Partnerships: Don’t confuse income with equity

Posted on 05/12/2018 by

How many times have you heard the advice “you should never go into a business partnership”? Probably a few more times than you have heard “you should never get married”. Both pieces of advice could do with the addition of “unless…”

The stats on marriage run between one in two and one in three havingbreakdowns. It is harder to find stats on business partnership breakdown but I suspect they would be higher. I have seen some spectacular successes andfailures overmy business life.I am often asked by clients what makes a successful partnership. My answer is:a shared vision, shared values, a good deal of mutual respect, some complementary skills and paying yourselves a “fair” wage.

Some of the great partnerships I have seen have come from people who have worked together in one form or another in the past, whether that be a colleague, an employee or in a related business. It is that time together, particularly in a work situation, that will give you the clues as to whether a partnership will work. Anything less than a year or two working together is risky.

One of the traps of business partnerships is how you remunerate the partners. Business owners so often confuseincome with equity. The partners of a business should be paid what the market would pay you to do that role.

I had an engagement with a business partnership of three brothers years ago. One was managing director, one a salesman and the other was the storeman. They had equal shares in the business -they all drew the same wage of $175k and shared profits equally. It seemedfair on the surface as they all worked just as hard as each other.If a valuer came in to value that business, one of the first things they would do would be to normalise the profits by ensuring all of the directors were drawing a fair wage. It turns out their business was more profitable than it was showing, as the MD should have been paid around $150k, the salesman around $125k base with a commission of $150k, and the storeman around $75k.

The source of the angst in the business was that the salesman brother was demotivated. It was not the easiest of conversations to facilitate, but it hadto happen. What eventuated after an ‘income-equity’conversation was a far more energised and profitable business thatis now booming.

Tim Ryan is a partner and business coach at [email protected]杭州龙凤论坛

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