by Dave Berkus, TCA Chairman emeritus
My dad was a smart businessman, even if not formally trained. He occasionally gave me advice that turned out to be more than wise, looking back at subsequent experience and events. His personal teaching event was a typical experience, as I reflect now upon the tens of partnerships I have counseled over the years. Most often, one partner remained active as another partner drifted away from the business, no longer carrying the weight anticipated at start-up.
So, what could happen with a partnership over time?
It’s just one – the most prevalent – of the many things that can happen to well-meaning partners after time changes plans, and after the business passes through phases of growth or contraction. The assumption at start-up is that all partners will carry their assigned weight for the foreseeable future, as percentages of ownership are divided accordingly.
Rarely is there any formal written agreement memorializing these initial expectations and stating the consequences of non-performance or inability to make capital calls when required. In fact, rarely are issues discussed involving downside protections, even including key-person insurance benefiting the partnership in case of an unfortunate event. And how about a buy-sell agreement if one partner wants to sell their interest to a third party unacceptable to the remaining partner(s)? How about non-compete agreements? Non-disparagement clauses?
It is always wise to have an attorney help memorialize a partnership agreement, even if painful conversations must take place to do so. Here’s an example of what not to do…
A personal story about a partnership gone bad
I recall one very personal situation when I was young, that reinforces Dad’s advice. Through my college years, I managed a phonograph record production and manufacturing business that I created as a senior in high school, using independent contractors in local venues to record tapes from musicals and performances from schools, colleges, churches and organizations throughout the USA and Canada – and then to sell the records to the appropriate audiences.
Partnerships are strained with growth and troubles
The business grew to significant size during my college years, and I informally associated myself with an equally young partner, of course without any written agreement or discussion of downside throughout those years, ceding to him all recording work throughout the large home territory and other helpful technical work. The agreement was that he would retain all the revenues generated from those activities and that I would finance the company and manage it. We received lots of press, even nationally, as we managed our teenage business.
Changes of circumstance often ignite pressures
A year after graduation from college, I left for six months to serve my active duty obligation in the US Navy, while others – not the partner – took care of accounting and customer relations.
And shortly after I left for my military service, my partner left the company without notice and set up a competing company in my absence, never saying a word to any of us. I was bitter, but unable to do anything about it, since there was no written partnership agreement. Luckily, after my return from active duty, my company flourished, even went public later, and his remained a small, one-person operation for the rest of its existence. But, as they say, everything he learned, he learned from me.
Dad was right, even if I learned the lesson years later.
Have you a partnership story to tell? Lessons learned to be never repeated? Or do you have a harmonious relationship to recall, one that could even be ongoing? My friend, Rich Sudek called partnerships “a marriage without sex” and reminded us that we often spend more time with our partner(s) than with our family.