Problem clients tend to have identifiable characteristics, as I mention in my article, “Profiles of the Top 5 Problem Clients.” From your first meeting with them, you sense that they are:

• Petulantly dissatisfied .  .  . with everything
• Looking for a deal .  .  . before you even mention your pricing
• Starting and stopping projects with a variety of service providers just like you
• In a crisis, with deadlines of .  .  . last week
• Hedging about your terms, and that collecting will be like grasping smoke

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There’s a reason this happens so often to service providers.

It’s because their time “evaporates” …

… much like whisky evaporates from the barrel over time.

Which explains why you can always seem to find yourself overworked … and with less than you thought in the bank.

Ready for a solution?

In this short video, I outline 3 simple tactics that have helped my clients work LESS … and boost their revenue by up to 30%!

To get free access to our digital resources on the topic, visit kaufmanbusinesslaw.com/resources.

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Ladies Who Launch (a terrific networking organization for women who embrace “entrepreneurship and creativity as a lifestyle”) — of which I am a member –has a regular column through the Huffington Post and this month’s topic is . . . you guessed it . . . partnerships.  Read more about Davina Ling’s tips on building successful working relationships and partnerships.

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Entrepreneurs are flocking to the “strategic alliance” bandwagon. But few comprehend what a strategic alliance really is, much less how to navigate their way through one successfully. A successful strategic alliance must have a sound foundation underpinning each of its four key considerations: form, function, finance, and fights.

Form

The different forms of business relationships — from simple referral relationship to actual merger – vary in their levels of interdependence and obligation to their partners. It is crucial to know (which Colin did not) where you fit along the spectrum.

In a referral relationship, neither side has any ongoing business obligation to the other, nor do the companies become interdependent. Picture an accountant and a lawyer: they are in different industries, and the clients of each can benefit from the services the other provides. A referral relationship is simply the open-ended desire to get and give client leads.

A strategic alliance brings the two sides closer contractually, like a preferred trading partner arrangement. Consider a marketing strategy firm that wants to attract a Fortune 1000 clientele. A strategic alliance with a graphic design company could give the strategist access to greater capabilities – by developing the print materials for the product branding campaign it recommends, for example – than it would ordinarily have “in-house.” Like a referral relationship, the companies remain financially and structurally independent. However, they will use the other on a regular basis (sometimes exclusively) for particular kinds of projects or work.

Along the continuum is the joint venture, where two companies will form a single, separate entity for a specific purpose or discrete project. A property developer may join with a construction company to develop a particular parcel of real estate. Or, look at Walt Disney Pictures and Pixar Animation Studios, which combined forces to produce “The Incredibles” in 2004. Joint venturers may also have an equity interest in the project, rather than simply earning a fee (as in a strategic alliance).

At the end of the spectrum is a merger, where two separate companies combine all their resources to result in one company. Unlike Colin’s “merger” where his company remained somewhat intact, unraveling a merger involves selling off the assets of the whole enterprise. Rather, Colin and Themis’s relationship was more like a joint venture or strategic alliance, depending on the extent to which they commingled their finances.

Function

Once the parties agree on the strategic alliance as the best form for reaching their goals, they need to clarify their respective functions. Who will do what? What are the deadlines? How will each be accountable to the other if it does not perform as expected? To what extent are they obligated to work together? Is this relationship exclusive? These questions are essential to understanding whether the alliance is really in your best interest. Colin was vague about the expectations in opening the Boston office; Themis misunderstood the levels of service that Colin’s customers expected. Also, as Colin and Themis were, to some extent, direct competitors, an alliance relationship of any kind may not have served them well.

Finances

Especially with strategic alliances, it’s essential to “follow the money.” Not only does the relationship need to make financial sense, but also the financial flow needs to be tracked. First, the parties need to plan out the relationship so that it will be profitable. Many entrepreneurs don’t explore this issue. They may under price themselves to win over the strategic alliance partner (or the ultimate business), and as a result, become contractually hitched to a sinkhole. Second, the parties should document how and when payments will be made from the client to the alliance and from the alliance to its partners. They should also establish what costs and expenses each would bear either jointly or separately. Colin bore the brunt of the costs from the Boston office, and did not factor this into his profit margin . . . which burned a huge hole in his pocket (book).

Fights

A strategic alliance requires strategies both for resolving disputes within the alliance relationship and for exiting the alliance itself. Eternal optimists, entrepreneurs tend to focus on how things will work instead of “what if they don’t.” “Fights,” disagreements, differences of opinion range from the more mundane (“how do we handle the client pitch?”) to the more profound (“is this really a workable relationship?”). For example, how will the alliance partners handle work in progress – and the receipt of post-breakup payments — if one of them leaves? How will they protect intellectual property, trade secrets, client lists, or other confidential information that might have been created or exposed during the relationship? Should they permit the solicitation of the other’s clients? And if disagreements become intractable, how (court or ADR?) and where (geographically) will they be resolved? Thinking this through in advance could have prevented the souring of Colin’s relationship with Themis.

Strategic alliances are all the rage. But like all other business relationships, and as Colin learned the hard way, they require careful forethought to make sure they are the right fit. And the input of accounting and legal advisors won’t hurt either. So before you become bamboozled by the jargon, make sure that there is a viable strategy behind every strategic alliance you create.

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Their premise is that nanotechnology is the next wave — industrialization and the information age being the prior two.  So how can Africa get on the nanotechnology bandwagon when it lags so far behind in industrialization and computerization?  When so many institutions shy away from introducing science into the educational curriculum?  Waruingi and Njoroge suggest finding the pockets of education in Africa where they have a fighting chance (naming the Jomo Kenyatta University of Agriculture and Technology) to develop leadership in science.  However, those universities do not have the large sums of capital necessary to fund nanotechnology programs.

The solution:  create a joint venture with industry, whether with the university itself or a special purpose entity.  As they opine,

Formation of such a joint venture allows the school to contribute sweat, and of course intellectual equity. The business people and non-business individual investors contribute equity in form of paid in cash. International donor community and international investors contribute to the joint venture by purchasing stake in the venture.

A joint venture arrangement allows the school to gain access to cash for research, development, and commercialization of science, and technology. The joint venture can authorise shares of common stock, and have them traded in the open stock market such as the Nairobi Stock Exchange. Creation of such joint ventures to support science, technology and development is not out of the scope of imagination of Kenyans.

Now that would be a joint venture worth watching.

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Only hindsight and reflection can reveal the lessons to be learned. Some center around money issues; others center on how we communicated with each other. In the end, perhaps it wasn’t so much what we did, but what we didn’t do, that led to our demise, both business-wise and personally. Here are just a few tidbits that I gleaned from the experience:

1. We stopped working on the partnership relationship. We were so busy working on the business and trying to make it successful that we stopped taking the time to reflect on the vision for where we wanted the business to go. We stopped having joint conversations about the over-the-dashboard perspective that a business needs. We stopped thinking of ourselves as partners and started acting more like independent departments trying to meet the business’s needs. What I’ll do differently next time: Set aside time at least twice a month to talk about where the business is going and whether that dovetails with our plans – both professional and personal.
2. We didn’t look carefully at the numbers. In retrospect, we should have paid much closer attention to running regular income (P&L) statements and balance sheets. Not looking at the numbers was our way of sticking our fingers in our ears and singing “la-la-la” as loudly as possible to avoid having to face whether the way we were working made sound financial sense. What I’ll do differently next time: Know exactly what I need to earn each month from the business to be sure that it’s the right investment of my time and energy. Discuss these numbers with my business partner. Not let my ego get in the way of acknowledging when a business venture is not meeting my financial expectations.
3. We didn’t set limits on capital infusion. We also fell prey to the tempting response that many entrepreneurs have of throwing money at the problem. When times were tight (and believe me, there were some v-e-r-y lean years), our solution was to draw upon our capital resources, rather than take a good, hard look at whether our business model was a sustainable one. Positive cash flow can be deceptive on paper. It’s not positive if the reason you have made the numbers work is that you’ve drawn on your credit lines. What I’ll do differently next time: Reign in spending during lean times.
4. We didn’t agree on the value of each other’s contributions. At first, working together was fun and fulfilling. We seemed to equally respect the different talents and skills that each brought to the relationship. But over time, there emerged an Orwellian (Animal Farm, that is) attitude of “some pigs are more equal than others.” We grew to have greatly divergent attitudes about how to run our law practice and how to handle the financial management of the firm. In retrospect, I didn’t look out for my own interests nearly enough. What I’ll do differently next time: Honor my talents and efforts. Set up systems (such as better budgeting) and gatekeepers (such as a bookkeeper) to prevent the partners from dipping into the company funds.
5. We didn’t communicate our personal goals as they changed and grew. Over the years, my desires, needs, and interests took a new path. I had significant lifestyle changes. Getting married and trying to have a child places a totally new perspective on work, the time you can spend, and the money you need and want to generate. What I’ll do differently next time: Voice my needs more actively. Take more time to gain clarity on what those needs are.

How could our partnership agreement have helped? Actually, it was a very well-written partnership agreement. But in the end, a partnership agreement is only as strong as the partners who are willing to abide by its terms. When communication falters, the bonds of accountability, integrity, and trust between partners substantially weaken. Keep your partnership agreements strong by making your partnership relationship stronger. Open the lines of communication. Don’t shy away from the difficult issues or allow the distraction of busy-ness to interfere with the vigor of your business.

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Here’s the goal: to make sure that you, the founder, get the financial security and value you want from turning over your business, while ensuring that the next generation receives a healthy business that will sustain them as they take it forward.

How can you get there? Keep these key issues in mind:

1. Know what it’s worth and what it will cost. Be fair and objective, as if you were selling the business to an outsider. Get outside advisors to help you determine the value of your company as it stands now . . . and where there might be room for improvement. Also, there’s bound to be a tax bite somewhere. Make sure you get the right advisors on board so that you’re prepared for what it will be and how it will get paid.
2. Know your options and why you’re choosing them. You may want to leave a legacy but you’re not doing anyone any favors if you’re saddling your kids with an albatross (and career path) that they really don’t want for themselves. If you want to leave an enduring mark on the planet (and that’s your reason for turning the business over to family), you may be better off selling the business and using the money to build a hospital wing (or other charitable purpose). Make sure you have a long, deep conversation with your company’s intended heirs to ensure that they have what it takes to truly build the business (and not run it into the ground).
3. Know what you want to do with your life. After pouring your blood, sweat, and tears into this company, give some thought to “is there life after business transition?” And if so, what does that life look like? If your idea of transition is handling the company over to your niece but then micromanaging it (and her) like a nudnik mother-in-law, think again. Leave your ego and the desire to be the eminence grise, the power behind the throne, at the door. Better yet, choose another throne to sit yourself on.

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Companies must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to employees.  They don’t generally have to withhold or pay any taxes on payments to independent contractors.

[If you’re self-employed, the IRS has a specialized Tax Center for you]

When you’re an employee, the company you work for (as noted above) pays to the government a portion of the taxes on your income. You are responsible for paying in the other part. However, when you’re an independent contractor, you bear the full responsibility of paying in both “portions” of your taxes: The portion you pay in as your own employer and the portion you pay in as if you were an employee.

But here’s one of the reasons why the IRS is starting to crack down on independent contractors.

Independent contractors have developed a reputation for not paying  their full tax burden.  Let’s face it: A check for $1,000 comes in–the landlord is itching to get paid, you need a new computer, and there are other bills to pay, leaving you with approximately $7.47 in “walking-around money.”  Where’s the money to pay taxes? Many independent professionals figure they’ll calculate taxes and worry about it on April 15.

But what happens if you don’t have enough on hand to pay that tax bill?  Say hello to “penalties and interest”–which become an ever-losing battle where you try to salvage a leaky boat by scooping out the water one bucket at a time.

Here’s a system I found helpful that I learned at one of T. Harv Eker’s Millionaire Mind seminars:

Every time money comes into your business, set aside a certain amount right away for taxes in a separate account. Take it right off the top. Don’t think about it–just do it. The percentage you may want to set aside depends on where you’re living (in New York City where I live, I should probably start setting aside 40 percent to 50 percent; for other states, your tax burden may only be about 20 percent).

This Guide to small business accounting suggests 30%.

Either way, having a regular system forces you to do two things:

1. Set aside money to take care of tax obligations
2. Look very carefully at your budgeting process

If the thought of taking 30 percent off the top makes you choke and cry with frustration because you can’t meet your bills, it’s time to look at where you can cut expenses and where you can increase income. Maybe this exercise will make you realize that you’ve been undercharging all these years! 

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Here’s the skinny:

• Partner 1 and Partner 2 met in corporate America and started a venture together when both had full-time jobs
• Partner 1 left the corporate job and entered grad school, ostensibly to help the business (and supposedly by mutual agreement)
• After Partner 1 entered grad school (and gave up his corporate salary, Partner 2 stopped returning phone calls or responding to messages.  Had Partner 2 been ticked off by Partner 1’s frantic and angry “where ARE you?” messages? Or was he just fed up with having to hold the bag while Partner 1 slogged through grad school
• Operations ground to a halt
• There’s credit card debt (amount undisclosed) incurred by or on behalf of the business

So what’s an abandoned partner to do?

Leaving aside a host of questions for further fact-finding (did they form a business entity? If so, what kind? Did they have a written partnership agreement?  Did they actually have a business plan? And why on earth would one of them leave a cushy job to go to grad school rather than hire an MBA to help run the business?) there are unpleasant but practical considerations involved in taking the next step (lawsuit).  What will it cost to find Partner 2 and haul him into court . . . and is the amount he owes more than that?  Also, what is the likelihood that Partner 1 would realistically be able to collect that money?  Does Partner 2 have collectible assets?  Bank accounts?  Regardless of how well-papered their understanding was, Partner 1 could be facing a situation where it’s better to walk away and say “lesson learned,” than to throw good money after bad.

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There ARE options for getting the guidance you need. It can come from a Mentor. Coach. Advisory Board. Peer group/Mastermind. Professional advisor. And you’re not limited to just one of them!

I’m a passionate advocate for outside brainpower.

Not just because I’m a business advisor myself.

Not just because I’ve suffered the consequences when I didn’t seek outside guidance. (Failed partnership, anyone?)

But because I was blessed to have my Dad, Jay Kaufman, as a kind of mentor.

He would have been 92 this week.

So in this short video, I wanted to honor Dad and share a couple of his stories that turned into memorable lessons for me.

Who’s guiding you?

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