There are many reasons that entrepreneurs and business owners enter into partnerships. The collaboration, shared responsibilities and different perspectives that partnerships offer can be incredibly valuable in the business world.
However, studies report that nearly 70% of business partnerships fail. After all, disputes between partners and failed partnerships can not only put friendships at risk, but also the entire investment into the business.
Why is the statistic of failed partnerships so high? Disputes certainly play a large role in partners’ falling out, but the reasons behind the failures might surprise many business owners.
WHAT ARE THE COMMON REASONS BEHIND FAILED PARTNERSHIPS?
Entrepreneur recently reported on some of the most common reasons partnerships fail. These reasons are so surprising since many of them do not stem from within the business, but from external, personal factors. For example, the list states that business partnerships frequently fail because:
- Business partners are at different stages in their lives
- Partners do not share the same level of motivation
- The level of dependence on the other partner is unequal
- There is a lack of trust between partners
These factors may be personal, but they affect the business in significant ways. Consider the matter of trust. Business partners should have a very high level of trust in each other as they embark on a financial and commercial investment. If they don’t, that only increases the chance of a dispute over business matters.
Some might say that involving personal matters is what puts business partnerships at the greatest risk of failure. However, the reasons listed above seem to indicate that partnerships require a healthy balance of both professional and personal compatibility. Striking that balance is not only important for success but also to avoid legal risks.
PARTNERSHIP AGREEMENT: PLANNING FOR THE WORST IS PRACTICAL – AND CRITICAL
The effects of a failed partnership are not only financial. They frequently lead to legal risks as well, including:
- Internal risks, whether it is a breach of contract or violation of the partnership agreement.
- External risks, if the dispute leads to breaches of agreements with suppliers or shareholders.
That is why it is critical to thoroughly vet a potential partner long before establishing a partnership. It is equally important to have a comprehensive partnership agreement that will address such critical issues as the: responsibilities of each partner; apportionment of expenses and profits; procedures to address disputes; and dissolution of the partnership.