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.