An Aspirin for Partners:
Taking the Headache Out of Partnerships
The Power of Partnerships
Many owners of closely-held businesses will think primarily of their partners or offspring when contemplating retirement. The success
of their post-business plans relies on others. At the same time, many partners or children dream of owning their successor’s
businesses. Everyone stands to gain when this happens.
Whenever such business transitions occur, the chances for success increase, but so do the chances for conflict. There are precautions
partners and families can take to improve the likelihood that the next group of owners will achieve their potential as a team and never
fall into destructive conflicts with one another.
There are many reasons to transfer a company to a partner(s), child(ren) or key employee(s) as part of an owner’s succession plan.
Partners taking over a business have a greater chance of success than someone new to the business. And a newly formed partnership
of more than one person brings increased resources – money, skills, experience, relationships, etc. – that will further contribute to the
company’s success.
Researchers at Marquette University's business school discovered that single owners founded only 6% of the fastest growing
companies among the 2,000 companies they studied, whereas partners founded a whopping 94%.
Succession plans that create or continue partnerships may lay the groundwork for future success; however, they simultaneously create
risks not present when a business is owned by a single person. Partnerships are notoriously unstable. A conservative estimate of the
number of businesses with co-owners that fail within four or five years may be as high as 50%.
Perhaps more revealing, among family businesses, the most frequently cited statistic is "30-12-3": only 30% of all family businesses
survive to the second generation (meaning 70% fail); only 12% survive to the third generation; and a mere 3% ever see the fourth. There
is little doubt that the success rate of family businesses as they pass from generation to generation has a great deal to do with the
challenge of having siblings, cousins and others as partners; and the more partners, the greater the risk. Any family that can minimize
those risks improves its chances of success.
The Risk of Partnerships
The complex relationship of partners encompasses both personal and business issues. On the business side, partners can have
competing visions of what the business should be; fight over who's in control; disagree over money – how much to put into the
business, when and how to make distributions; or argue over how money is spent.
Some partnerships fail because they cannot get along on a personal level. They may have conflicting values or competing
personalities. Even siblings raised in the same household may see things so differently they cannot work together in a cooperative
manner.
In many instances, some may have unrealistic expectations causing them to feel let down by their partners even though these
expectations have not been shared. Other partners are plagued by the belief that they are being taken advantage of in some way.
From our experience, most conflicts between partners span the personal and business realms. Since partners fail to plan how they will
work together, they experience unexpected and damaging disagreements. Although they have made plans for their business, they have
not invested the necessary time to plan for their partnership.
The Reasons for Poor Partnership Planning
There are a number of reasons why partners fail to invest in better partnership planning. Despite what is at risk, there is a surprisingly
lack of information on what it takes to create and sustain a successful and thriving partnership. Consequently, most people aren’t
aware of the degree of planning that is required and most advisors simply warn people, “Do not get involved in a partnership.”
For most, having the appropriate legal documents (shareholders or partnership agreement, buy-sell agreement, etc.) is sufficient for
the partnership structure. Though these legal documents are necessary, they can give people a false sense of security regarding their
preparation for the challenges of being in a partnership.
Since many of the most important issues that require discussion, negotiation and clarification are sensitive (e.g. power-sharing,
authority, decision-making, money, perks, personalities, work commitment, and values) planning frequently falls short.
In most family-owned businesses, successors erroneously believe that since they have already been functioning like partners, they do
not need to plan. They fail to realize the impact parents made when they were involved in the business. Here it is important for
successor-generations to plan their own partnerships.
The Partnership Charter
For partnerships to succeed, partners must participate in a thorough process of planning that includes discussion, negotiation,
understanding and clearly communicated written agreements on a number of business and interpersonal issues. One structured
method for accomplishing this is the Partnership Charter.
In the Partnership Charter Planning Process, partners will address many of the items that contribute to the failure of their relationship.
Both business and interpersonal issues are thoroughly explored. These include:
Business Issues:
Direction Issues:
The partner’s strategic plan for the business
Ownership Issues:
The partner’s view of ownership including succession and transition
Management Issues:
The roles, titles, authority and roles each partner has in managing the business
Financial Issues:
How the money goes into, stays into and comes out of the business
Governance Issues:
How daily, strategic, financial and long-term decisions will be made
Interpersonal Issues:
Personalities:
The differences and similarities of partners and how these will be used to grow and expand the business
Personal Values:
The driving values of each partner and how they will be integrated into the business practice
Expectations:
What each partner expects from the other regarding time worked each week, personal days off, generating
new income, operational and management issues, job descriptions, etc.
Fairness:
How each of the partners define “fair” with regard to the partnership, the work load, and the income
Scenario Planning:
How the partners agree to resolve disputes and disagreements
The Partnership Charter is a document that is drafted from a deliberate and well-structured process. Partners must agree to reach an
agreement on all of the issues before completing the work. In many respects, the finished document embodies the “deal” among the
partners in both the tangible and intangible parts of working together.
Most business partners who have completed this process appreciate having something in place that serves as a guide in their working
relationship. They will not only review the charter, but will adjust it periodically to bring it up to date with changing circumstances.
With family-owned businesses, after approving the plan formed by the successor generation, parents can have the charter included in
the succession plan and have the necessary and supportive legal documents drafted while they remain in control of the business.
Succession Planning and Partnership Charters
The best business succession plans are those that are formed from the first day of the business. Stephen Covey’s counsel to “Begin
with the end in sight” comes to mind. This is especially true for partnerships.
A typical example of how a Partnership Charter was used in succession planning occurred recently in an ownership transition situation.
The owner had created a solid management team and had been grooming his son and two other executives to take his place when he
retired. This team had been running the business for a couple of years. Nevertheless, the owner knew the relationships would change
when they become partners. He told them to form a Partnership Charter.
The group contracted with an advisory firm who facilitated a planning retreat. Through different assessments and feedback, participants
identified their respective leadership styles and personal values and developed clear agreements about how they would work together
more effectively. They then clarified their expectations, roles and responsibilities. They also agreed on how they would hold one another
accountable.
They then brainstormed every conceivable type of scenario that might threaten the health of their partnership and devised guidelines for
ways to deal with them. They agreed on a multi-step procedure for resolving conflicts.
This process proved to be extremely effective in identifying critical ownership and management issues. Their willingness to dedicate a
large block of time to review every aspect of the partnership enabled them to devise action steps that will prove to save them thousands
of dollars and years of potential frustration.
By using outside advisors, thorough, confidential interviews were held that had the power to uncover hidden agendas and constructively
discuss differences. This process proved to be non-threatening, yet effective.
During the process, the three professionals were given the opportunity to decide for themselves whether or not it was a good idea to
become partners. They were also able to agree exactly on how they would do so. As a result, everyone had more clarity about the how
the succession would work, and greater confidence in its success.
In this case, the owner retained the right to “veto” any plan that he did not believe was workable, and was not obligated to transfer the
business to them.
When planning for their succession, owners need to know whether a new team of partners is viable before plans are made, and
successors deserve to know whether they can, and want to, work with one another before it becomes too late to pursue alternatives.
Whether starting a new business, continuing to run an existing one, or planning for succession, partners will be wise to take the
necessary steps to create a Partnership Charter. Sigmund Warburg, the founder of the Swiss banking giant, UBS, once noted that, "All
events should be crossed in imagination before reality."
Proper partner planning gives people the opportunity to do just that.
Article written by:
Paul R. Brown, Principal
BROWNSTONE Capital Advisors LLC
© 2006 to Present Paul Brown All rights reserved.