Why Most Business Partnerships Fail

Business partnerships have many advantages as they allow entrepreneurs to pool complementary skill sets and share startup costs and risks with one another. Unfortunately, many of the advantages of partnerships can also be disadvantages, and statistics show that up to 70% of business partnerships ultimately fail. Take a closer look at some of the most common reasons why business partnerships break down, so you can make any partnership you enter a more successful relationship.

Mixing Personal Relationships With Business

Many spousal, family businesses, or partnerships between friends are successful, and the notion of starting a business with someone you know and trust can be very attractive. However, money can change everything.

Any successful business partnership should be based on the complementary strengths, talents, personalities, and experiences of the prospective partners. A relative or friend needs to bring much more to a potential business partnership than just their personal relationship with you.

Done properly, a business partnership with family or friends can be rewarding and profitable, but unsuccessful partnerships can break up families or destroy friendships permanently.

Unequal Commitment Among Partners

Starting a business takes a huge financial and personal commitment. As a sole proprietor, you alone are responsible for the success or failure of the business. In a partnership, you are dependent on the contributions of other partners, and if they are unable or unwilling to make the same level of personal or financial sacrifices, it will likely result in resentment and conflict.

A partnership based on one partner making a larger financial contribution and the other partner(s) promising to make up the difference in "sweat equity" might sound reasonable in theory, but "sweat equity" is difficult to quantify and describe in a partnership agreement. If the promised "sweat equity" is not delivered, the partnership is headed for disaster.

It may be difficult for a member of the partnership to be fully immersed in the business when they have other commitments, like family or work.

Unequal contribution among partners may not present a problem if understood in advance, and fully articulated in the partnership agreement. Otherwise, it's likely to lead to strife among partners.

Lack of Success

Building a business takes patience and perseverance. To build a successful business, the owners must be prepared to make a long-term commitment.

Lack of business and/or periods of declining revenue can take a psychological toll on business partners and eventually lead to conflict, particularly if the business becomes a heavy drain on the personal finances of the people involved. If business isn't going well, the partnership should have something in place to renew motivation and assess barriers to success.

There are no certainties of success in business and the advantages of a partnership cannot overcome a lack of preparation or a business idea that is not viable. Thorough business planning before and after startup, including research on the target market, realistic cash flow, and revenue projections, and having sufficient debt or equity financing available when needed are all requirements for any business to prosper in the long term.​

Differing Values

Many partnerships do not succeed because the partners do not communicate their goals. As the business evolves the differences can become an increasing source of friction.  

Before entering into a business relationship, prospective partners should meet and state:

• Why they want to become entrepreneurs
• What their vision is for the company
• Their long-term objectives 

Make sure you and your partner(s) are aware of the realities of owning and running a business. Potential partners need to be realistic about business prospects and temper their expectations accordingly to avoid possible disappointment.

Potential partners may disagree on their visions for the company and have radically different notions of the long-term goals of the organization. For example, one partner may see the business as merely an alternate way to earn a modest living and have no wish for future expansion, whereas another partner may have ambitious expansion plans for the business, including having a large staff, opening satellite offices, and taking the company public.

To avoid long-term conflict between partners, the company vision should be agreed upon and described in advance in a vision statement and ​sections of the business plan should be used to formalize the long-term goals of the organization. 

Personality Clashes

Sharing financial risk and having complementary skill sets are some of the great advantages of business partnerships. If you can't get along with your business partner, the business may be headed for trouble.

Disagreements among partners are to be expected, but heavily contrasting personalities can amplify differences of opinion and lead to resentment and conflict.

When evaluating a potential partner, assess their personality by considering the following:

• Are they a risk-taker?
• Are they highly motivated?
• How would they handle difficult situations such as dealing with problem employees, customers, and vendors?
• What are their expectations of the partnership and the business?
• Do they have the patience and perseverance to handle starting and growing a business?

Keep in mind that differences in personality can also be a benefit rather than a hindrance, providing you respect your partners, value their opinions, and have a shared vision for the business.

Failure of Trust

An honest and open relationship between partners is the foundation of any successful business partnership, so nothing breaks down a partnership faster than a lack of trust. Given the shared liability inherent in business partnerships, illegal or unethical business practices by one partner put all other members of the partnership at risk.

While you can never predict with certainty that your partner(s) will always conduct themselves in an ethical fashion, you can mitigate the possibility by researching their history and reputation ahead of time. Find out:

• Whether they have had other businesses in the past and if so, how were they regarded by past partners, suppliers, customers, and employees
• Their reputation in the community
• Any previous legal difficulties
• Their employment history
• If they have ever been bankrupt, had a poor credit rating or been in difficulty with the tax authorities
• If they are willing to agree to a written partnership agreement that outlines all the critical aspects of the business

In general, if someone has a history of stability and ethical behavior, they will likely be a more trustworthy business partner.

Bottom Line

Thoroughly scrutinizing your prospective partners in advance and developing a comprehensive written partnership agreement will improve your odds of having a successful, long-term business partnership. Part of your planning should include exit strategies from the partnership in case any of the above or other problems thwart the partnership's success.

Frequently Asked Questions