Wow! I bumped into a former high school acquaintance (that I barely knew) at a sports apparel trade show. After looking at my tennis dress line, he asked me if I was interested in having a partner. We continued to talk and a few weeks later he put together an offer of $500,000 for a 50 percent interest in my three year old company.
On the surface, this looked like a great opportunity. My company was generating 2 million dollars in sales, making a small profit and I was selling tennis dresses to some of the best known department stores in the country. With the infusion of a half a million dollars into the business, I would be able to double the size of my company.
That euphoria of having a working partner to share the responsibilities, coupled with the cash to grow the business, evaporated in less than six months. By that time we were in court, the company had lost all its business and I was left with a nothing but a warehouse full of last season's dresses.
I made four critical mistakes that cost me my business -- but I never made them again! Here they are:
Prepare a Growth Plan for your Company
If you have an opportunity to significantly expand your company's growth overnight, plan for it first! Consider for starters such things as; how additional personnel, increased manufacturing capability, new operational and administrative challenges, increased raw material purchases and cost of additional overhead will impact your cash flow.
Establish up-front Command and Control -- Have Specific Areas of Authority and Responsibility
My partner excelled at one skill-sales. He had zero knowledge or interest in operations, cash flow, financing, and other routine business matters that are essential for small business owners to deal with. Because he was clueless -- that making too many sales can be just as bad as making too few sales -- it became impossible to limit his order taking. In less than 2 months his huge volume outstripped the cash flow necessary to cover our manufacturing costs. Our partnership failed to anticipate the necessity of establishing clear lines of control and veto power -- which is always a tricky issue in a 50-50 partnership.
Learn the Personality and Traits of a Potential Partner and Determine if they are a Fit
The time I spent negotiating the purchase agreement with my future partner was far too short to learn enough about him to make such an important business commitment. I believe this was my fatal mistake. I had no idea he was stubborn to the point of being pig-headed, ignored sound business advice if it came from a woman, and refused to work collaboratively to solve problems.
Stay Away from a 50-50 Partnership because it sets up an inherent Conflict
Once my partner and I realized we were 180 degrees apart on everything, having an equal partnership created a lethal stalemate. Although we had a buy-sell agreement, the terms were too vague -- which made it impossible to break-up the partnership without dissolving the company!
My advice is to avoid a 50-50 partnership. But, should you ignore this advice, make sure you thoroughly and carefully explore all the "what if's" in the event that a stalemate occurs and have a good business lawyer prepare a "break-up formula" that works for both partners.
In my subsequent companies I achieved success without a 50-50 partner!