January 1, 2011

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Who's the Boss?

Why 50-50 Business Partnerships Often Fail

Carolyn Campbell

January 1, 2011

Eric Montague has achieved remarkable success with his IT outsource company, Executech. The company boasts about 580 clients in Salt Lake City, Provo and Ogden. And, in its 12-year history, Executech has never experienced a year of lower than 30 percent growth. But before he hit gold with Executech, Montague was involved in a couple of other businesses. He was a small partner with a 5 percent ownership in an IT outsource company and owned a 50 percent partnership in another firm. These enterprises did not work out so well for Montague, and he discovered that business partnerships can be as difficult and complicated as any other personal relationship. Partnership Pitfalls “My core belief is that partnerships in companies are very difficult. I work with hundreds of companies and witness how difficult partnerships can be,” says Montague. “I believe that partnerships should be avoided unless there is an overwhelming business reason why they are necessary.” In particular, he says that 50–50 partnerships are a truly bad idea. “There are too many opportunities to reach an impasse, where one person wants to go one way and the other partner wants to take a different route. There is no one person to make the decision.” Montague says he would never again own a company where he didn’t possess at least majority voting rights. “In a partnership that is divided with at least a 51–49 percent split, one person can evaluate the other person’s goals, discuss them and say, ‘this is the way we are going.’ With a 50–50 partnership, you are both twiddling your thumbs.” Montague says his previous IT companies “were very difficult to manage because of partnership issues.” He faced the issue of partners who he felt spent money in the wrong areas. “I felt it was no longer prudent for me to continue earning 70 to 80 percent of the company’s money while spending only 20 to 30 percent of that money.” Get it in Writing Today, as the owner of multiple companies, Montague outlines relationships in a document before money changes hands or business is transacted. “Partnerships must be strictly outlined prior to any LLC, organization or other legal documents being drawn up. If an initial agreement is not reached regarding these details, then the partnership will die before it is born,” he says. “While it may be a hard thing to sit down face to face for a difficult discussion about business aspects, a one-hour discussion outlining each other’s crucial expectations has a huge preponderance of weight on the company and your professional life. At the onset of a relationship, I sit down with someone and discuss all points of the document. If there are 42 points included, then that will be 42 areas that we will never fight over. I make sure it is absolutely clear and write down even the smallest possible thing that could happen.” Within the document, Montague always details possible expenses. He also outlines each person’s role very specifically. “We understand what the relationship is in the beginning. Then, if something is going to change, there is a total re-discussion of the entire deal,” he says. “I’ve learned to never concede something without taking the opportunity to rework the entire relationship document.” He also brainstorms and outlines future expectations. “In a collaborative process, we outline what the future will bring, so that there is no misunderstanding. If a person manages the sales force, is it his expectation that he is always going to manage the sales force if he brings on other salespeople, or will they just earn their own commission?” Even with a detailed agreement, things don’t always work well. In that case, Montague is not hesitant to have a frank conversation about what is going wrong. “I ask them, ‘Do you feel like this is working?’ If their answer is yes, they are obviously getting too much out of a relationship and it is not a fair relationship. If their answer is no, I would say, ‘I agree. Here is where I see the problem.’” Although such discussions can be difficult—and may even bring an end to the business relationship—Montague believes “there is no reason to let emotion take over in business. You can discuss problems and, if you don’t reach a resolution, or make a move that you feel has a good result, take what you learned and make sure you implement that in the next business relationship.” Build a Foundation Another early lesson for Montague was that entrepreneurs should never put the cart before the horse. He and his former partner, “spent time and money building the perfect company in advance, rather than first focusing on clients, customer relationships and customer service and letting other aspects build gradually as the company grew.” They rented a large office space ahead of time, “so that we would have the room to grow,” he recalls. They purchased “a nice phone system and business management piece of software, along with a vehicle and a laptop for each employee. Peripherally, it appeared that we had a perfectly set-up company. But the cost and debt burden for that destroyed the company.” Montague says that company never turned a profit. “I’ve learned not to worry initially about procedure and structure. You have to make money first and the rest will come,” he says. “There is an idea of ‘build it and they will come’—but if you can’t finance the company, there is not a reason to have them come.” Montague put that lesson to work at Executech, which is now celebrating 12 years in business. “We are just arriving at the same structure we had previously, and we can now afford it. In our second go-round, we’ve filled pieces and components as clientele and income arose to sustain the debt burden and capital expense burden.” Montague incorporated all the lessons he has learned as a serial entrepreneur into Executech, which is on a solid growth trajectory. The firm provides computer and network support for companies that are large enough to have a computer network, but not sufficiently large to merit hiring a full-time computer technician. “Businesses outsource their computer department to us and receive all the benefits of a full-time technician at a fraction of the cost. We develop a synergistic alliance with every client by assuming their goals as our own,” says Montague.
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