Should I enter a partnership?

Silent partnerships form the structural basis of so many hospitality businesses you’d be in danger of thinking they have something going for them. The concept looks quite attractive in theory — find a person with spare money to invest and team up with them.

Maybe you’ve got experience in the industry and a desire to do your own thing. You’ve got great ideas but you haven’t got much money. You’re aware that someone you know has got money and a desire to be ‘involved’ in the industry. On the surface it seems logical that you should get together and live happily ever after.

Partnerships are often dysfunctional

What are your chances of carrying this off? Not too good, actually. In my travels I see far more dysfunctional partnerships than I see workable ones. They’re so easy to get into and so hard to get out of that they suck people in and trap them. If the relationship sours, the person with the experience often can’t raise the money to buy the investor out, and the investor can’t run the business without the experienced operator. Then you have a Mexican standoff.

Downward graph

Poor financial performance is behind many failed partnerships

Expectation of unrealistic profits creates conflict

It usually starts when people go into partnerships with unrealistic expectations. The experienced person often has the outrageous expectation that the silent partner will actually be silent. The silent partner often expects the business to generate 25% profit while allowing them to swan around offering Dom Perignon for all their family and friends. Both parties probably expect to pocket a thousand dollars a week in cash.

On top of the issue of unreal expectations, partners often end in conflict because they haven’t clearly define their relationship right from the start. In the best of all possible worlds a silent partner should be an arms length investor who takes a gamble on the skills and ideas of the operating partner and backs them ‘for better or for worse’, just like a marriage. Sometimes partnerships even start out with this intention but quickly degenerate into farce when it becomes obvious that the goose that lays golden eggs flew somewhere else.

Many partnerships are formed by people who have never run a business

This is especially relevant when the experienced partner has never run a business before and shares the expectation for a 25% profit. It’s quite common for someone who has only worked as a waiter or cook to have quite unreal ideas about the financial performance of a hospitality business. As soon as it becomes apparent that cashflow or profit is not as much as expected the recriminations begin to fly and the relationship between the partners can deteriorate rapidly.

I don’t think many people would invest in hospitality if they knew the real risks versus the modest potential for profit. It’s too easy for people on the outside of the industry to see those rare high profile industry personalities who seem to be making money and jump to the conclusion that they can do it too. ‘We’ll find somebody who knows what they’re doing, then all we need is a few tables and chairs, we’ll make a fortune . . .’ I could categorise a lot of partnerships as the naive being financed by the gullible.

Silent partner

There is no such thing as a silent partner — it’s a myth.

There is no such thing as a silent partner

A silent partner who refuses to remain silent can also be a major headache. People who put substantial amounts of money into businesses often use the threat of withdrawal of financial support to gain management and artistic control of the business. I’ve seen quite a few cases where the cheque book has been commandeered by the financier and the operator has to go hat in hand to get things paid for—sometimes critical things like the butcher’s and the laundry account (or even our accounts, much to my annoyance).

Beware the partner with a financial background

If the silent partner has a financial background and not much hospitality experience, they are likely to veto any expenditure that will not enhance a balance sheet. Hospitality businesses rely heavily on human interaction for their success and growth. Such necessities as careful recruiting and thorough staff training will often get vetoed in favour of capital expenditure like renovating and decor changes. This is particularly common if the financier has a background in an asset based business such as real estate or property development, as a lot of them do.

Money vs skills

Money 2

If you make financial input outrank skills and experience you set yourselves for failure

People with money to invest are quite likely to value their contribution way higher than skills or experience. We often have to deal with partnerships with a majority shareholding in the favour of the person with the money. I think that this can be a recipe for disaster — if I was in a partnership with someone who only put money into the relationship, I would want to have the power to veto and make the operational decisions. The problem with this attitude is, given a clear picture of the risks and the reality of the hospitality industry, who’d want to sink any money into it? This is why a lot of potential investors get conned — if you told them the truth they’d run a mile.

The desire for people to get into business for themselves, or to be involved in a high public profile business can be so strong that they see the whole process through rose coloured glasses, then form ill considered relationships with virtually no research. In all the years I’ve been in this business, I’ve only been called on to provide advice to potential business partners once — and after I pointed all the pros and cons out to them, they decided to forget the whole thing and stick to what they were doing. I think I saved them a fortune.