Understanding Business Partnerships
This article appears in the Nov/Dec 2014 issue of Business Franchise Australia & New Zealand
A comprehensive two-year study conducted by Griffith University’s Asia-Pacific Centre for Franchising Excellence identified four critical areas in which most failed business owners were lacking in knowledge – partnerships, contractual understanding, expectations, and debt levels were identified as the critical factors.
By allying with a likeminded associate, friend or family member/s when entering into a business, individuals can increase the amount of assets at their disposal – often in a short space of time.
Partnerships exist in almost every business sector and industry, including in accounting, in legal firms, in retail, and in professional service firms.
Traditionally, business people form partnerships to collectively benefit from one or more of the following:
• Knowledge• Skills
• Relationships and contacts.
For any business partnership to be fruitful the input of resources (tangible and intangible,) from both parties, is a necessity. And it has been found that partnerships are relatively low cost, easy to set up, and ongoing compliance is cheap.
However, Griffith University’s 2012 ‘Survival of the Fittest’ research showed that failed business owners were more likely to be engaged in a partnership – when compared with sole business owners.
This higher failure rate found in partnerships may reflect restricted or slower decision making; reduced adaptability; confused responsibility; or poor communication often associated with poorly maintained partnerships.
In the context of operational factors, failed business owners had less decisionmaking autonomy, were less adaptable to business environmental changes, felt highly restricted by their business contracts and, as a consequence, experienced detrimental effects to their health and private lives and regretted their decision to enter the business arena. Interestingly, failed business owners were more likely to be in partnership with someone else (as opposed to sole owners) and this may explain why they felt restricted in their own decision-making and, to a certain extent, less adaptable. Therefore, it appears that by having sole discretion over decision-making may assist individuals in taking responsibility for their own decision/actions, thus causing less psychological discomfort. In this sense, the management of partnerships (within a franchising agreement or with others), is an area that requires further attention.
In addition to the risks associated with any business, partnerships have two additional risks:
1. Risk of the partners’ relationship failing (this risk can be reduced through a clear dissolution process and understanding the way forward).
2. Risk of the decision making process being slower or less effective (this risk can be reduced by clear and concise, collaborative decision-making).
So, before starting a business, all interested parties need to seek professional advice specific to their partnership, jurisdiction, and situation - then select the partnership (or other business structure) that works best for them.
Like all relationships, effective communication is essential to establishing and maintaining a productive business partnership; as is a mutual understanding of well set-out business goals. If the communication process works well, then all things are possible.
Communication between stakeholders should always be clear, timely, open and complete. It is also essential to draw-up a partnership agreement document, prior to conducting business, which can be updated over time. This means that, if any part of the business operation becomes contested at a later date, there is a set of documented, mutually agreed-upon guidelines that can be referred to.
This agreement is the first step in the ‘partnership cycle’. Once the agreement is completed, partners need to work to:
• Actively manage and improve the partnership.
• Regularly sit down to review and update the partnership agreement document.
• Know when and how any or all partners can exit, or perhaps take the partnership through an evolution to something different and new.
So, what have we learnt about partnerships?
They have benefits and risks. They bring more assets to the business and are fairly easy and cost effective to set up, but reduce flexibility, increase complexity and the need to focus on communication.
Partnerships can change and evolve over time – depending on the business’ need.
Partnership outcomes reflect the persons, and personalities, of the partners. This means that each partnership is unique and needs to be assessed and managed on its own merits. Building and nurturing a good partnership is more art than science.
To help business owners – both prospective and current – manage their businesses better, Griffith University have developed four free e-Classes to address the topics listed above. Each e-Class takes less than 10 minutes – visit www.franchising.edu.au and go to the Education tab. You will find these eclasses in the franchisee area