Partnerships are a great idea. You pool together talents and money to go farther than each party could by themselves.
Written for MILK Magazine/DairyHerd and originally published at https://www.dairyherd.com/news/business/what-makes-partnership-successful on 5/23/2022.
Some partnerships are large endeavors, and others are smaller. But no matter their size, some flourish, and others don't. So here are the basic principles to have a flourishing partnership.
Principle #1 – Run it like a business
Run multiple "what if" scenarios of sales, expenses, debt levels, and startup costs. Assume that not everything will go smooth and build in a fudge factor. This will cover the unknowns that are sure to pop up. The projections will not be spot on, but they will show you where your assumptions were right or wrong. Imperfect projections are better than no projections at all!
People involved in the partnership will wear several hats. They can be board members, owners, managers, and employees. Having every owner on the board of a large partnership is not feasible nor desirable.
The board's purpose is to guide the manager at the strategic level. Managing the daily activities is the realm of the manager and employees. Even with a small partnership of a couple of owners, board meetings should be separated from deciding daily activities.
The partners should expect to be treated like any other customer. For example, a dairy delivering milk to a cheese plant should not expect any special favors, pricing of their milk, delivery, etc. They should be treated the same as the dairy down the road without an ownership stake. I have witnessed partners treating the partnership bank account as an extension of their personal bank account. This is a slippery slope with no end in sight.
Principle #2 - The Right People
Partners bring different talents and expertise to the project, and the partnership is better for it. Yet sometimes, there is a skill set needed in a partnership that the owners can't provide. So don't hesitate to hire the expertise. Yes, it costs money, but learning on the fly also costs money.
Partnerships often borrow money. Understand your loan commitments and your portion of the capital call, should the business need additional funds. Some partnerships are structured to protect each owner's personal assets, and others have unlimited legal and financial liability: the conclusion—partner with people who can financially fund and maintain a business. You don't want to be left holding the bag because they ran out of money.
Principle #3 - Clear expectations
Operating agreements and codes of conduct bridge the gap between ownership responsibilities and operations responsibilities. How much of the profits will be reinvested? How much debt will the partnership take on? Is the partnership in a growth mode or maintenance mode? These are just some of the questions that should be answered before starting a partnership. People change over time, and their needs do as well, so don't forget a buy/sell agreement.
Partnerships are a terrific way to leverage talent and investment capital into enjoyable ventures that one person couldn't do alone. It truly is a way to go far. Unfortunately, it is also easy to get so excited about the idea of the venture that details are glossed over. This is especially true when partnering with family, but with family, the stakes are even higher. So take your time and get it right the first time because the rewards of a great partnership are hard to beat.