7 Reasons You Should Never Have a Business Partner
If you’re reading this, you may be debating whether to take on a business partner. It’s a good thing you found this article because you’re about to make a terrible mistake!
Why? Here are 7 reasons why you should never have a business partner.
1) You’re Legally Tying Your Finances Together
I started my first business by accident.
It was early 2015, I had come across the whole Amazon FBA craze before everyone realized it was a thing. Back then, all you had to do was get generic goods shipped to Amazon, and they did the rest. (These days it’s so competitive you’d be hard-pressed to recreate these results)
I told my friend about this, and he thought it was a great idea, so we got to selling. I initially thought of it more as a way to make extra beer money than as a serious business venture. That is until this happened.
There was a point where we were making over $1,000 in profit per day. It was significantly more money than either of us were making at our jobs COMBINED.
I’m not bringing this up to humble-brag. You need to consider how a life-changing amount of money could alter your relationship.
Here’s a simple scenario. One co-founder wants to start cashing out some of the money. The other wants to re-invest the profits and grow the business.
They’re both valid responses to this situation. Neither partner is right or wrong to feel the way they do. The problem is that you’re in a 50/50 business partnership and there’s no way to break a stalemate. On top of that, serious money makes emotions run high. When you find yourself in this position, it’s already too late. You’re screwed.
Running a real business will test your monetary risk tolerance over and over again. If you and your business partner aren’t always on the same page financially, you’re in for a wild ride. Plus, you have to split the money you make. That stinks too.
2) People’s Interests Change Over Time
Have you ever gotten really excited over a new job? Then after a year or two passes, you’d rather have a colonoscopy than get up and go to work?
Businesses sometimes go the same way. You’ll start out excited, but after a few years, you might feel burnt out. Your interest could change to the point where you want to exit from the business entirely.
If you didn’t define an exit strategy with an actual lawyer before starting your business, you’re screwed. Even if you did, you’re probably still screwed. An unexpected exit where both parties end up happy isn’t an easy thing to pull off.
Keep in mind that your business partner owns you. If they’d rather play with horses all day than come to work they still get half. This is not a good situation for you if it comes up and it comes up more often than you’d think.
3) You Don’t Need The Other Person (Or They Don’t Need You)
There is only one valid reason to give another person a major equity stake in your company. That situation is if you literally can’t bring your idea to life without the other person. AND they can’t bring it to life without you. It needs to work both ways for it to be a good idea.
A lot of people conflate this. They decide they want to build an app but don’t have any technical skills. They see themselves as having the following 3 options.
- Learn to Code.
- Hire a developer.
- Find a “technical co-founder” to do all the work without them realizing that they don’t need you.
A lot of people think that if they can pull off option 3, they’ve made out like a bandit. But, is giving up half your company actually better than hiring a short-term developer?
Developers capable of building a minimally viable product aren’t THAT expensive. Once the product exists, you can charge people to use it. You can then use that money to hire more developers. All while staying in 100% control of your company. (And if it doesn’t make money, was it that great of an idea?)
4) Your Business Partner Will Become Your Boss
One of the reasons I got into entrepreneurship was to be my own boss.
But, if you’re in a 50 / 50 split with your business partner, they’re kind of your boss. Even if you’re CEO and calling all the shots, your business partner is not a person you want to upset.
If your partner stops showing up to work, it will sink your company. Ignore what your partner wants too often, and they’re likely to do just that. They need to be on board with all your decisions to prevent this from happening.
A less common scenario is one where you want to sell company stock in exchange for financing. This makes your new financier and business partner the majority stakeholder. They now have the power to vote you out as CEO and start making all the decisions. Steve Jobs was famously fired from Apple in a similar situation.
5) You Can Still Collaborate With Other Business Owners
One of the only good reasons to have a business partner is that it’s great to have others to collaborate with. Starting a business can be an isolating experience when nobody cares about it but you. That feeling of camaraderie is something special and can help to get a new idea off the ground.
But, you don’t need to trade ownership stake for collaborators. For example, I’m a great computer programmer, but I need graphic design help. I could go out and find a graphic designer who needs programming help, and we could do each other a favor.
There are ways to work with other business owners that don’t involve giving them half of your company. Find a meetup group, find business groups on Reddit or Facebook. Find a co-working space. Get a business coach.
Whatever you do for collaboration is a great idea as long as you don’t exchange half of your company for it.
6) Your Co-Founder May Not Share Your Vision
One of the most crucial roles of a business owner is providing a vision for the company.
Companies pivot away from their original business strategy all the time. And the pivot will fail if the two co-founders aren’t on the same page about it. Here are a few examples of companies you may have heard of that made some incredible pivots early on.
- YouTube started out as a dating site
- Shopify was a site that sold snowboards.
- Slack was a video game.
- Flickr was also a video game.
- Twitter (a company that played a role in creating President Donald Trump and the Arab Spring.) started as a podcast subscription service.
Are you getting the picture? If you need to pivot and your co-founder isn’t on board, it could sink the company.
7) Liability For Your Partner’s Actions
I don’t like to drone on and on about legal topics as I am not a lawyer and none of this is legal advice.
But, you may find yourself in hot water if your co-founder does something sketchy. Not being involved doesn’t absolve you or your company of all consequences.
Even mundane scenarios can escalate quickly. What if your business partner’s spouse gets 25% of the company in a divorce? Now the spouse is trying to cash out, and you have no viable way to accommodate that. This can destroy your company overnight.
When you give up significant ownership of your business, these are the types of risks that you’re taking on. You need to think about these things and more before casually taking on a business partner. Your future livelihood is getting tied to this person and anything that they might do.
Leave a Reply