The 3 Common Mistakes When Forming a Business Partnership
“To partner or not to partner – that is the question.” When investing in real estate, this is an extremely important question, and how you answer it can be the difference between failure and success. Or at the very least, success and massive success.
Chris Clothier, a partner at one of the largest turnkey real estate companies in the world, which does over $100 million in annual revenue, purchases over 600-single-family homes yearly, and manages over $400 million in assets, learned the pros and cons of partnership the hard way – through first hand experience.
In our recent conversation, he provided an example of a partnership that resulted in a six-figure loss, and he outlined the lessons he learned that ensured the success of partnerships in the future.
Chris’s Sticky Partnership Situation
The first company Chris founded was a grocery arbitrage company in Denver, Colorado. “I was very successful thanks to having some really good mentors and my family around me that helped me to build me first company successfully,” Chris said. “I was taking my earnings from that company and I began to invest in real estate.”
Even with this previous entrepreneurial success, rather than going at real estate investing alone, Chris decided to partner up. “I should have been smart enough to look around me and say, ‘I’m a smart person, I’ve got good people around me, I’ve paid attention, I’ve got good mentors’ … but I still felt like I needed a partner in order to invest in real estate, the fix and flip stuff.”
However, rather than selecting the best and most qualified partner, he picked a friend. “Let me be clear: great guy, phenomenal person. He was a good friend of mine, but the problem was that neither one of us had any experience in real estate, and the funny thing was we both were scared of losing, and rather than lose alone, we chose to lose together.”
Chris said, “that’s what happens so often in partnerships. We made the decision to be partners for all the wrong reasons. Not because he had strengths and I had strengths, but because we both had a weakness, which was a lack of faith, lack of bravery, lack of courage to go do it on our own.”
Things seemed peachy in the beginning, but that turned out to be a double-edged sword. “We picked a couple of deals and we were doing well,” Chris explained. “We had no idea that we were spending twice as much as we needed to spend and taking twice as long to do it, but we were selling the houses and making money. And we mistook making money for success.”
The main problems Chris and his partner faced were not tracking their progress, moving too fast, and not holding each other accountable. Instead, Chris said, “we basically were just kind of relying on the other to be the smart one.”
The combination of these three issues resulted in their eventually downfall and the dissolution of their partnership. “The problem is that we purchased a home that was literally two blocks away from where it needed – both school district and taxing district. The way that homes were going to be appraised and what would be used as comparable sales, it literally was the difference between a home being worth $500,000 and a home being worth $300,000.”
What Lessons Did Chris Learn?
As a result of this failed deal, Chris and his partner lost over six figures, the partnership broke apart, and they aren’t friends anymore. Here are the lessons Chris said he learned from this deal and partnership (my emphasis):
Don’t Partner Out of Comfort
“I tell people on the backside when it’s all said and done that I went into a partnership with someone that I was comfortable with, someone who told me all the right things that I needed to hear.”
“I chose to take the easy route, which was, ‘I’ll get a partner instead and let him do these things. I’ll provide the money and make it on the backside.’”
“The point of it was that all of it I did with a partner, because I wasn’t brave enough to go on my own. It’s interesting for me, because I look back on it… I had all the tools, I had everything that I needed, I just didn’t have the confidence and the bravery to go on my own.”
Find a Partner With Complementary Skill Sets
“I did not partner with someone who had the ability to run good forecasts as far as what we’re spending, how to budget that money, and how to model that money. I didn’t partner with someone who could pull comparable sales and could analyze that [two block] difference. I didn’t partner with a person that had the right skill set for me, because my skillset was absolutely at my business, and I had money. I had the ability to stay organized and stay on point, but I didn’t know real estate. My partner, unfortunately, didn’t have money, but also didn’t have the real estate skills that were needed, so he was managing a project that he didn’t know how to do.”
“I just didn’t recognize what I needed in a partner. Instead for me it strictly was, ‘I like this person, I’m good at what I’ve been doing, he’s been good at what he’s doing. It will be fun to be in a partnership with this person. He and I can make some money together.’ … These things say, ‘hey, this is what makes us a good partnership, and he’s got time on his hands, he’s got some experience…’ but I was never asking the question ‘does this person bring to the table exactly what I need?’ Forget anything else about it, and [ask yourself] ‘do they bring to the table the specific things that are going to make me successful in this project?’”
Don’t Partner Based on Fear
“I [partnered] out of fear, and that is never a good reason to go into any type of transaction… You should never enter one out of fear. We were fearful of losing money, so rather than losing money as individuals, we lost it as a partnership.”
“So when you’re making a decision on whether to bring a partner in based on fear of what could happen, then you’re probably not ready to bring on a partner.”
Based on previous successful and not so successful partnerships, Chris’s three main pieces of advice when approaching a potential partnership are:
- Don’t partner for comfort or lazy reasons
- Don’t partner because you are afraid of going at it alone
- If you do partner, make sure that person has the skill sets that complement your strengths so that you two are an ideal fit
“Surround yourself with good people, know your strengths, know what you need, be clear, and see what happens.”
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