Small Business

Contemplating a Business Partnership?


The initial inspiration is the fun part. Next comes an honest discussion of expectations, roles, and other details of a good pairing

A business partnership (BusinessWeek SmallBiz, June/July, 2007) is usually hatched in a state of inspired optimism when two or more seemingly like-minded individuals come together with an idea to create a product or service and develop it into a business. But perhaps not surprisingly, for every partnership agreed upon formally or informally, there are a number of questions about the best way to keep it going forward. How should the contributions of each party be tallied? How does that play into the continued growth and stake of each person involved? Is the idea man worth as much as the guy who brings the money?

In their book Beer School, Steve Hindy and Tom Potter, who founded Brooklyn Brewery in 1987, described the importance of defining a partnership from the outset and formalizing it on paper with a set of parameters that could be referred to when questions or troubles arise. To underscore their point, the pair wrote: "Even a dog can shake hands."

"One important thing that we did at the beginning," Hindy explained to BusinessWeek in a 2005 interview (BusinessWeek.com, 11/18/05), "was to draw up a partnership agreement that defined it financially and also defined a buy-sell agreement, in case one of us wanted out or in case of disputes. Over the years, I saw many partnerships dissolve into chaos. They had shaken hands at the beginning, but there was nothing on paper to define what that meant." The two parted ways amicably when Potter retired in 2004.

"The Rules of the Game"

Karen Harned, executive director of the small business legal center at Washington-based trade group National Federation of Independent Business, also believes that coming to an agreement in the beginning can usually keep partners out of court later. "The advantage of having a partnership is that it is easy to establish," she says, adding, "I think what happens often is that you go into business with a friend and everyone is excited about the prospect of creating a business without taking a hard look at the realities." Harned says it is essential to carve time out at the start and create an agreement so that "everyone knows the rules of the game."

However, Gary Dushnitsky, a professor of management at the Wharton School, doesn't favor formalizing a partnership agreement too early. "When I talk to early-stage entrepreneurs and my students, they often ask if they should have a legal contract [for their partnership]. I say, you will have a chance to pay legal fees—that will come. But before that, I say, do what I call the latte strategy: go to a café and buy a large cup of coffee and have a conversation before you begin to formally write it down."

According to Dushnitsky, the early stage of the business relationship is the time to determine what each person can bring to the partnership in terms of capital, contacts, level of engagement, as well as to see how each views their commitment to the venture, their vision, and the time line they see for its development. In other words, Dushnitsky says, "early on, it is easy to have an honest conversation." Moreover, it will become apparent rather quickly if the parties are on the same page to be able to move forward successfully.

It's not that Dushnitsky is opposed to formalizing a partnership agreement eventually. "I do think a document is extremely important," he says. "But [it's] just like a marriage. You don't [bring] a ring in one hand and the prenuptial in the other."

Flip through this slide show for a look at 11 seminal business partnerships that resulted in companies that continue to impact our daily lives.

Perman is a staff writer for BusinessWeek.com in New York.

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