Andrew, an entrepreneur from Columbia, Mo., recently called into the Dave Ramsey Show because he feels like his business is under water (1).
Andrew owns a pool cleaning, repair and resurfacing company with a business partner, but things are not working out. His partner convinced him to go into debt to buy the business — and now he isn’t pulling his weight.
Ramsey agreed the arrangement isn’t working. In fact, he told Andrew to walk away as soon as possible. Going even further, the guru argued that the entire partnership model is not the right way to run a business, quipping, “Partnerships are the only ships that won’t sail.”
Here’s why Ramsey told Andrew to brave the breakup conversation with his business partner — along with some insight into why partnerships can be such a problem.
Ramsey immediately identified a few major issues with Andrew’s partnership.
Andrew explained that he’d grown the pool cleaning and repair company dramatically, earning $49,000 in just the past month. Unfortunately, his partner isn’t doing nearly so well.
When they got started, Andrew’s partner had convinced him to pay $260,000 for the partner’s uncle’s pool resurfacing business — leaving their fledgling company on the hook for thousands per month over the next five years.
Andrew’s partner was supposed to be running the marketing portion of the business. Unfortunately, he has only brought in a few jobs, and that part of the business is losing money.
On top of that, the partner isn’t really working very often, and when Andrew brings it up, the partner gets defensive, repeatedly claiming, “You wouldn’t understand; you don’t have a child at home.”
Ramsey told Andrew the only real solution is to walk away immediately.
“Deed your partner’s portion to him,” Ramsey said. “You’ve got to get out of this.”
Andrew’s story is a perfect illustration of why Ramsey cautions against partnerships. He identified several typical red flags in the situation.
For one thing, the two partners don’t have a formal agreement in place, which Ramsey said is essential if you’re going to run a business as a duo. Secondly, one partner is doing all the work, and they have conflict over the best way to manage the business — both common scenarios as well.
Going into business with a partner is an alternative to sole proprietorship (running the business by yourself) or more formal options like incorporating (which require much more paperwork).
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Partnerships don’t have to be just two people — they can be formed anytime people decide to combine resources and start a business together. They often require little or no paperwork, although regulations vary by state.
Since partnerships are so easy to start with so few requirements, jumping into a complicated financial arrangement can feel as easy as jumping into a pool — but just like with a pool, you need the right safety measures in place.
Because so many problems can arise with few safeguards, Ramsey advised against forming a partnership at all. However, if you do, he said you should make sure to have a written partnership agreement.
“If you are dumb enough to do a partnership, you have to have thorough partnership agreements,” Ramsey said.
Having an agreement in place can both head off conflicts and provide a path to resolving them — or ending the union if things aren’t working. In a partnership agreement, you can outline:
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Responsibilities of each party
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Financial contributions of each partner
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How profits are to be reinvested or distributed among partners
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What happens when conflicts arise
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What happens if either partner dies, divorces, becomes disabled, or wants to exit the business (2)
If you don’t have this kind of agreement and the partnership isn’t working out, ending it could be best, as Ramsey suggested.
Andrew will need to negotiate the terms of the dissolution, put them in writing, and make sure both partners sign on. He should also close joint financial accounts and credit cards, as those won’t automatically be split up when the partnership is.
It’s best to seek legal advice when initially creating your partnership. An experienced attorney can help you understand the advantages and disadvantages of different business structures, and help you draft a partnership agreement that protects you.
If there is a conflict like the one Andrew and his partner are dealing with, a lawyer can also help you explore options for ending the partnership without jeopardizing your future success.
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Ramsey Show Highlights (1); Los Angeles Regional Small Business Development Center Network (2)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
