18 Reasons Why 50% of Partnerships Fail in the First 2-3 Years
Based on these conversations with people who have experienced partnership failures, I have put together a list of 18 possible reasons why a stated 50% of partnerships fail within the first 2-3 years:
A partnership venture starts out as a brilliant idea between at least two entities. The venture may be based on friendships that you are proposing to extend into a new business arrangement. You agree it's a good idea, you sign the agreement, get started and the partnership may work well for a while, until cracks start to show.
The financial costs of not planning your partnership venture properly before you get to the agreement can easily get amplified by the costs of damage to friendships and loss of reputation.
For some time now, I have been talking to people who've experienced failed partnership ventures. There were too many similarities and a few shocks. Based on these conversations with people who have experienced partnership failures, I have put together a list of 18 possible reasons why a stated 50% of partnerships fail within the first 2-3 years:
1 Too many chefs in the kitchen. When getting together partners gravitate to others with similar skills. Tradies with similar backgrounds working together are a good example. They may have different technical skills which formed the basis of their partnership, but what they possibly needed was a partner with business acumen. Bringing together technical skills for growing market presence may seem attractive, but there isn't enough diversity to value-add to existing skills and experience.
2 Different (and conflicting) values. In hindsight, conflicting values shows up as a contributing factor to partnership failure. A partner with a strong family values set will eventually come into conflict with a partner that puts the business first.
Which is it to be - 80 hours a week workload to get the venture making lots of money, or a business structured around family time? These differences may not be touched upon at the start, but will quickly become a sticking point and possible deal breaker.
4 At least one partner is a control freak and treats others as staff. The need to control is a common trait of business owners. Most business owners have it. So why do they forget about this when they get together? At first, partners may try to compromise and make collegiate decisions.
But for various reasons, at least one partner will break the silence and move front and centre. There are several ways they take control. They may feel they need to take control so that things get done.
Their ego may lead them to showing their control in front of clients. If there isn't a clear delineation of roles and responsibilities, then partners may extend their control over the other partners and, in turn, confuse the staff.
4 Imbalance of effort. This is where one partner alleges to be putting in more time and energy than the other(s), which may be the case, agreed or not. Much of this is down to the perceived value of the partnership venture and the time and resources available.
A good exploration of the value of the partnership, the return on investment, commitment and resource requirements at the start, will inform an agreement that clearly sets out to identify the effort required of each partner to make the venture work.
Any conflict of these arrangements should also be dealt with via the terms of the agreement.
5 Partners are not being transparent, especially when it comes to the money. This is an all too common partnership breaker. One entrepreneur stated, after three acrimonious partnership failures, that his biggest learning was that "whoever controls the money, holds the power".
Whilst this statement is open to debate, his viewpoint represents the partners who've been on the receiving end of lack of transparency from their colleagues. All too often, we hear about partners who syphon off funds and leave the remaining partner(s) with significant debts.
6 Partners bringing hidden debts to the partnership venture. You probably wouldn't think it were possible, but we came across two partnerships where partners had attempted to bring hidden debt to the arrangement.
One was spotted before the arrangement could proceed. The other wasn't and the innocent partners found themselves left with the debt. We cannot be too careful when it comes to risk.
7 Hidden agendas. It's OK to enter into a partnership with an agenda. That's a benefit. However, things turn sour when it becomes evident later on, that there are other, less than altruistic, reasons for entering into the partnership venture. Be clear up front. Agendas discovered later on will inevitably lead to mistrust and partnership breakdown.
8 Lack of communication. When communication breaks down, at least there is some recourse to figure out what went wrong, but a lack of communication is a symptom of a lack of planning - who does what, reporting and accountability. Even with planning, a partner can take a lead role and not keep in regular communication with partners, staff and other stakeholders. Many instances of dissatisfaction and mistrust find their roots in lack of defining and following a good communication plan.
9 Too much, too fast. A partnership venture that moves too quickly without inclusion of internal stakeholders is heading for trouble. Without a good plan, change gets bogged down in resistance compounded by fear. It takes time to integrate systems and resources. Moving too quickly without good reason slows down the process. A strategy that incorporates change enablers and a change management plan is more likely to succeed.
10 A job versus a business? Partners, especially when it's a two-person partnership may be approaching the venture from different mindsets. One partner may be reliant on carrying out the next commission or contract, whilst the other is thinking big picture and building the customer base.
Whilst this could be a good combination, each partner must recognise the value the other brings to the venture and take into consideration when dividing the profits.
11 No agreement in place, or missing elements in the agreement. There are many levels of partnership, not just a formal business partnership. There may be strategic alliances, project-based partnerships and joint ventures.
Some will start on trust without an agreement, others will require an agreement in law. When the problems start, the first logical place to look is the agreement. Without the signed agreement, things can go unresolved and may require legal intervention.
12 Management and priorities change - the partnership venture becomes irrelevant. This is particularly true with strategic alliances. For many, the original negotiation would have taken place at a middle management level. The concept may have aligned with strategic priorities at the time, but things change.
Policy directions change. Financial positions change. Without ongoing commitment from top, the partnership venture may become irrelevant to partners who will take their interest and priorities elsewhere.
13 Differences of opinion - who wins the argument? This can also be associated with some of the other reasons why partnerships can fail. If there is a dispute between partners, how do you address the problem? A good dispute resolution clause in the formal agreement should mitigate issues and address the argument, but it's not always as easy.
The argument may be more fundamental than within the boundaries of partnership. It may be personal. How do you continue a partnership when the wounds aren't healing fast enough?
14 The balance of power changes when family members are drafted in to 'assist 'with day-to-day operations. This is a common factor in partnership breakdown. A partner will suggest a family member to assist with some aspect of the business.
This seems a good idea at first. It may be the right move, but in other cases, there is a perceived shift in the balance of the partnership. Problems can arise over the payment to the family member. One partner may find themselves competing with and alienated by, the other partner and their family member around decision-making.
15 There's no exit clause. A strong, yet obvious recommendation from people who had previously been burnt by partnerships was to make sure there is an exit clause in the agreement. This clause is one of the most important, yet can be easily missed or glossed over.
It defines what happens to intellectual property, profits, debts, clients and other considerations, in the event of, or when, the partnership venture ceases. This is particularly important if partners bring assets to the partnership and wish to retain those assets afterwards.
16 No policies and procedures and/or documented system. This is also associated with the issue of too much, too fast. The partners will be bringing to the venture their existing ideas on systems and processes which need to be rationalised for the new venture.
The venture may lead to staff and additional resources. If there are no policies, procedures or documented systems, as with all businesses, the venture is high risk.
17 Not resolving issues when they first occur. Examples of failed partnerships are littered with issues that were not addressed as soon as they occurred.
These might have occurred between partners that didn't feel confident about raising issues, especially in the early days. If not resolved, this practice can become toxic to the partnership.
18 Didn't need a partnership in the first place. What if you enter into a partnership and realise it's not what you want? Over time you find you're not comfortable with giving up some of your power. You begin to notice the irritating habits of your partner(s). You prefer to be your own boss and manage your own staff.
You find you could have achieved what you set out to achieve another way. For these businesses, some investigative planning at the start of the partnership journey could have saved them from the experience. A partnership was probably not the right option
Are you or someone you know setting up a partnership venture? Are you in a partnership without a plan?
The Essential Partnerships Toolbox is our one-stop planning solution that could save you tens of thousands, your friendships and your business reputation.
Build your business case, develop a plan as to how your partnership will work, mitigate risks up front, plan for change and get an understanding of foundations that must be in place for partnerships to work.
The Essential Partnerships Toolbox contains checklists, guides and templates to support prospective partners through the process of planning the partnership venture.
Working together through this resource should lead to clear strategies, defined roles, responsibilities and parameters, and reduce misunderstandings later on.
The toolbox is available at http://essentialpartnershipstoolbox.gr8.com/.
About Pat - For the last 16 years, I have been working with partnerships, assisting through processes to joint venture or develop strategic alliances; with varying levels of success and in some cases, failure. I have learnt to spot potential problems right from the start, able to identify flash points, in some cases, within the first meeting or conversation.
I developed this toolbox to help you build your business case for a partnership and address potential risks before you put ink to paper. If you are already in a partnership that isn't going the way you expected, this toolbox may help you identify why.