Mitigating risk when forming new business partnerships

Starting any business involves a large amount of risk. The failure rate of start-ups in the UK is currently around 60%, but some businesses are inherently more risky than others. For partnerships, failure rates peak at around 70%. They face all the risks of other start-ups, such as cash flow issues, shifting market conditions and competition, yet they also have the added risk that comes when two or more people work together.

But it’s not all doom and gloom. Partnerships also have advantages over other businesses, as the founders can share the start-up costs and benefit from their complementary skill sets. However, while many partnerships thrive, others can struggle to overcome the unique values, goals and perspectives each partner brings.

With that in mind, here are some steps can you take to mitigate the risks and build a long-lasting and successful business.

How to mitigate business partnership risk

It might be obvious, but you can reduce the risk tremendously by choosing the right partner in the first place. By doing your due diligence at this stage, you can help mitigate both reputational and financial risk further down the line.

Even if you are considering entering into business with a friend or family member, you still need to make it a priority to conduct background checks and credit assessments before entering any potential business partnerships. This step can help you better understand the parties involved, including their appetite for risk and how they have managed their affairs in the past. This information enables you to make informed decisions based on solid facts rather than best guesses and wishful thinking.

You also need to consider how compatible you are likely to be when it comes to the day-to-day running of the business. Going into a business with a significant other might seem like a good idea, but think about the impact on the business if the personal side of the relationship sours. Equally, you might want a partner who’s more aggressive in their decision-making to balance out your risk-averse style. However, having such different approaches can lead to clashes in the long run.

When choosing a business partner, look for someone who shares the same vision, is reliable, dependable and is financially sound. Ideally, they should also have good business experience, the emotional intelligence to compromise and a commitment to the business’s long-term success.

2. Choose an appropriate business structure

A general partnership is the most basic form of business partnership in the UK. General partnerships are simple to set up and you don’t have to register the business at Companies House or make regular filings. One of the defining features of a general partnership is that each partner is taxed individually on their share of the profits rather than the tax falling on the business itself.

Although the ease of a general partnership makes it popular, it may not be the best business structure for you. Setting up a limited liability partnership (LLP) or limited company (LTD) can be beneficial when it comes to mitigating the risks. These business structures limit your financial liability, so if the business fails, you stand to lose your original stake in the business but you’re not liable for its debts.

3. Create a comprehensive partnership agreement

Although you can legally set up a partnership without one, a well-drafted partnership agreement should be considered essential. If you don’t put a partnership agreement in place, you’ll be governed by the Partnership Act 1890, which will expose you to several risks, including:

• All partners are equally liable for the debts and obligations of the business
• Each partner is entitled to the same share of the business’s profits, regardless of how much they put in
• There’s no clear exit process, including notice periods, the valuation of assets or transferring ownership
• There are no guidelines for making important business decisions
• There are no mechanisms for resolving deadlocks and disputes

A formal partnership agreement removes these risks by giving you and your business partner(s) a solid framework to apply to your relationship. It can also prevent costly legal disputes and provide certainty in situations you could otherwise struggle to resolve.

Set clear roles

Determining each partner’s role before starting the business can prevent you from treading on each other’s toes. You should assign roles according to the specific experience and skill sets you both have. And while you should make key decisions jointly, each partner should also have the autonomy to make decisions within their roles to reduce complexity and help the business scale.

Find a trusted mediator

You don’t necessarily need a professional mediator, but you should have someone you can turn to when you need an objective and impartial opinion. This person should be familiar to both partners but not tied to either. They should also have plenty of business experience and the ability to keep a level head. If you and your partner have differing opinions, this third party can offer an unbiased view to prevent conflict and help you find a resolution.

Expect challenges but prepare to overcome them

A successful business partnership can be one of the most rewarding relationships you’ll ever have. The key to success is to take steps to mitigate the risks, listen to each other's opinions and have pre-agreed methods to work through challenges and decisions. Play it right and in 10 years, you could be clinking some rum together in the Caribbean to celebrate your successful business sale.

About the Author

Article written by Sharon McDougall of Scotland Debt Solutions, part of Begbies Traynor Group, is a DAS-approved Money Adviser with vast experience in providing debt advisory support to individuals in Scotland.