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Partnerships, do they work?
Author: 
Philippe Richer
February 18, 2020
several hands doing a fist bump over a table

Partnerships, Do They Work?

Partnerships are a tricky business. When they work well, they are wonderful. One can consider the monster success of Apple (Steve Jobs and Steve Wozniak) or Microsoft (Bill Gates and Paul Allen). For those of us with an entrepreneurial spirit, the thought of finding a business soul mate is alluring and enticing.

However, in reality, business partnerships are fickle. First, a partnership must survive as a small business. According to an Industry Canada Report, 30 per cent of small businesses fail within two years, and a half fail within five years.

Definitions

Secondly, a partnership must survive the partners' relationship with one another. Now, before I go any further, I am using the term partnership very loosely. Legally speaking, a partnership in Manitoba is regulated by the Partnership Act. A partnership is a different legal entity than a corporation.

The act states that a Partnership is "the relation which subsists between persons carrying on a business in common, with a view of profit ".

If two individuals incorporate a company, legally speaking, they are not partners. They are shareholders in a company. However, practically speaking, if they are running the company together, they are often referred to as business partners. For this article's purpose, I am referring to partners in the general or practical sense, which includes co-shareholders or co-founders of a company.

Anatomy of a Good Partnership

When I read about successful partnerships, a familiar theme develops. Really successful partners have skills that complement one another. One will be a technical wizard, while the other will have business foresight - think Apple or Microsoft. I found this interesting infographic outlining how different personalities can complement each other. I recently read an article (sorry, I couldn't find the source the author referred to, so I can't categorically stand by these statistics) where the author cited statistics from the Small Business Administration in the U.S. According to him, partnerships that managed to survive experienced a higher rate of revenue growth. So the theory that complementary personalities can lead to success certainly seems to be grounded in statistics (provided they are accurate!)

Success Not Guaranteed

However, we all know that individuals with different skill sets see the world differently and may disagree on a path forward. When disagreements pile up and egos get bruised, a partnership can take a turn for the worst. For every Jobs and Wozniak, multiple partnerships fail. I expect this number to be in the tens of thousands, but I am just guessing.

In my practice, I have seen many partnerships fail. When they fail, they fail spectacularly. Feelings are hurt. Business partners who were once friends cannot stand the sight of one another. Having represented parties in failed business partnerships and spouses in separations, I can assure you that the emotional atmospheres are almost identical. Failed partnerships evoke the same feelings as failed marriages (or common-law relationships).

The Law

Unfortunately, the law does not offer any tools to assist partners in overcoming their differences. For repairing damaged relationships, partners must resort to the same tools available to couples who experience difficulties. When attending university, I worked for a small business that used mediation to resolve conflicts between partners.

In reality, the law can only provide a means to unwind a bad relationship, just like cohabitation agreements (prenups), which provide a road map for couples who need to separate; partnership or shareholder agreements can set the stage for an eventual break-up.

Why Is This Important?

Because when partner relationships deteriorate, the business suffers. Partners or co-founders cannot agree, so no new decisions are made. In corporations' case, funds may be stuck in the business, with no means of getting it out to the shareowners. Capital expenditures are frozen. The new business is frozen. I have seen businesses suffer and value evaporate. It doesn't take long.

In my next article in a couple of weeks, I will discuss the anatomy of a good partnership or shareholder agreement in more detail. A good agreement will prevent partners from making unilateral decisions that can affect the other partners' interests. It will also provide a means to unwind the partnership in an efficient (but drastic) way.

I always tell my clients that these agreements are like insurance policies. Hopefully, the agreement will sit in the bottom of a drawer, never to see the light of day as the parties roar into the sunset, enjoying the fruits of a wildly successful business. But, should the relationship sour or something unforeseen occurs (like the death of a partner), the parties will have a road map to move forward. Not everyone will be happy, but at least the value of the business may be preserved.

Disclaimer - Legalese

This article is presented for informational purposes only. The content does not constitute legal advice or solicitation and does not create a solicitor-client relationship (this means that I am not your lawyer until we both agree that I am). If you are seeking advice on specific matters, please contact Philippe Richer at 204.925.1900. We cannot consider any unsolicited information sent to the author as solicitor-client privileged (this means confidential).