Tweet

The Risk Factor In Small Business Partnerships

Guest post by: Susan Regier

Article Overview: In my small business workshop, I always advise people not to enter a business partnership, but to establish a company structure if they want to go into business with anyone else.

The Risk Factor In Small Business Partnerships

In my small business workshop, I always advise people not to enter a business partnership, but to establish a company structure if they want to go into business with anyone else.

The frequent expressions of surprise this advice generates has led me to put the reasons here for all to see.

Noted financial advisor Noel Whittaker writes: “Partnerships sound like fun. You and a friend go into business, make heaps of money and then both live happily ever after. Unfortunately the reality is usually the opposite and you end up deep in debt and on bad terms with each other.”

He gives an example of two women who decided to go into a dress shop partnership. Kay knew fashion but had no money; Margaret had money but no great fashion knowledge. They signed a 5 year lease and bought stock using the second woman’s credit rating. He writes:

"The shop never became profitable and the losses grew. The raised only [part of the money needed] at the closing down sale so all the creditors looked to Margaret to make good the shortfall. After all why chase Kay – she had no money.”

The fact is that each business partner can be held solely liable for debts incurred by the partnership.

And this liability applies even if you are taken for a ride on purpose.

Cairns business consultant Andrew Griffiths tells how he was once burned by a partnership that went wrong due to unknowingly partnering with a con artist:

“We owned a busy retail shop on a major highway [which] was starting to come good. It was my turn for a holiday so I … headed to sea for a couple of weeks. Feeling refreshed and relaxed I arrived back on dry land and rang my partner to see how business was.

“To my surprise the phone was disconnected… The day after I left my partner had a huge clearance sale and sold everything – shop fittings, the lot. He had ordered a pile of stock the day after I left so he had plenty to sell and he walked away with a couple of hundred thousand dollars. I was left with the bills.”

OK, you say, he was conned by a crook – it couldn’t happen to me…

So let me give you a third and final story that happened to someone I know personally.

A hairdresser and a beautician started a hair and beauty parlour partnership, which became a thriving small business. The beautician’s husband, with her knowledge, borrowed a large sum from the joint business bank account, which they forgot to tell the hairdresser about.

When the books were discovered to be well out, the beautician accused the hairdresser’s father (who did the books and had largely funded the shop’s establishment) of stealing from the account. End of friendship … and end of shop.

There are many stories like these. My advice is not to sign into a business partnership unless you happen to be already married to or legally defacto with your proposed business partner.

Sure, things go wrong with personal relationships too. But your business activity is then based on the foundation of a committed relationship in which both have an equal stake

Related Articles
  Zero Down Partnerships an Entrepreneurs Key to Starting a Business
  A Coffee Franchise by the Numbers
  Power of Partnerships
  The Partnership Model for Growth and Profit
  Fusion Marketing: Two Businesses Are Better Than One

Article Tags:



Related Forum Posts
My entry - 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read - this is a fascinating book about the history of Business theory, and I'd recommend it to anybody. 2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto. 3. PADI: The Business of Diving Book Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.
These maybe the coldest franchises out there: - Here are the worst 15 performing franchises in regards to having the highest Small Business Administration (SBA) loan failure rates. The list is dotted with sub sandwich shops, fitness centers and car shops. WORST FRANCHISE LOAN FAILURES Failure % 1 OBEE'S SOUP SALAD SUBS 55.56% 2 LADY OF AMERICA 41.94% 3 COUNTRY CLUTTER (BED & BREAKFAST) 41.18% 4 COPY CLUB 36.36% 5 ALL TUNE AND LUBE 35.71% 6 PICKERMAN'S 35.71% 7 PHILLY CONNECTION 35.59% 8 ROLY POLY ROLLED SANDWICHES 34.78% 9 COTTMAN TRANSMISSION 34.48% 10 HAIR COLOR EXPRESS 33.33% 11 LEE MYLES AUTOMOTIVE TRANSMISSIONS 33.33% 12 GODFATHER'S PIZZA 33.33% 13 SMOOTHIE FACTORY 33.33% 14 BLIMPIE 31.39% 15 GOLF U.S.A. (RETAIL GOLF EQUIP.) 30.77% Source: Small Business Administration, SBA Loan Performance Within Franchise Code for the Period of FY 2001 - 2005
Exclusive: Interview with Results - Hi Forum Members, I'm helping start up a Business Coaching and Consulting company here in Toronto, Ontario, Canada (a Subsidiary of RSC Business in Los Angeles). As a Research and Development Intern I am required to practice my listening and interview skills by surveying Small and Medium Businesses on thier Business. This Survey is designed by RSC Business to also assist the Business being interviewed more insight into their own business. I am looking to interview about 30 businesses across North America over the span of 3 months. At the end of these interviews I will be publishing a report of the results and they will be made available for free to the Interviewees. The Report data will include responses from a minimum of 100 interviews. I would like to extend this opportunity to members of the Forum. If you would like to have this short 20-30 minute interview conducted on your Business and you reside in North America please send me an email or PM. Please contact me at andy[at]jvprosperity[dot]com to arrange our interview and to get free access to the results when they are published.
Re: Biz Plan Competition - i just wanted to say that posting Small Business Events on CanadaOne is a great resource. Thanks Julie!
How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Ten Steps to Go from Idea to E-book for Sale

10 Steps to Excelling at Franchise Sales

An Intelligent Contact Sheet

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.