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Partnership for Profit

How Strategic Business Alliances Can Increase Profitability in a Custom Installation Business

In the hit comedy series Seinfeld, neither George, nor Elaine, nor Kramer, nor Jerry ever ended up finding a suitable mate. Amidst all of the talk of close talkers, face painters and women who ate their peas one at a time, it became clear that no matter how hard they tried and how much they criticized the quirks of others, this foursome was so odd, quirky (and yes, mean) that they were destined to be alone.

Such is the case for some businesspeople. While they (hopefully) don’t nit-pick at inane characteristics such as how one chooses to eat their greens, there are those out there who, even though they think they are capable of it, just aren’t cut out for a business partnership.

“When you are starting out in business, you should figure out whether you are the type of person who should have a partner or not,” advises Helen Heneveld, principal of Heneveld Dynamic Consulting Inc. in Holland, Michigan. “Sometimes businesspeople get partners and it doesn’t work because they are really a lone gun.”

This is especially prevalent among entrepreneurs who fly solo in the beginning, and then signed on with a partner as their business grows. “If people start out without a partner and then get one, it’s a real challenge because you have to shift your mindset. It’s similar to being single for 45 years and then getting married,” Heneveld added.

In fact, there are more similarities between marriage and business partnerships than many like to admit. “Chemistry is everything. If you don’t feel it, don’t go looking, because no matter how hard you try, it isn’t there,” noted Jason Carnahan, who recently stepped down as president of Washougal, Washington’s Premier Home Theater to take a systems designer position with Las Vegas’ Creative Home Theater. “Make sure you like the other party both socially and business wise, because personality conflicts can wear over time.”

According to Heneveld, when businesspeople consider entering into a partnership agreement, the first question they should ask themselves is why? “Most often, the reason people bring in a partner is because they need money and that partner brings money with them, and right away that is a desperate situation,” she said. “But if you are in a good financial position and you are taking on a partner with money so that you can leap to the next level, that’s OK.”

In some cases, entrepreneurs enter into partnership agreements because they no longer want to run a business alone. Sixteen years ago, Steve Hayes and Ken Smith, who had both run companies on their own, entered into a 50/50 partnership with the launch of Custom Electronics Inc., a custom installation firm based in Falmouth, Maine. “Neither of us had ever worked in a partnership before; we had always been sole proprietors and independent,” Hayes reflected. “And here we are.”

Once you have determined that your business is best operated as a partnership, it’s necessary to clearly define each partner’s responsibilities. This requires a bit of soul-searching.

“First, you have to go through the exercise of defining each partner’s strengths and values of what they are bringing to the table,” Heneveld said. Then you must decide who is responsible for what aspects of the business. “Who has the ultimate say on marketing? What has the ultimate say on hiring? Pricing? Product development? Whatever it is, you must clearly define that at some point, the buck stops here,” she explained.

In establishing their business, Hayes and Smith took the unusual measure of deliberately bringing their friendship into the legalese of their partnership agreement. “What is really important in our partnership is the maintenance of that relationship, so if you read the first few lines of our partnership agreement it says that under no circumstances would we compromise our friendship. If our friendship is at risk, then we would liquidate the company,” Hayes explained. “The consultants we hired said that we couldn’t really start a partnership agreement with that kind of a statement, but why not? If there is nothing more important than the relationship, and if you are going to have your whole business reflect that, then why not say it right off the bat?”

In fact, Hayes argues, once people recognize that business relationships are much like marriages and must be maintained in similar ways for them to succeed, the more successful they will be. “It better be approached as one, otherwise I think you are in trouble before you start,” he said. “I would suggest that it works better for everybody when they realize that number one, they are human, and you have to manage the humanness of the relationship. Does that mean that you manage the relationship before the business? No, you still have a partnership agreement, you still manage profits and all of the other things that you need to manage, but you aren’t devoid of the humanness of the relationship.”

As such, there are times when partners can take on the same behavioral traits as husbands and wives. Hayes acknowledges that one of the mistakes that he has made in the past is not to vent his frustrations. “There have been times when I have kept my mouth shut when I should have said something about what was bugging me,” he admitted. “I think it’s the reason that some marriages don’t survive: you let things build up and you don’t manage the conflicts. You don’t move towards each other, you move away from each other and before you know it, you are wondering what happened to the partnership.”

Although several factors–the events of September 11, 2001, and a motorcycle accident among them–contributed to the departure of Jason Carnahan from his company, he says that his 10 years of experience provided him with valuable lessons on how partnerships work best. “My advice before entering into a partnership, or merger is to make sure one person is in charge and has majority control of the company, and that you can accept their decisions,” he explained. “Also try to limit the influence of minority-share partners, as they can do the most damage if they are put in control of a large part of your business. They receive the respect from company clients while they don’t own enough of your company to make it worth their while to make things better if things get bad. Instead, when the going gets tough, they can leave and we they do it can be devastating.”

Hayes notes that while partnerships may not necessarily reap more profits, there is something to be said for sharing the workload. “I don’t think it is more profitable because you have two substantial salaries and expense sheets,” he explained. “But you have to decide: do you want to balance your life, or do you want to maximize profitability? Having a partnership where you can share the workload but take less cash is one choice you can make, and it has worked out for us.”

At the same time, there isn’t always an even split, which is one of the benefits–and drawbacks–of a partnership. Sometimes one partner may have more family commitments, requiring the other partner to pick up the slack. “That is part of the beauty of a partnership,” Hayes said. “The prime objective is that the work continues to get done.”

The same principle applies when a partner is on the verge of burnout. “If it’s the function of the partnership to maintain the relationship, then the first thing we want to do is be attentive to each other,” Hayes said. “If you see your partner overstepping their capacities, there are times when you have to tell them to go home because they are too tired, and that you need them to be a good partner for the long term, not just the week.”

While it’s easy to get caught up in the excitement of embarking on a new venture, it is necessary to consider how things will play out when the partnership, for whatever reason, comes to an end. “You need to look at exit strategies and a buy/sell agreement,” Heneveld emphasized. “How are you going to value the company? How do you separate ways in an amicable manner? People tend to go into this not thinking about when it’s time to get out, and then when they do, it gets very emotional.”

Hayes suggests that one of the best ways to approach a new partnership is to hire a consultant for help. “Write everything down about how the partnership is going to look, including how it is dissolved,” he said. “If you don’t have an exit plan right from the start, it will fail. You need a way out without feeling ripped off, or feeling that you are ripping someone else off.”

Carolyn Heinze ([email protected]) is a freelance writer/editor.