Tuesday, May 7, 2013

Why You Should NEVER Have a Business Partner

Story 1

Guy I know decides he's going to buy out an old sandwich shop and run it for his retirement plan.  He has enough money, but not enough time to manage it.  He finds an old buddy from his high school days to manage the shop.  Sure enough after mortgaging his house to the tune of $300,000, he finds out his business partner is not managing the shop effectively, they're losing money, and they guy is handing out free food to friends, almost to the point of embezzlement.  He has to take out another $150,000 from his house to buy his partner out and now manage the firm on his own which he has not the time to do.

He is depressed.  He is miserable.  He has wasted the past decade of his life and with nothing to show for it.

Story 2

Another guy I know decides to start a business with a friend.  There is are barely any real start up costs, but some and since both are young, these start up costs are significant and thusly shared 50/50.  After depleting what little savings they have, one of the partners decides he wants out and demands he get his capital back.  The guy I know has to borrow money from his father to buy the guy out, and once again, now has to manage the firm (which the other guy wasn't really doing anyway).

Story 3

A good friend of mine went and worked for this older fellow who was planning on retiring and needed somebody to take over his business.  He agreed to train my friend in and invariably give him the company for all the labor and sweat equity my friend put into learning the ropes.  My friend received a minimal wage and upon taking over the company would have to pay out 33% of the profits, but be able to keep 67% of the profits for himself until the guy inevitably died.

Unfortunately, the old man had some health problems and completely cashed out his company dishonoring this agreement he and my friend had.  My friend only managed to get a minimum wage as he no longer wished to take over an insolvent company whose accounts and assets had been raided.

I could go on, but there is no limit to the number of stories where a partnership was started, one of the partners was a loser, and the whole business went down the toilet because of it.  However, it is not so much the entertainment value of such stories that is important, as much as it is the financial lesson everyone should glean from it -




going into business with a partner.

Let me explain why.

If I were to estimate the number of partnership that failed based on my experiences in banking, I would say about 80-85% of them failed.  And they




failed because ONE partner was a loser and didn't carry his weight.

The reason such a high percentage of partnerships have this "loser partner" is because of the binary nature of partnerships.  Losers, by definition, cannot support themselves financially and are always on the cusp of insolvency.  Because of this they are constantly coming up with scams.  It is important to note the difference between a "scam" and a legitimate business idea as one could claim any loser like myself who can't hold down permanent slavery employment would be a scammer.  However, business ideas MAKE MONEY, the purpose or aim of the scammer/loser partner is to merely access somebody else's capital so they can live another year or two without having to work.  i.e.-they have no INTENTION of making money, they merely (like Solyndra) need somebody else's capital to finance their "business idea."

This brings in the nature of the second partner - the capital provider.

With the smooth-talking sales guy, looking for a sucker to finance his "idea" they naturally seek out friends, even old long lost acquaintances to finance their scam.  These capital providers usually are normal, hard working people who have saved up their pennies and dimes and are looking for a better rate of return than what they're getting on their savings account or 401k.  Sure enough they are sold on the idea, cash in their retirement account or the equity in their home and are now financing a sports bar with the "idea guy" running it into the ground and drinking the inventory on the side.

Again, 80-85% of the partnerships I saw had this binary relationship.

The irony, of course, is that this means the majority of partnerships should never have been partnerships in the first place.  They should have been sole-proprietors.  Not just because you would be jettisoning the loser partner, but out of all the partnerships I've seen 100% of them were not big enough to warrant two people to start them, either for capital or labor.  The other person was just completely unnecessary and was extra baggage, if not a risk.  Additionally, there is ALWAYS a leadership battle when the ownership of the company is 50/50.  It is the WORST of all situations in that the largest single advantage a small company has is that decisions can be made QUICKLY and thus outmaneuver their competitors.  I've seen more energy spent bickering over business decisions between two equal shareholders than energy put into managing the business.

The REAL reason people go into partnerships is psychological.  Namely they're scared and daunted by the task of embarking on a business venture and thus the perceived risk-sharing seems appetizing.  Also, a lot of people are bored and would like somebody to manage the company with.  Many friends have become enemies because while they made great friends, they made horrible business partners.  The larger point though is that starting a business is not a "fun" thing to do and your psychology should play no role in a financial decision.  Additionally, if you do have a genuine business idea, then the last thing you would want to do is SPLIT THE PROFITS WITH OTHER SHAREHOLDERS.  Again, it is a FINANCIAL decision.

Now, the reason I bring all of this up is because I know my readership.  I know my lieutenants, economists and Cappy Cappites and I know many of you are of the pro-capitalist, unemployable, self-employment types. And because of this you will likely be offered the opportunity to engage in or start a business with another person. 


Unless the company REALLY needs two people's labor or two people's capital, it's best that it is started, managed and owned by ONE person, be it you or the other guy.  The risks of having your savings plundered by some scam artist, not to mention your profits halved should the business prove successful, is just not worth it.

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