14 Reasons Why 80 Percent Of New Business Partnerships Would Fail Within Their First 5 Years Of Exis

by J. Watananbe - Date: 2007-03-02 - Word Count: 1756 Share This!

At least 80% of new businesses in developed countries would fail within their first 5 years of existence; many of them are owned and operated by business partners, and I'd risk to say that a very high percentage of new business partnerships would also fail within their first 5 years of existence. Failure of business partnerships often results in failure of friendships as well. This is why many advice you to not to form a partnership when you start a new business even if they don't advice you against starting a new business. I don't disagree with that, but I also do not force anyone to not form a business partnership. However, those of you who plan to form partnerships to start new businesses ought to know potential problems that can harm business partnerships severely and you need to understand that those potential problems can often break partnerships. The followings are those potential problems, and I also give some examples based on my personal experience.

1. Profit sharing and ownership

The profit and the ownership should just be divided into 50 - 50 unless there is a very good reason why it should be otherwise. If there are three partners, then the profit and the ownership should be divided into 34 - 33 - 33 or close to that. If the profit and the ownership are not divided equally, then, in reality, the relationship becomes that of an employer and an employee(s); it is not a partnership. Yet pretending that it is only does harm to the relationship which has the name "partnership."

Sharing the profit and dividing the ownership were very serious problems in one of partnerships that I formed. My partner assumed more than 50% of the ownership initially and I did not disagree, but retrospectively speaking, there was no good justification; this became a very serious problem later on. The profit sharing was not clearly defined; more specifically, how exactly two share incoming profit from different sources according to our contributions was not clearly defined; this also became a very serious problem later on.

2. Skill set problem

Two skill sets should compliment each other; otherwise, there is really no merit of forming a partnership. Also both skill sets have to be equally valuable to the partnership business. If one is clearly more important than the other, then the purpose of forming the partnership has to be questioned; this can make the partnership very unstable.

IT skills were desired skills in the business in one of partnerships that I formed. Especially, IT skills were essential at the very beginning (and it turned out that the partnership was maintained only at this beginning stage; business operations that were proposed to take place at later stages have never been implemented by neither my former partner nor I), and those skills turned out to far more important than other skills. However, only I had those skills, and this made the partnership very unstable.

3. Honesty

Partnership cannot be maintained without honestly. This seems so obvious, but some people apparently do not understand this.

Retrospectively speaking, this is the main reason that failed one of partnerships that I formed. My partner lied too much; there were reasons, but there were no justifications.

4. Communication problem

A lot can be done using email and phone, but neither is a perfect communication tool. Without the face-to-face physical communication, maintaining a partnership is extremely difficult. Online collaborations are becoming more and more popular, but forming partnerships is much more difficult than just collaborating.

My partner and I used only email and phone in one of partnerships that I formed. Although we knew each other and lived in a same city at one time, we had a great difficulty maintaining the partnership.

5. Lack of transparency

Sharing information can become difficult oftentimes because some information can be very personal. However, as time passes, more and more information should be shared, not less and less. If, as time passes, less and less information is shared, then that shows that there is a problem of lack of transparency. Lack of transparency is deadly when you form a partnership.

- The following problems can arise not only in businesses owned and operated by partners but also in businesses owned and operated by single persons, although they can harm partnerships greatly.

6. Funding problem

Lack of funding oftentimes becomes a very serious problem. Especially, if the problem is so serious that neither you nor your partner can get any financial support from the partnership business, then it can damage the partnership severely.

There was a very serious funding problem in one of partnerships that I formed. In particular, the business was unable to provide any financial support to either of us for over a year; this made the partnership very difficult. If this had been a kind of business that we were not required to spend so much time at the beginning and we could grow gradually, then the partnership might not have had to suffer, but this was not the case; this was a kind of business that we were required to spend a lot of time at the beginning while there was no income coming in.

7. Lack of experience

Experience teaches you a lot and you learn how to solve various problems as you experience more and more. Without it, you often have hard time solving various problems.

In one of partnerships that I formed, neither my partner nor I managed to create a business that actually enabled one to make his living before we formed the business; in other words, both severally lacked experience. Retrospectively speaking, we severely lacked problem solving skills, and this made our life hard.

8. Family problem

Family matters ought to be priorities, but they should not interfere with the business. Obviously they do interfere to an extent, but partners ought to prepare to minimize the number of problems and mitigate the effect of each problem.

One of my business partners was married, and to describe briefly, he maintained his marriage in such a way that it only became a liability to him; he ended up spending too much time to maintain his marriage and too little time for the business. While family matters are extremely important, this was a very serious problem for the partnership because he barely spent any time for the business. Furthermore, the problem was largely created by him; it was not an accident such as sickness and traffic accident. Therefore, it was definitely a problem that he created for the business.

9. Too much emphasis on the idea

One of trends in late 90s and 2000s in US was that the idea is what is so valuable; execution comes second. I get the impression that too many people believe this even today. Ideas are important, but nothing really takes place without execution; this has to be understood.

Both of my past business partners and I put too much emphasis on ideas. Retrospectively speaking, it was too naive to believe that great ideas would solve most problem including the financial problem, but it was almost silly to believe that.

10. Excessive Optimism

There is no doubt that you need to be optimistic about what you do; however, you cannot be too optimistic. For example, sales is essentially a number game, and when you speak to 10 potential customers, you can expect that a few of them are interested in your product or service. You can optimistically think that more than a few of them are interested in your product or service; you can also optimistically think that a few of them are going to buy your product or service. However, believing that all of them are going to buy your product or service is excessive optimism; it is unrealistic. Departure from the reality can only hurt your business.

11. Lack of dedication to work

It seems obvious that you need to dedicate yourself to your work in order to build a successful business, but quite a few people do not do this. They often spend too little time; they often say that they are working hard, but they are not doing that actually. Obviously, your business will not succeed unless you dedicate yourself to your work unless there is a miracle.

12. Drugs and alcohol

I have nothing against alcohol personally; I also personally believe that some drugs be de-criminalized. I do not take drugs but my personal opinion is that taking drugs is a personal choice at the end of the end; I'd even say that taking certain drugs is a civil right. However, I have only seen negative influence of drugs when it comes to business operations. When you run a business, you need to be clear-headed. A similar thing can be said about alcohol; there is nothing wrong with drinking with moderation, but you cannot really operate businesses effectively when you are drinking. Chatting about a few ideas over a couple of beers is ok, but serious decisions should not be made.

13. Sticking to a business model that does not work for too long

Patience is a virtue; however, your business ought to have a result if you work hard for a period of time. If not, something needs to change; also its business model ought to be reviewed and revised. You cannot just stick to a business model that does not work for too long.

14. Keep believing that you are a God, if not, THE God

It is very important that you have faith in you; your ability, your dedication, your intelligence, etc. You also have to have self-esteem and confidence. However, you cannot be believing that you are a God, if not, THE God. You cannot believe that you are a Howard Roark or Frank Lloyd Wright, either, unless you really are a Howard Roark or Frank Lloyd Wright. (Frank Lloyd Wright, an American architect, was one of the most prominent and influential architects in the world in the first half of the 20th century; his designs were revolutionary at the time, and he believed in his designs, and he was very independent. He had the courage to stand for them while he was not easily accepted. Howard Roark is the hero of the novel, "The Fountainhead", written by Ayn Rand and is loosely based on Frank Lloyd Wright.)

The list is not made to discourage you to form a partnership. However, you ought to understand potential problems if you plan to form a partnership. Many of problems can be eliminated before you form a partnership. Even eliminating all problems does not guarantee you to form a very successful partnerships or to build a very successful partnership with your business partner, but it should increase your chances.

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J. Watanabe is the owner of the finance discussion forum eFinancialDistrict, Finance and Accounting Forum. The forum is a part of a finance and accounting portal, and the portal has a discount finance and accounting book store.

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