Making an entrepreneurial partnership work

Entrepreneurial partnerships, like marriages, are either made in heaven or messy entanglements that lead inevitably to divorce. I know. I’ve experienced both varieties.

For the past 14 years, I’ve been building what had been a small meat supplier to restaurants in the Kansas City area with my current partner, Ed Rea. We’ve taken our enterprise, River City Meat Company, from annual revenue of $2 million to $14 million and from a handful of employees to 33.

By Paul Turpin
Reprinted courtesy of EntreWorld.org

http://www.usatoday.com/money/smallbusiness/2004-07-11-entre-jul-1_x.htm

Our partnership could be considered a model of sorts for other entrepreneurs building a business with another person, and in this article, I will elaborate on the reasons why it has worked for both of us—and for our business.

Mistakes made

The irony, however, is that it’s worked largely because of the lessons I took away from a previous partnership that ended acrimoniously, the partner with whom I founded the company in 1989.

Back then, a saleswoman who had worked for me in my pre-entrepreneurial career had started a meat supply business from her home and invited me to join. I respected her skills and her work ethic. At the time, I was looking to leave my corporate job at Kraft Foods Inc. because of its heavy travel demands.

So together we launched the company under its current name in 1989. My partner became president and chief operating officer, and I joined formally in early 1990 after I had earned a lucrative year-end bonus from Kraft. That I let her be president, as it turned out, proved to be the first mistake.

A matter of personality

Let me step back a moment and explain that it didn’t occur to me to question matters such as titles—I didn’t particularly care about what mine would be. I just wanted to delve into the job of building a meat supply company.

Nor did it occur to me to put in writing matters such as what to do if the partnership folded, which was mistake number two. I am by nature the type of person who firmly believes in the integrity of the handshake. By the same token, if things aren’t working, I feel I am able to resolve differences. In general, my personality is such that I don’t see bad things happening in my world.

All of this came back to haunt me when the opportunity arose in 1991 to buy a poultry supply company, and an old friend from college, Ed Rea, offered to put up $30,000 in stock as collateral for our loan. My then partner didn’t have the assets to do that, and I had previously signed personally for a $10,000 loan to cover operating expenses.

The three of us agreed that Ed’s contribution would entitle him to a partnership stake. At the time, I had a 50/50 split with my partner, and with Ed’s arrival, I assumed the split would be a third each. Making such an assumption without a formal written agreement proved to be mistake number three.

An acrimonious finale

With the addition of the new business, we were so busy during the subsequent four months coping with a company that had quadrupled its staff and doubled its revenue that we weren’t attending to the personal dynamics of our relationship.

Threatened by Ed’s presence, my co-founder began treating him like an employee rather than a partner. In her view, we hadn’t committed to giving him a stake. Things became so tense that I offered to buy her out or sell the company to her. She refused.

Instead, on a Friday in the spring, she took it upon herself to file for Chapter 11 bankruptcy, told our biggest customer to buy his meat elsewhere, informed the USDA that we were out of business, and instructed our employees to cash their checks and leave. That afternoon, she brought in the police to have me evicted from the premises. Then she set up another entity in the same line of business.

Not surprisingly, the matter wound up in court. Because of the perishable nature of our supplies, we got a court date the following Monday. The matter of her title proved to be a problem for me: in a 50/50 partnership, I learned from my lawyer, the officer of the company could make decisions without the untitled partner’s consent.

Her undoing, though, was that in filing for Chapter 11 with the intent of setting up a shadow company, she didn’t show good faith to creditors. That is because the purpose of such a filing is to assure recovery for creditors. The upshot: the judge awarded me 100% of the stock and ordered her to turn over her stock certificates the next day.

Lessons learned

It was a new beginning for me, in more ways that one. Not only had I shed the partner with whom I had co-founded the company, but I learned valuable lessons about how to structure and deal with the partner, namely Ed Rea, with whom I would go forward.

In structuring our new relationship, I was no longer willing to agree to a 50/50 split, because I had learned that even among partners, one or the other must have the final say in case disagreements can’t be worked out. We decided on a 65/35 split, with me the majority holder. Accordingly, I agreed to accept the title of president, with Ed becoming vice president.

Even though we were old college friends and despite my preference to conduct business with a handshake, we agreed to put the terms of our stock split in writing, as well as plans for how we would divide the business if our partnership were to fail.

Simpatico counts

In addition to its structure, our partnership works because Ed and I share similar values about how to run the business, such as the need to put the customer first and deliver optimal service.

Underlying our relationship, in short, is the bedrock of trust. Over the years, we have—like the best marriage partners—learned when we have gone too far and need to back off. A persistent area of disagreement that hasn’t ever come to a head, for example, is Ed’s belief that I treat employees too lightly and mine that he is too harsh.

A difference in our areas of expertise and thus our duties at the company has also contributed to our smoothly functioning pairing. Whereas he oversees finances, I deal with customers—and each of us is loathe to step into the other’s realm.

Handshakes matter most

About that handshake, though: Because our partnership has worked so well, I upped Ed’s stake in 2003 to 45%, and we duly put that in writing. However, one financial matter hasn’t ever been put in writing: my promise to him that we will share the proceeds equally from an eventual sale of the company.

It isn’t in writing, because I will do that, and because he knows that I will. The most important lesson I learned from a partnership gone bad is that in partnerships that thrive, it’s the handshake that ultimately matters most.