Partnership Horror Stories

A reader sent in his story of partner woe and asked me to write about partnerships gone bad. It reminded me that I've heard more than a couple stories of business partnerships that turned really, really sour. They may have a higher failure rate than marriages (not touching that subject with a 10' pole).

The following horror stories are true. The names have been changed to protect the innocent.

An Excavator's Tale (In His Own Words)

Ron,

One mistake I have done in life is about partnerships, you should discuss those issues in your newsletters. For me I had taken on a partner with devastating effects. Now after buying out the partner and back on my own with an economy that just will not let me make a profit is like going to the casino and gambling.

I have been a site contracting for the last twenty-three years and I have lost all my gains from having a bad partner, He said all the right things and was great at his job, but after he got his piece of the pie it turned into Hell for me because of his oppressiveness.

If I had more time, I would write down the dos & donts. So if you had some insight to warn others, you could save others the misfortune of a thief coming into a business.

Moral of the story: Partners MUST have compatible management styles and maintain mutual respect.

A Remodeler's Tale
Due to some horribly timed bad luck, Albert had destroyed his credit rating years ago. Then he scratched and clawed to get himself back on his feet and once again built a business from the ground up. It grew to the point he needed an office manager and some additional cash flow.

He found a lady who would work as his office manager and use her superior financial health to secure the needed line of credit. In exchange, Albert needed to give her a piece of the business. Mind you, she didn't invest any money in the business, just lend her credit worthiness.

Within a year, she emptied $75,000 out of the checking account and disappeared. Unfortunately, quite a bit of the money was from deposits on projects he hadn't started yet. He had no money, bills to pay, and work to do that he wasn't going to receive income from for awhile. Albert was on the edge of disaster.

Fortunately, an Angel stepped in to provide a short- term loan that let Albert move on some very profitable projects. He has plenty of good business now and is quickly working himself out of the hole his partner put him in.

And in case you were wondering, Albert still hasn't been able to track down his former office manager / thief.

Moral of the story: Make sure your office manager / bookkeeper is bonded against embezzlement. It's fairly cheap insurance for the protection it provides.

A Paver's Tale
John's tale goes way back. He has been in business with his partner for over ten years. John's partner is strangling the business.

John's partner, Tim, put up the money to start business. Tim owns 75% of the business and John owns 25%. So far, so good.

But there's a catch.

The company's equipment is not part of the company's assets. It is furnished by a company 100% owned by Tim. Tim rents the equipment to the paving company- at somewhat uncompetitive rates.

Furthermore, Tim doesn't actually do anything for the paving company. He doesn't sell. He doesn't run operations. He doesn't do the books. He is what amounts to be a silent partner. He gets 75% of the profits without adding value.

Tim has John in a real bind. John doesn't have the authority to rent equipment from anyone else. John hasn't been successful in getting Tim to sell off some of the unneeded equipment nor lower the equipment rental rates.

Why should Tim?

He makes more money from the equipment rental than he does from the paving company's profits. Especially since the equipment is long paid for.

This arrangement has limited John's income for so long that he doesn't have the financial strength to start up his own business because his trade requires a sizable equipment fleet. John's only real escape would be to find an owner who is getting ready to retire and would let John buy the business over time from the profits the business generates.

Moral of the story: Some partners strangle you so slowly, you don't realize the noose has been put around your neck until its way too late to do anything about it.

An Engineer's Tale
This one I have personal knowledge of. It was my first exposure to partnerships and the mine fields they involve.

As is often the case, one partner owned 51% of the firm. When you have that extra 1%, you might as well have the next 49% also. With 51%, you set the rules.

Hank, the majority owner had two partners, Kent and Paul. Hank and Kent were pals from way back. Things started and ended great between Hank and Kent. Not so much with Paul who was lured over from our chief competitor.

When Paul joined the firm, it never dawned on him to include clear, air tight terms and conditions for how his piece of the firm would be priced should he leave the firm. That would be akin to asking your fiancé to sign a pre-nup. It just feels like bad form. Of course, those often turn out to be a good idea too.

Naturally, Paul had to sign a non-compete. That's standard practice for partners. Nothing out-of-the- ordinary there.

Things went well for several years. The business grew like weeds. All three partners worked equally hard. The future looked bright for all.

Then Hank got himself into a little financial trouble. It threatened the long term health of the firm. Paul wanted out, desperately.

Being a service firm, the retained earnings were distributed every year end. The balance sheet showed minimal owner's equity. The real value of the firm was future revenue generated from the loyal client base. Paul received virtually nothing for his stake in the firm AND he couldn't work in the same field for one year.

Moral of the story: Develop the exit plan BEFORE starting up the partnership. Create checks and balances in the partnership agreement that limit the majority owner from significantly changing the business' legal arrangements without the minority partner's okay.

Four Stories, Five Lessons
The fifth and final lesson is one I share with every client who is run by multiple people: Make sure the long term goals of the partners are the same. Make sure both are equally committed to reaching those goals. Otherwise, trouble will be a coming your way sooner or later.

Should you be getting ready to add a partner, let me help you get your get your ducks in a row before the relationship is locked down contractually. Call me (913-961-1790).

Ron Roberts, The Contractor's Business Coach, teaches contractors how to turn their business into a profit spewing machine. To receive Ron's FREE Contractor Best Practices Newsletter visit www.FilthyRichContractor.com.

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