Scope out your partners

Some years ago, Alexander Penrose discovered, to his great dismay, that a promise isn't necessarily a promise. His partner, who owned a majority stake in their reseller company, had made a verbal commitment to groom Penrose to take over the business. But when the majority owner's son graduated college and decided to join the firm, that commitment was promptly forgotten. Making matters worse, the majority partner refused to buy out Penrose's minority stake. It took Penrose seven years, until the reseller business ultimately got sold, to collect on his share. In the meantime, he incurred hefty legal bills in pursuing his claim.

Penrose, who now runs a network integrator, Penrose Computer MarketGroup in Binghamton, N.Y., is glad to be free and running his own show. "It's awfully hard to have partners," he says understatedly.

Such complaints are hardly new to the IT industry, or to any other field. Indeed, it's a safe bet that if two cavemen went into partnership on the invention of the wheel, one of them ended up shafting the other.

What destroys most business partnerships, says Salt Lake City attorney Scott Carpenter, are many of the same factors that break up half of all marriages. They include a paucity of foresight in the courting stage and a similar lack of care and feeding in sustaining a relationship.

First, say experts, choose the right business partner. Be sure he or she is someone with whom you share fundamental values and business philosophies.

Carl Palmieri, who now runs a family reseller business in Bridgeport, Conn., has been involved with several partners over the years. His best partnerships, he says, were with "customer-oriented" people like himself.

"You want someone who is passionate about what he does," adds Tim Radtke, president of TSR Solutions, a systems integrator in Germantown, Wis. At the very least, says Radtke, you've then got a partner who will work as hard as you to make the business a success.

In Radtke's case, however, passion and hard work couldn't keep an earlier business relationship from dissolving. His former partner in a network integration company, a programmer by trade, developed a piece of software for the insurance in dustry. The business then evolved in two conflicting directions, before the partner took his software product and went off to do his own thing, leaving Radtke with the networking and hardware side of the company. While it was an amicable breakup and both men wound up the better for it, the story illustrates another guiding principle in choosing a partner: Select one who shares your long-term vision.

And last, but far from least, never enter into any relationship involving shared destinies and finances with someone you can't entirely trust.

"No amount of paper and nothing in a prenuptial agreement can save a bad relationship," says Paul Arne, an Atlanta-based attorney. Adds Sample, "Be sure you can trust [a partner] with a piece of your life."

That said, you must have a written agreement. Penrose, for example, never obtained one, and it came back to haunt him.

The partnership agreement serves two broad purposes, according to Arne. It documents the relationship between the parties, and forces the partners to think through the relationship and focus on critical issues they may have been neglecting.

Attorney Carpenter advises including the following elements in any partnership accord: the specific responsibilities of all parties in operating the business; compensation issues, including salaries and the sharing of profits; and restrictions on the transfer of assets.

The last issue is critical. For example, if you and your partner don't get along, you don't want him or her selling out to just anybody. Or, if your partner dies or remarries, you might not want the surviving spouse or the new spouse as a business partner. To ensure your control over who will be your future partners, the agreement should include the right of first refusal for one partner to buy out the other's share.

Other important aspects of a partnership agreement, according to Carpenter, are outlining concrete procedures for resolving disputes and identifying the automatic triggers that will terminate the agreement. Such a trigger could be when the business loses money two years running, or when 60 percent of the business's assets are sold.

But, as with any marriage, the written agreement can never anticipate every contingency, and the partners must be flexible. Sample, the minority partner in Kenwood, says one problem that isn't usually envisioned in a contract occurs when the majority partner refuses to give up any decision-making responsibility. In these situations, says Sample, it is incumbent on the majority shareholder to relent and relinquish some control to the other owners.

Penrose believes most post-contractual problems arise when the business is going either very well or very badly. When things are bullish, he says, the money stakes increase and the tensions rise accordingly. But when business is in the doldrums, he adds, the partners tend to squabble over whatever little money is available.

Such conflicts, concludes Ray Taggart, the director of IT at DSW Partners, are inevitable in even the closest business partnerships. However, as long as the partners are able to sit down and talk things out, a company's chances of surviving will remain strong.

"The key, absolutely, is communication," says Taggart.

There's nothing wrong with partners disagreeing, or worse, as long they have a mechanism in place for resolving their disputes.

Tim Radtke of TSR Solutions and his partner employed informal, after-hours weekly chats to iron out their differences. "We'd talk about what was happening, how the business was doing, what we liked, what we didn't like," says Radtke.

Another excellent tactic for handling conflicts is to rely on an impartial third party, like an attorney or friend, to arbitrate when the parties can't resolve the issue themselves.

When Alan Ashton and Bruce Bastion founded WordPerfect Corp., for example, they granted each other 49.5 percent ownership stakes in the company, and handed the remaining 1 percent to a trusted third person, who therefore had the swing vote when deadlocks occurred.

That procedure should resonate in any red-blooded American, because it's the same one specified in the U.S. Constitution for resolving tie votes in the Senate.