The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Frank Farwell Headshot

For Entrepreneurs, Taking On a Business Partner Can Be More Risky than Marriage

Posted: Updated:

Sure, starting a business is scary and financially dangerous. Entrepreneurs should feel queasy when they quit their jobs in The Land of Steady Paychecks and venture out on their own. But that doesn't mean they should take on a partner just to hold their hand and put a few dollars in the equity pot. Why? Because taking on a partner is in some ways way more dangerous than a marriage--and we know that U.S. divorce rates are a sobering 50% or more.

If you make a mistake in marriage you can divide up the asset pool, learn from the experience, and go your separate ways--providing you take charge of your respective attorneys at the outset (tell them they're both fired if the divorce isn't final in five months). OK, divorce can cause some real pain and financial bleeding, but you can move on, retrench emotionally and financially, and start over--having held your job and paycheck in the meantime.

A business partner, on the other hand, may be harder to shake and more of a drain. For many years it's quite likely neither of you will have the cash to buy out the other, since any cash you have will be soaked up by your business. So you may be stuck with a business "spouse" with few ways for either of you to exit. Result: a relationship that can drain time from your schedule and conflict with your vision of how to build and manage your business. History says it can morph into a perpetual semi-hell. There are more horror stories about ex-business partners than about ex-spouses. Keep that in mind when you and a buddy are quaffing down beers at a neighborhood tavern after work and outlining your new venture on the back of a napkin.

If the potential downside of partnership doesn't sound appealing, let's look at the other side of the coin--the advantages of going solo and staying solo:

-Your spouse or close friend can act as a sounding board at zero cost. This way you marriage stays protected and your spouse can be your cheerleader.

-Most of your energy will go vertically, towards improving your product or service, selling more and more of it, and fine tuning the company's operation. You will be moving forward, simply and efficiently. With a partner, too much of your time can be vacuumed up getting approval, reaching consensus and trying to move forward. Your energy in this scenario is dissipated sideways. Which of these scenarios is most likely to let you carry out your vision of what the company should be?

-If things go well and you sell your company for a bundle 10 or 15 years or so down the road--and you have used debt financing along the way--you will own all of, or most of, the sales proceeds. With a partner you will get a much smaller share and have perhaps suffered more along the way.

-Employees will know who to go to. For better or for worse, you are the boss. Decision making will be clean. You will be able to run your race the way that suits you best, in sync with your own personal personality and brain chemistry.

Now, all this is not to say that some situations can provide ideal partners: an identical twin certainly will mesh well with you; a trusted and respected spouse of many years, almost as much so; a person from work you've worked with for a long, long time also has good odds.

Even so, you're playing with fire. If more than half of marriages end up in divorce, assume that as many or more business partner-"marriages" have the same fate.

Knowing this in advance, you have the opportunity to make a wise decision right at the beginning. You can avoid a major headache and still have people there to hold your hand when the going gets rocky. Here's how:

-Form an informal board of advisors with varied backgrounds (a C.P.A., attorney, entrepreneur, supplier friend, etc.). If some of them have experienced the sweaty fear of having made a payroll, they can be an especially big help. You can meet two or three times a year in your offices and cater lunch or tea for them. Then, most importantly, you can call them individually for advice when you feel you need it. Voila!--you have on-call mentors, and you still completely own and manage your own business.

The key is not confusing needing capital with needing a partner. While some partners can invest a lot of capital, it will come with risks you may not want to take on; you could be stuck with an equity owner who may imperil your vision and drain too much time and energy that could have been used to build the business.

Instead, use (and take good care of) your board of advisors, and hire key people as you need and can afford them. Figure out a way for key employees to self-finance their payroll cost via increased sales and/or increased efficiency. Consider a small amount of equity to retain top-performing key personnel as they demonstrate their talents.

And be careful not to hire someone just like you. Hire someone who can do the things you are inherently lousy at. Consider, for appropriate positions, focusing on middle-age and older employees who are inclined to be more geographically stable and will cause less turnover--which you want to avoid at all cost.

In my book, Chicken Lips, Wheeler-Dealer, and the Beady-Eyed M.B.A.: An Entrepreneur's Wild Adventures on the New Silk Road, I tell the instructive stories of gaffes I made on the way to building what became a three-time INC. 500 company. In the early days, desperate for capital, I sought out partners who could afford to invest, without success. After a few months of this I was befriended by an elderly man who had become a large scale entrepreneur. He had some unusually good advice:

"Most of the time you should forget about partners," he told me. "They'll take up your time and divert you from running your business. You're better off getting capital from a bank, and running the company yourself."

"But, what if I can't service the loan payments," I whined late one afternoon when I heard this advice for the first time.

The old-timer looked at me squarely, and then told it to me straight: "Then you don't have a viable business," he said.

It took hours, days and weeks for me to fully appreciate the intelligence of what he was saying: If your business can't kick off enough cash flow to service even a small loan at the beginning, then you're doing something wrong--wrong product, too much overhead, weak selling and marketing, whatever.

But if you are doing things right in your business, you will be able to make debt service payments on an increasingly large scale until one day you build up enough cash reserves to pay off most of your short- and long-term debt. This is the point in time every entrepreneur should dream of and shoot for. And it is achievable if you build your "house" of business one brick at a time, modifying your product line and operation as you go along.

The other thing the old-timer was saying is that, most times, a partner is probably not going to help you get to that point. If anything, he or she will conflict with your vision of how to arrive at this destination, and in the end neither of you may get there. Keeping things simple is always best, because in the end the odds favor a clean decision-making process and unimpeded daily schedules and emotions. In plain English, this means that only you can successfully navigate your way to your vision for a new, flourishing business.

Frank Farwell is founder and past president of the WinterSilks catalog. His book, "Chicken Lips, Wheeler-Dealer, and the Beady-Eyed M.B.A.: An Entrepreneur's Wild Adventures on the New Silk Road," details his experiences as a start-up entrepreneur, and was nominated for the Financial Times/Goldman Sachs Best Business Book of the Year Award. Its Appendix lists the attributes of an ideal product; the book is available from Amazon, or frankfarwell.com.