Partnership Pitfalls
So… you and your best friend, brother, or spouse want to go into business together? Of course, you agree on everything right now, but what happens when you don’t? In many cases being realistic and pragmatic can be the kindest, most loving thing you can do for your partner and yourself.
Our very own Maine SBDC Business Advisor Chris Cole has personal experience with a scenario that ended very differently than she thought it would. Over the course of the next month, we’ll be sharing a 3-Part series exploring the pitfalls of partnership and how you can protect yourself and your business.
We asked Chris to speak about what happens when partnerships break down based on her experience from an employee’s point of view and as a co-owner of a business.
Part I
For many years I worked for various restaurants and cafes throughout coastal Maine including starting a mission-based soup business. It was always my dream to own a café and bakery, someplace all the locals know and where tourists want to go.
A friend and former co-worker asked me if I wanted to purchase an existing diner with her. Yes, we would finally have our own place! We worked diligently on our business plan, figured out how much money we would each need to make to support our respective households, contacted an accountant, and got the go-ahead from our families. We spent months on planning the menus, doing our food costing, figuring out the staffing needs, lining up vendors, and securing the funds for a down payment and working capital.
Before purchasing the business and signing a lease agreement, we hired an attorney to form an S-Corporation. During the first meeting, we agreed my partner would be the President, and me the vice President and treasurer, the attorney our secretary. The attorney asked us about creating a partnership agreement. “We don’t need that, we have worked together for years, never had a disagreement.” Besides, we were good friends and our families spent holidays together. He said what if one of you wants to end the partnership? We would not, owning a café together was our dream.
The café was busy from the start and then we expanded to wholesale baking (something my partner was not keen on). The business was open six days a week and on the seventh day, we would be in doing the ordering and prepping for the week ahead. Neither one of us was afraid to work and work hard.
Shortly after opening, we were approached by colleagues in the industry and asked to open a second location in the new Portland Market. I wanted to leap at that chance, but my partner believed it would be too much for our growing business. We passed on that opportunity.
Even through the recession, our business continued to grow at a very strong rate, but so did the differences between us. Because of the recession we had to keep prices low to keep customers coming in even though food costs were going up, which meant we had to reduce labor costs. We each worked seventy to eighty hours a week and that put a strain on our families.
Three years in, I wanted out. This was not what I had always thought it would be and the working relationship with my partner was getting more difficult every day. Thankfully, we still respected each other and wanted the best for each other. I offered to sell my portion of the business to her; we would just need to come up with a price and terms.
Instead of meeting with our attorney, we tried to come to an agreement. I will not go into the details, but it took eighteen months, multiple meetings with business counselors, each hiring private attorneys, and in the end, I bought out my partner’s share of the business. Not really what I had planned to do.
Sadly, during those eighteen months, our friendship dissolved. Each of us had our own view of the events and who did what and how much the business was worth. If I could go back to that first meeting with our attorney, I would absolutely have a partnership agreement drawn up.