Partnerships: Success formula and Pitfalls

PARTNERSHIPS: SOME GOOD INFORMATION

One of the most challenging aspects of owning your own business is working with a partnership. There are lots of different kinds of partnerships that you may consider.

• Marriages are partnerships.
• Financial partnerships where one operates, the other(s) invest.
• Friendships are often made into partnerships (they don’t often work out well).
• Multiple Operating Partners in various formats like Joint Ventures, etc.

Think of the following story as a partnership scenario: You just hit the Florida Lottery worth $20 million. You have 3 circles of “partners” who are going to know about it, and here is their likely response:
1. Your co-workers. The people you work with. “Wow, Jim hit the lotto. That’s unbelievable! I wonder if he’ll still stay working here or if he’ll retire. I hope if he gets a boat or Bucs tickets, he’ll give us a call sometime to join him.”
2. Your friends. “Wow, Jim hit the lotto. That’s unbelievable! I bet he gets a boat and new car, and I know we’ll spend lots of time together, and I hope he gets a box at the Bucs games so we can go every week. This is great, when we go out, I’ll never have to pay for dinner again!”
3. Your family. “Did you hear that WE hit the lotto?”

A strong recommendation would be that the closer the relationship of the new partners, the more important it is to have everything clearly communicated.

REGARDLESS OF WHICH FORM OF PARTNERSHIP THAT YOU HAVE, IT IS CRITICAL THAT YOU HAVE A WRITTEN AGREEMENT THAT CLEARLY OUTLINES THE TERMS AND CONDITIONS OF YOUR ROLES IN YOUR BUSINESS.

There are 6 elements that must be covered in this written agreement:

1. How do we grow, if we choose to expand?
2. How do we get out if one of us wants to get out, or has to get out?
3. How and when do we pay ourselves, and how do we determine how much?
4. How do we put money into the business if we need additional cash?
5. How do we balance the workload (for working partners)?
6. What specific performance levels must be achieved by the operating partner?

The Ohio State University came up with a failure rate of independent restaurants in their first 3 years of operations. It is 59%. That means that 3 of 5 independent restaurants fail in their 1st 3 years. Many of these are due to failed partnerships.

Here are the 10 reasons why partnerships fail:

1. Unrealistic or unclear expectations. This is the most common cause of partnership friction. Unmet expectations are mainly from a lack of honest and open communication.
2. Underestimating the difficulty and risk in partnering. Each partner could lose everything that they put into the business. It will be harder than you think and involve a greater risk that you may have planned for. It may also be very difficult to get your money out at a convenient time (in the first 3 years), even if the business is doing well.
3. Cultural incompatibility. It is important to play to the strengths of each partner. All of us are different and prefer to do or not some things; or are better at some things than others. If one of you is the people person and one in the organizer, play to those strengths.
4. Power Differences In almost every situation, the power is with the person who has invested most of the money. We STRONGLY recommend that one or the other partner holds 51% control.
5. Lack of Partnership Methodology. It is important to have a clear plan as to what the roles are for each partner and how they should go about performing those roles. Having clear roles established for each partner and how they will function is critical. It is also important to support the other partner and not correct them in front of the team. If the crew perceives a lack of continuity in the partners, they will leverage that against you and it will have a negative impact on your business.
6. Forgotten Agreements. Having a written agreement will avoid the main points of this. Another part of this is missed commitments. Whether it’s covering a weekend for some time off or paying for a new benefit, having things written down will help. We recommend some type of journal or daily communication.
7. Absence of metrics and accountabilities. This is outlined above in having a clear understanding of what benchmarks must be hit and by whom. We also strongly recommend that each month a formal P & L review is done with each partner.
8. Unwillingness to commit time and resources. In our Topper’s Creamery shops, we are open 79 hours every week. Adding in administrative time and community time, there is a need to cover about 90 - 100 hours each week on behalf of the business. One person cannot do all of this. It’s important to work together to balance the workload.
9. Relationship breakdowns and absence of trust. Once the trust has been violated, it is very difficult to move forward. Be especially cautious of this and make sure you communicate clearly and effectively. Relationship breakdowns are especially difficult with family. What happens with a broken trust with family members and everyone is at your favorite aunt’s house at Thanksgiving? Broken family relationships are extremely difficult to repair and can be toxic.
10. Exte
al forces and changing priorities. What happens when things change? Family changes, personal health changes, loss of interest in the business, or other changes. How do you handle these types of changes?

It is true that some partnerships are harder to get out of than marriages! With guarantees on loans, leases, and other long term agreements, it’s sometimes years before one partner may be completely divested from the business. Partnerships with family members need even more care than normal partnerships. What happens when you need to fire your sister or your mother-in-law?

Here are the top 10 reasons why partnerships succeed:

1. Organizational Readiness: You have a solid business plan and each partner is ready to move forward to execute the plan with strategy, structure, and people.
2. Mutual Needs and Opportunities: Each partner will be able to meet their needs and be able to fulfill their goals while in this business.
3. Realistic and agreed on goals: Each partner has their goals, sometimes a few may be different, and you have clearly communicated these goals with one another.
4. Partnership process and framework; You have a formal written agreement that spells out the 6 functions stated above.
5. Capacity and Commitment: Between the 2 or more partners, you have the skill to succeed, the resources to succeed, and the will to succeed.
6. Effective Communication: You have the information network in place to communicate and the discipline to use it.
7. Shared values and compatible culture: It’s important that you understand and share common values and create a culture that is consistent with each of your personal and business values.
8. Visible Leadership. You show that you are in charge. It’s important to support each other in the shop, even if you don’t always agree. This is true with your crew, your guests, and your vendors. The owner or operating partner is always in charge.
9. Performance measurements and reporting mechanisms: Again, see the 6 functions above. It’s important to measure success against agreed upon goals. These are especially important if there are financial partners who expect a certain return on their investment.
10. Unrelenting focus on your customers: This is a non-negotiable. If you neglect your customers, you will fail.

Partnerships are tough. We know of multiple examples of very successful partnerships that are thriving. But for every example of a successful partnership, we can show you 2 or 3 that failed. If you get a chance, speak with some of our existing partners on how to manage your partnership successfully. There are no secrets. If you follow the above partnership practices, your likelihood of success will be very high.

Thoughts:

• “Silent partners get loud when money expectations are not met.”
• The money partner almost always wins.

Topper’s Creamery philosophy of partnerships.

• We are in the business of building and sustaining partnerships with our company owned shops, our JV shops, and our area developers. We are in the relationship business.
• Stress in our partnerships come mainly from 2 areas:
1. The partnership does not adequately reward our time and effort.
2. The partnership does not reflect well on the development of the Topper’s Creamery brand.
• We have an obligation to go the extra mile with our partners IF there is a good business reason to do so.
• We believe in being tough on business issues, and being soft on people. We can disagree.
• We believe our partners should always be treated with respect. Accordingly,
o Tough issues are handled with personal contact.
o We want to maintain a dialogue of win/win through personal interaction.
o We expect to be treated with respect as well.
• Partnerships involve mutual accountability, for the benefit of the brand.
o We have an obligation to the brand to listen to our partners if they believe we have not fulfilled our obligations.
o We have an obligation to inform our partners when they are not rewarding our time and effort; or if they do not reflect well on the image of the brand.
o We have an obligation to provide systematic support, and systematic termination.
• We believe in “Proportional Response.” If a partner is neglecting their obligation under our agreement, we have the right and obligation to respond in proportion.
• We have an obligation to our stakeholders to determine if we arrive at a point that we can no longer afford a partner’s business. This can be due to lack of payments, lack of compliance with the brand’s existing standards, and failure (possibly of both parties) to demonstrate mutual respect. This should only happen after all steps have been exhausted to understand their position, communicate our position, and make a reasonable effort to solve the issue, through compromise or synergy.