESS PARTNERS
Starting out as 50/50 partners, foolishly, with both of us being generous, trusting people, we didn’t stop to talk about the fact that I was the only one contributing start-up capital; that the business was funded by my cashed-in 401K; that she’d be getting a small salary but I would be paid nothing for a while; that she’d be working from the makeshift office in my basement, “dialing for dollars” we called it, while I’d be the road warrior, driving from city to city, staying in cheap hotels and living on fast food – trying to convince hospitals to move their business to us. In retrospect, we weren’t avoiding a tough conversation…we just didn’t know what we didn’t know, and it never occurred to us to do things differently.
The frustration on my end came to a boil one afternoon when I determined, without objective evidence, that I was working harder than she was. I lashed out at her verbally and she walked out, hurt and angry.
THAT WAS THE LAST TIME WE TALKED.
A few days later, I received a letter from her attorney, ending the relationship and demanding that I buy her out. That was hard to swallow because, in MY mind, I’d given that 50% to her and now I was having to buy it back? Ugh! Obviously, things were different from her vantage point.
With no fanfare, with just a few letters between our attorneys, our partnership was dissolved. As was our friendship.
IF I HAD TO DO THINGS OVER AGAIN, WHAT CHOICES WOULD I HAVE MADE?
What did I learn that can help you? The best way to sum it up comes from one sentence from Dave Ramsey of Financial Peace fame: “The only ship that doesn’t sail is a partnership.” The statistics say that he is right on that: at least 80% of the time, partnerships fail. But the other 20%? Why do those work? Because they did these things:
- Determined percentage ownership based on total investment divided by individual contribution. In our case, given the fact that I provided 100% of the startup capital and would also work full time on building the business without taking a salary, it was crazy that we’d started out as 50/50 partners. There are several ways we could have worked it instead so that she could earn some ownership over time, but we didn’t know any better.
- Have an operating agreement. This is a contract between the partners that details the roles and responsibilities of the individuals in the partnership. It lays out the “rules” of the company, stuff like who is responsible for what outcome, how profits will be distributed, who has what voting power, etc., so that any disagreements are more easily settled. If we’d had such an agreement up front, it would have been clear that the lion’s share of responsibility was on one person (moi). And that’s OK – I’m a workaholic, but we’d each have a clear understanding of who was going to do what, and I would not have been increasingly resentful when she was happily packing up to go home each day at 5:01 PM. (But if I’d done what I’m advising here in bullet point #1, she’d have been an employee, not a partner, and there would have been no resentment!).
- Have a buy-sell agreement. This is kind of like a prenup – where the business determines up front who gets what in the event of a breakup or a death. Can one buy out the others? At what price – or by what method of valuation. (Well, back to #1 – if we’d done it the right way from the beginning, there’d be no need for a buy-sell because I would have owned 100%).
- Clear understanding and open communication. What is the goal of each person? What are they trying to achieve? An honest discussion of both these questions would have been game-changing for my partner and me. How so? Only after we were several months in did I realize she was looking for a particular lifestyle – something that would enable her to work 9-5, 5 days a week, and make enough money to pay her bills and set a little aside. She was a great salesperson and would have been a tremendous asset to the company AND could have made a lot of money, but even though we were great friends…we never had those talks. Why? Because our friendship got in the way…and now, with hindsight being 20/20, I’d advise to never go into business with a friend. You may BECOME friends with your business partners after the trust and respect are nurtured, but it’s unlikely to happen the other way around.
Now, several years after I grew the business to $40 Million and sold it, it is crystal clear to me that if we’d done ONE thing to begin with, we’d likely have all those other things taken care of. What’s that one thing? HIRE A LAWYER.
If we’d consulted an attorney with experience in setting up partnerships, they’d have challenged us to spend more time thinking and talking and negotiating and then they’d have urged us to have a different equity structure, to have a buy-sell, to have an operating agreement…and all that talk about those foundational things would have made it necessary for us to get used to open communication.
A good lawyer would have saved us a lot of heartache and would have negated the need for the lawyer who negotiated the settlement that ended our partnership. So, my final advice on this is:
5. IF YOU ARE THINKING ABOUT ENTERING INTO A PARTNERSHIP AGREEMENT, LAWYER UP!
Listen, if everything in life went exactly as planned and we were all filled with grace and kindness and abundant understanding all of the time, we might not need lawyers as much. But that dream world doesn’t exist. The reality is this: Life is messy, and partnerships bring additional layers of potential messiness.
If you are in the process of establishing a partnership, make sure you set it up for success by reading everything you can about the potential pitfalls and how to avoid those. I highly recommend the book Marriage Without the Sex – An Unconventional Approach to Business Relationships by Rachel Schaffer Lawson. Rachel is a business attorney who has been involved in several couplings and uncouplings of partnerships. I also recommend these articles, from Entrepreneur Magazine: “Why Business Partnerships Are the Kiss of Death,” and from Forbes: “Why Partnership is Harder than Marriage.”