New businesses characteristically fail at an alarming rate. Between 2007 and 2010, the failure rate for U.S. small business rose by 40 percent. Yet, according to the U.S. Small Business Administration, companies with multiple owners are more likely to survive longer than sole proprietorships. What’s more, a 2008 study showed that the average revenues for partnerships increased 157 percent since 1980, while revenues for the average sole proprietor decreased 51 percent during the same period. The study also reported that the average sole proprietor’s net income in 2008 was around $12,000.
The facts seem to make the case for partnerships, yet 72 percent of small businesses are sole proprietorships. Partnerships have their pros and cons, and at first glance, the pros might seem to outweigh the cons. Yet, a partnership gone bad can make you wish you’d never gone into business in the first place.
The biggest risk is shared liability. Each person is contractually and legally bound by the agreements the other partner makes. So if your partner does something shady that lands you in court, you are equally liable for damages. If one partner skips town, the other is liable for all the debt he may have incurred. Assuming none of that happens and all goes well, you’ll still have to share the profits.
The upside is that you’ll also be sharing start-up costs, expenses, responsibilities, and risk. Plus, having partners means having a support system and motivation when the going gets tough.
All that goes to say that a business partnership, like a marriage, is not something to enter into lightly. Friends often jump into partnerships based solely on the fact that they are friends—and the assumption that they’ll always be. While it’s important to choose a partner who’s your opposite skill-wise, what you must have in common are values. You may be the best of friends, but do you share the same work ethic?
How a Broken Clothes Dryer Led to a Successful Business Partnership
One fateful evening in late 2000, I received a phone call from James, an intern at church. He was packing to catch a flight the next morning to visit his family, but his dryer had broken down and he was in a bind. My wife’s motherly instincts kicked in; she told him to bring his laundry over and she’d take care of it so he could finish packing.
Up to that point, I knew James on a semi-casual basis—we both had built a handful of websites—so when he came by to pick up his laundry, we spent the next hour or so “talking shop.” Turned out, James hated designing websites and only did so in order to do what he really loved—programming. I loved to design, but was frustrated at my inability to create more interactive websites because of my lack of programming knowledge. It didn’t take long to realize that teaming up would benefit us both.
Each of us had built up a modest clientèle, so by joining up, we immediately doubled our client base. Forming a partnership gave us a greater level of credibility with our clients. What’s more, James was single and a full-time freelancer, while I was holding down a full-time job, so we suddenly became a “legitimate” business with someone available during regular business hours.
But our business didn’t begin to grow until we brought on a third partner. Jeremy was one of those “super-networked” people (you know, the ones with 700+ Facebook friends) and having him in charge of business development brought us clients and projects beyond the scope of what each of us could have achieved individually.
John D. Rockefeller once said, “A friendship founded on business is a good deal better than a business founded on friendship.” Many friendships have been ruined when the partnership goes awry or the business fails. I had the good fortune to team up with a group of people who started out as acquaintances but ended up as friends, even though we eventually went our separate ways, business-wise.
It’s clear that a partnership can increase your odds of success, so have you considered a forming one? If not, why not? There are valid reasons for forming one and equally valid reasons for remaining a sole proprietor. Post your comments and experiences below.
Former owner and partner of web firm Jenesis Technologies, John is currently Director of Digital Strategy at Haines Local Search, a company providing local search marketing solutions to SMBs, including print and Internet Yellow Pages, web design, and local SEO. When not working or spending time with his family, John offers great sales and marketing advice on his blog, Small Business Marketing Sucks.