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Chapter 5

Potential Pitfalls of Partnership

A business partnership is defined as the following: a closely held corporation with two or more managing shareholders.

Any business with two or more owners can be a Limited Liability Company (LLC), a fully incorporated entity, a simple partnership, or any relationship where two or more share responsibility to manage the entity. As the managing shareholders, each assumes the financial risk, and it is important to ensure they have a way to agree when making decisions. There is much more to this, but these are the key points: keep in mind, if you own anything less than 50% of the entity, you do not have the ability to make the decisions. You can add your input, but if there are only two individuals and you own 49.9%, you might as well only have 1%. The controlling shareholder has the final say on all decisions.

If you are considering entering into a partnership, it is very important to keep in mind that many people do not make great business partners, even if you have a great relationship with them. It takes hard work to keep a partnership successful, much like investing in a marriage. Due to possible differences in skill sets, one partner might need to do much more work than the other. The workloads and time spent can be defined by the skills of each partner, as well as what is required to keep the business moving forward.

For some people, the imbalance of workload bothers them. Of course, if one partner is lazy and does not do their share of the work, that is most certainly cause for concern. But, if each person’s skill set dictates the amount of time required to do the work, and the work each partner does meets those expectations, then you expect each person will fulfill their respective responsibilities.

Think this through, if the partnership is successful, growing, and making money for both partners, it should not matter that one partner might be required to work longer hours or travel for the company more. That is simply the result of that partner’s skills and contribution to the overall success of the entity. Both partners benefit. The main point to understand here is that every person is different. They have different skills and talents, as well as unique strengths and weaknesses. Everyone has a specific way of doing things, and often, these differences are what make up a great partnership—their weakness is your strength, and vice versa. However, sometimes these differences, if not understood or handled properly, can cause dissension and irreparable damage to the relationship.

It has been said that one of the main reasons for a partnership failure, aside from financial reasons, is because of one of the partner’s spouses. To be successful, it is important for you to maintain a separation between your business partner and your personal relationships. You will need to have conversations and open discussions with your partner(s) about difficult business decisions, goals, finances, etc. Your spouse could never have the knowledge of all the issues from all the perspectives to make wise decisions. It is simply best to keep business conversations among the partners. Think about this: whenever someone shares a frustration or conflict with another person (such as a spouse), that person only hears one side of the story. It is impossible to understand or make a reasonable suggestion if you do not know all the facts or hear both sides of any issue. The person who hears only one side tends to support and reinforce the person giving them that one-sided story. That’s just a natural human tendency. The other party then makes a decision lacking the complete information.

And who do you think hears these stories most often? That’s right, our spouses or significant others.

Again, stories like this are not the normal case studies one will encounter in business school, nor read in a textbook. Most professors and business book authors do not have the real world, hands-on experience of starting or running a business, especially a partnership. They may have book smarts, and the statistics but often do not have the practical hands-on experience, or what might be called street smarts. Street smarts come from life experience. That is why you won’t be able to learn everything you need to know about running a successful business—or be successful at anything you do, for that matter—by only reading a book, watching a video, or searching the internet.

However, you can learn some important lessons from our real-life experiences (and hopefully learn even more from our mistakes).

John and I both agreed during that first all-nighter planning session when we decided to launch this business that we should never bring work home. What we meant by this is that we would leave our business between us. Even when it was difficult to not say anything, we both knew it could make matters worse to come home and vent to our spouses. Looking back, there was a situation that turned out to be the perfect example of why this agreement was important for the health of both our business and our marriages. We might be laughing now, but it wasn’t so funny when it happened!

One night, my wife was livid as I drove into the driveway at 2:00 AM in a company truck. I’ll never forget her words piercing through the cold, winter night, “What is John doing?!”

Let me paint a backstory for you before we get there.

As you may remember, John was the one with the manufacturing skills. He purchased the retread plant equipment and was responsible for the construction and buildout of the plant as well as the ongoing retread operations. He was a generally quiet person and spoke very little. I, on the other hand, had the interpersonal skills. I was responsible for bringing in the customers—the “rainmaker” if you will. I was definitely the more outgoing of the two of us, but this was not the only difference in our skillsets, thankfully. Both of us were well-versed in operational management, we both had experience with budgeting and planning, and we were both early risers who did what it took to get the job done. My skills required more travel, time away from home, and spending time with customers at events, often in evenings.

From the very first day our business got started, I was the one knocking on doors, making face-to-face calls on customers, trying to get companies to believe in us and use our services. We started from scratch. We didn’t have a single customer lined up the day we opened for business. That alone was daunting! That meant that somebody was required to work incredibly hard in an attempt to build a customer base. And that someone was me. The business we were able to secure, then provided John with the tires to retread in our new shop.

Thankfully we weren’t by ourselves in the very beginning, as is the case with many startup companies. We were lucky enough to have found two great employees who helped us get off the ground. One was an administrative person to answer the phone we hoped would ring, as well as handling the paperwork on those customers we didn’t yet have. The other was a service person who would drive a truck to different customer locations, or on the road servicing equipment and mounting the tires we hoped we would sell. The truck had an air compressor and the heavy tools required to change or repair large truck tires.

Though it was in the plan to incorporate retreading from the beginning, we had yet to find a facility for lease to build the retread plant, and we wouldn’t have a place for the first few months. The plant could only be constructed in the proper city-zoned industrial areas. Not many people are willing to rent a space to a new business with little credit established and no customers. A landlord wants to be assured the tenant will pay the rent on time. It was hard finding a landlord willing to take that risk. Remember Bill Gates and Paul Allen, who founded Microsoft? They also had real estate problems when they started! There was more than one landlord who has since regretted not taking a risk on Microsoft.

Without a space secured yet, our business was housed in a mobile office (“job shack”) behind a warehouse in the south industrial side of Seattle. I found myself on the road early every morning, calling on potential customers in person, knocking on the doors of businesses that could be a great fit. John, on the other hand, could be found in the office at the same time. However, I would not get home until 7:00 PM most days, while John went home in the afternoons as he was out of work. Until we found a building for our retread plant, there really was not a lot for John to do. As is the case with many people, John was not comfortable walking into a company office uninvited and asking for business. So, that ball was mostly in my court.

I could not operate the retread plant. John did not have the knowledge or experience calling on potential customers. We both had excellent skill sets, but very different; a highly-rated reason for a business to succeed.

Having turned in my new company car when leaving my management job to start this new company, I bought a used Volvo to start making sales calls at customer locations. Most tire salespeople drove pickup trucks… not me. John, on the other hand, had purchased the truck of his dreams: a black, fully loaded new Ford F-250 Lariat, complete with fancy wheels and big tires. I wore slacks and a tie every day, while John considered himself dressed up when he had on his jeans and a long-sleeved shirt. We ended up taking John’s new dream Ford F250 into the business and adding a big compressor and tools so we could use it to service customer trucks and make deliveries.

Can you see the pattern developing here?

John and I had different skills, different personalities, different lifestyles, and different experiences. Is one more important? Is one better than the other? Or are they complementary, both important parts of the equation? I’d say the latter. That said, when choosing any partner, it is best you both possess valuable skills needed to operate a business.

My day would start at 6 AM every day, and often away from the office or even out of state as we operated in both Washington and Alaska. I worked hard all day, and often would not be home until after 7 PM, or out even later with customers or employees.

One day, I needed the service truck (John’s dream truck) to deliver some tires to a customer on my way home. The tires were too large to fit in my car. This truck was our only service vehicle at the time. It was needed 24 hours a day if any customer called with an emergency flat repair. We had to be available to quickly respond to any emergency if we hoped to keep the customer. So, off I went with our only truck, hoping a customer did not call that evening. It was December, so it was cold, and it was starting to snow lightly.

Of course, the inevitable happened. I got home late, well after dinner time, and was in the house a short time when our service person, Dave, called me and said, “The answering service called. Darigold has a milk tanker truck on I-5 with a flat!” Dave was in bed and lived 30 miles south of me, and the truck with the flat was 15 miles north of my home on the side of the freeway. The customer was huge—they ran trucks 24 hours a day. The milk tanker was a 105,500 pound, 9-axle, huge vehicle that was on a tight schedule to make it to the dairy processing plant. We had to perform. This was a new customer to us, and the largest customer for us at that time with hundreds of trucks. We would lose the account if we could not service them properly.

So, off I went. No dinner, tromping in the snow, heading out at 10 PM to fix a flat tire along a busy freeway. The bigger problem was that I had never done this from a truck before! I can change the big tires. I had done it in the shop over the years. I thought I knew what to do, but had never really done it by myself. I had been an executive. I wore a tie every day. Now I found myself on my back with a hydraulic jack, on the side of the freeway under a huge truck changing a tire and wheel that weighs more than 150 pounds. I had a tire gun that also weighed about 80 pounds connected to a huge airline that allowed me to remove the big bolts. The Darigold truck was back on the road in short order, and I packed up the tools and headed back to our home just after midnight.

Jill, my wife, was up, worried and in tears for lots of reasons. It seemed to her that I had to do all the work. This is the point of this little story. As I entered our home through the garage to remove my now wet and filthy clothes, I apologized to Jill, and explained it was all part of building this new business. She understood the hard work, respected that, and knew starting and growing a business would be hard, but she still couldn’t help but blurt out, “WHAT IS JOHN DOING?!”

“Jill, for all you know, John is doing everything I am doing and more.” I left it at that even though I knew it was not the case, but also knew there was nothing more John could be doing at that time.

A partnership does not have to be fair or equal, or anything else. Both John and I needed to do what we were best at doing at that time to grow our little business venture. I was not proud that a year earlier, I wore a suit, drove a new car, had a great office and expense account with many employees and here I was getting out of wet, dirty clothes doing hard physical work. John would be building our manufacturing plant soon and have his hands full, doing work I was not able to do, as he had a different skill set than me. I was hoping John would be holding up his end when the time came. While we do not know the future, I felt he was a man of his word. He wasn’t a slacker; he was a genuinely hard-working person.

Think this through, though: at this early stage of the business, I was putting in many more hours than John. I started earlier, worked later, and was away from home more often. It might be I was doing 70% or more of the work to get the company started, but does that matter? Looking at Jill’s point of view, all she knew was that her husband seemed to be doing all the work in this new company. She could only make a judgement based on what she heard and saw, and at the moment she saw her husband having been on a service call in the snow at night. She was rightfully concerned. Not to mention my ruining a nice shirt and shoes. The Darigold driver did mention I was the best-dressed service person he had ever seen!

After a few years, we all laughed at Jill’s question, “What is John doing?” and the story behind it. There was no way Jill could know all the details behind the current situation. The lesson here is that it is simply best not to bring work home. At that time, neither partner or spouse had any idea if we would succeed or what the future would hold. So, while I did want to reply to Jill that John was really not doing much at that time, my gut feeling was to simply say what I said, that he was “doing everything and more.”

A few weeks prior, John and I had spoken about this at length. John knew I was carrying the lion’s share of the workload as we still had not moved into a space for the new plant that was sitting in storage. We were both in the office and he said, “I know you are working a lot more than I am, Kim. When we are able to build the plant, I promise I will more than make up for this.” There really was not much I could say; I was pleased he acknowledged my work and really hoping he would contribute his share when he could.

Although I still had some reservations, I was smart enough to keep them to myself. More importantly, I did not share any of my thoughts or reservations with Jill, who could never fully see the other side of this story—at least not yet.

A few months later, we finally secured a lease and moved into our first building. We were still in the industrial area of South Seattle, and thus were close to many trucking companies and industrial firms. As promised, John built the retread manufacturing plant we had purchased to start the business. He was in the plant around 5:00 AM every day, working weekends and late evenings as well. John more than made up for his share of the work, and to this day, we have both kept up our sides of the bargain. Nobody worked any harder than John did, and thankfully, we can look back and laugh at Jill’s frustration. After a number of years, Jill and I shared that story with John and his wife, Sharon. While it may be funny now, it is a good lesson on humility, holding back your immediate thoughts, and not bringing home any one-sided stories, especially if the outcomes are still unknown.

Our different skill sets, when combined, added up to a successful partnership. I had knowledge, education, and skills John did not have. John had manufacturing skills, an education, and knowledge I did not have. We combined our strengths and weaknesses, had open communication, pushed through conflict, and watched our company succeed. Of course, as I mentioned in the last chapter, we grew way too fast for a small, privately-funded enterprise. We funded the company 100% on our own, with no outside investors, family funding, or gifts. We didn’t have a glamorous startup or enormous profit at the beginning. We were just a legacy-type business with knowledge and insight that our competitors did not have.

The process of starting up our business provided several opportunities to test the mettle of each of us. These hardships are worth reviewing, as these instances are yet another area not covered in depth by schools or books as mentioned already. In school, we aren’t taught why partnerships fail, or why partnerships succeed. Perhaps because every story on success or failure has so many variations and twists. What makes a business fail or succeed is a different scenario in every case. Our story is a basic example that can go very deep and needs to be understood. If you only concentrate on how much each person is working, you can fail to see that the success might not be possible unless one person works more. The sum of the inputs can be a great success, while they do not need to be equal inputs. Together, you can accomplish much more than by yourself.

Even though this new company was a corporation, we were still two individuals running it equally. We each owned 50% of the shares of stock issued. We paid ourselves the same amount of money each month, shared equally in any gains or losses, and vowed to always be fair with each other. We shared equally in the risk and invested the same resources, time, money, and talent. But the number of hours needed each day was not equally divided, and could not be. Each partner needed a perspective on this fact in order to succeed. Our skills balanced each other out, but the workload required would never be equal, and it varied at times. One partner always worked more than the other, but the sum of the whole was far greater than it ever could have been individually. I could have never succeeded without John, and vice versa.

One last comment on how decisions can be made when the two owners are equal partners: today, John and I are still partners, now in several LLCs. After 40 years of being partners, we still have never had a serious disagreement between us. That is not saying we always agreed; in fact, that is far from it. But we did develop a process from day one on dealing with situations. This way of working through a decision still works successfully today as it did when we started and can be used in any business.

We agreed on a way to communicate up front, explaining our thoughts and how strongly we felt about any major decision, a process that would serve us well over the years. It was John’s idea that whenever we needed to make any important decision, if either felt strongly against the idea, then we would not do it. Think this through: one partner might not agree but still voice that opinion and let the decision be made to proceed. But unless either partner strongly objected, they could still move forward. An example later in the book relates to a large real estate acquisition I wanted to do. We needed to expand, and I wanted to buy a large piece of land and develop a 60,000 SF building for manufacturing, warehouse, and offices. It would cost millions and consume a lot of time. John felt it too big a risk, but said, “I am not comfortable taking this big a risk, but I trust you and believe you have researched this well. If you feel strongly, that this is a good decision and will work, I will agree to move forward.”

Fortunately, that investment did pay off in huge ways, but had John said no, we would have chosen some other alternative. Either way, we would have kept growing and would have continued to work together. All decisions were important, and we agreed upfront on a process, communicated, talked things through, and provided valuable insight to each other in order to make good decisions.