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The Partnership charter

The Partnership Charter by David Gage Millions of people co-own closely held companies, family businesses, and business partnerships, but establishing them and keeping them together is never easy. Here, finally, is the guide they have been waiting for.... Read More
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Clearing the ‘Heir': Defuse Conflicts Before the Handoff!

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by David Gage
Textile Rental Magazine
June 2011

“Partnership Charters” give team members a chance to ‘road test’ their ability to run a business together

The future value of many successful businesses rests on next-generation partners having not only solid business skills but also the ability to work as a team and avoid destructive conflicts. Including multiple successors in a business-transfer plan can help ensure success. However, it also can create risks that aren’t present when assets are transferred to one heir alone. In multiple-successor scenarios, partners must cooperate or the transfer ultimately will fail. This article describes a structured, collaborative process, called a Partnership Charter, for minimizing risks, improving the odds of success, and preventing future partner wars long before they start.

Partnerships bring benefits … and risks

Including a next-generation partnership in a business transition plan can help ensure success. Presumptively, we know that partners starting or taking over a business have a greater chance of success than one person alone because of the increased resources that additional owners contribute. There also is empirical evidence demonstrating that companies with partners grow at a much faster rate than companies with solo owners.

A caveat is in order, however. Plans that turn heirs into partners all contain one serious drawback: These partnerships are notoriously unstable. This is why so many advisers warn people to steer clear of any kind of partnership or family business. It’s also why an Inc. magazine poll of business people reported that two-thirds of the respondents thought having partners is a “bad idea.” Why? Because of the “inevitable conflict,” most of them said.

Why sibling partners are a risky proposition

To understate the obvious, family partners have complex relationships. They are both business and personal in nature.

Some partners have trouble managing the business side of their relationship. They end up unhappy and eventually unwind their partnership. They may have different visions for the business; they may fight over who’s president, or not believe a partner is capable of performing his or her job. They may fight over money, perks, control, or ownership. In one case, a son joined his father who founded a company and his older brother who had been working in it for 10 years. The brothers were so close that no one anticipated any problems and no serious planning was conducted.

Business partners at round tableAs soon as the father started to retire, the brothers began a ferocious, two-year battle over whether the brother who had recently come on board would be a 45- or 50% co-owner. Their fight tore at the heart of the family and shocked the community because the brothers had always been so close. Eventually, the father with great sadness fired the younger brother and gave him a million dollar loan to start his own business. The son eventually got back on his feet, but the family relationships have yet to recover.

Unlike those brothers, many family partners fail because they can’t get along on a personal level. As one daughter running a business said recently, “The company’s doing fine; it’s the family that’s screwed up.” The principals may have personalities that rub the wrong way or personal values that conflict. Despite what many people believe, siblings raised in the same household may have personal values that are so disparate that they can’t tolerate working together. Some partners have unrealistic expectations of their partners; others just don’t feel their arrangement is fair.

Contrary to the line in The Godfather when Michael Corleone says to his brother Sonny as he’s about to shoot a cop, “It’s not personal. It’s just business,” family business conflicts are always an intricate blend of personal and business. Twenty years of mediating partner disputes has convinced me that the best explanation for why partners experience conflict is because they fail to sufficiently plan how they would work together.

Why partnership planning doesn’t happen

Anybody can become business partners. There’s nothing special you have to do, not even a paper you have to sign! The absence of any barrier to entry and a lack of understanding of what it takes to be partners are major reasons why people fail to plan adequately. And why should people know the ins and outs of having partners? Business schools don’t teach it, and there are very few books on it. Many people are under the impression that if they get the appropriate legal documents in place (e.g., shareholders agreements, buy-sell agreements), then they have done all the planning they need to do. Though helpful, these documents serve a limited, legal purpose and unfortunately give people a false sense of security that they’ve done their homework.

Sometimes planning is short-circuited because the topics to negotiate are highly sensitive (e.g., power-sharing, communication styles, decision making, money). They are easy to put off until “later.”

In many families, the need for the next generation to thoroughly plan their partnership is obscured by the impression that the successors have been functioning like partners for years. They appear to get along just fine. Families have trouble appreciating that a parent who is still active can keep problems from surfacing. The kids work great together as long as a parent remains somewhat present. But that period ends sooner or later.

Many parents imagine it’s their responsibility to plan next-generation partnerships. It’s easy for parents who have had responsibility for defining their children’s roles in the business to believe it is also their responsibility to determine how their children will work as partners after they pass the baton of leadership to them. Or, they inadvertently structure their adult children’s partnership by deciding which children will inherit stock and in what proportions. I call these children “accidental partners.” Parents must allow—and require—their adult children to figure out their own partnership arrangement in order to make it more likely that they’ll succeed in working together closely for years to come.

Lowering risk through effective planning: The partnership charter

A structured method for reaching these agreements, based on a decade of mediating partner conflicts, is called the Partnership Charter. It’s based on the premise that soon-to-be partners need to discuss, negotiate, and come to agreement on key business and interpersonal issues. The business issues include the partners’ vision; ownership; roles, responsibilities, and accountability; how money flows in and out; and governance. The interpersonal issues include personalities, personal values, expectations, and the question of fairness.

By discussing and reaching agreements before conflicts arise, partners are able to prevent the vast majority of destructive conflicts that might seem “inevitable.”

Partnership Charters are nonbinding documents that are different in their purpose and content than shareholder or buy-sell agreements, etc. They serve as a guide for working together and embody the “deal” among the partners in all of its tangible and intangible aspects. They can be self-created or developed with the help of a business mediator. They are living documents that the partners review and revise regularly to keep their partnership vital in light of changing conditions.

The role of a partnership charter in succession planning

Succession planning should be on the minds of business founders from the moment they start their businesses in the same way that pilots always envision where they’ll land before they take off. If it becomes clear that “the successor” will be more than one individual, the planning should include putting the successor team to the test.

For example, Jonathon had imagined himself continuing to run his company until he was 70, when his daughter Jody and son Mike would be in their late 40s. But the death of his first wife and subsequent remarriage at age 64 changed his plans. He now wanted to retire within one year and turn the company over to his two kids. They and one other employee were his management team, and all four of them had been working closely together for over six years. While his two children felt more than ready to take over, Jonathon felt uneasy about it, remembering how his own father and uncle had fought as partners in their business. He now worried about his kids fighting.

His accountant recommended that he get them to develop a Partnership Charter. Over the course of a couple of weeks, Jody and Mike individually competed exercises using a workbook. That helped them prepare to spend three days with a mediator discussing and negotiating every aspect of their possible partnership. Two big surprises came out of their work. One was an agreement that Jody would become president when Jonathon retired and Mike would become CFO after their current CFO decided to retire, something that wasn’t expected for another 5-10 years. The second surprise was that Mike raised an issue between them about something from their grade school years that Jody had been oblivious to. They successfully resolved it.

Even though they had not been sure that they needed to do a Charter, they both expressed pleasure at how much they had learned about one another and the clarity they felt they achieved about the prospect of co-owning the company. Mike admitted that he probably never would have gotten to the sibling issue without the mediator’s help. They expressed confidence that they could work out just about anything because they had negotiated so many issues and created guidelines for what they would do if they did experience conflict.

Jonathan understood that not everyone who goes into the charter process makes it successfully out at the other end. There’s no guarantee that adult children will like what they experience in this “road test.” In many instances, I’ve seen siblings work on a charter and realize that they don’t wish to commit to a partnership with each other. Typically, in these situations there is great relief. Siblings begin making other career plans and parents are able to find alternative exit and estate strategies. Jonathon hoped for himself and his kids that they would complete the process intact. When he read their 43-page Charter, he said he felt totally confident they could take over and succeed long term. He stopped worrying and was ready to go.

While partners-to-be can develop their own Partnership Charter, a mediator helps people face up to sensitive discussions and ensures that all hidden agendas and differences are addressed. A mediator conducts thorough, confidential interviews with each person. Although reluctant to admit it, most people becoming partners have some information that’s important to them that others are not privy to or aware of. A major advantage of the mediation approach is the confidentiality it provides people in private meetings with the mediator. When conducted by an experienced mediator who knows what to look for, these meetings have the power to get people discussing uncomfortable issues that may seem petty and not worth discussing but are important to deal with.

The safe, mediation-retreat structure in which partners discuss sensitive, difficult issues and a process that fosters open and candid discussions ensures future partners against the risks inherent in co-ownership. The written charter memorializes the business and interpersonal agreements and helps protect partners from conflict.

The timing of partner planning

Parents need to know whether or not a sibling team is viable before plans are designed. Successors deserve to know whether or not they can and want to work with one another before it becomes too late to pursue alternatives. Sigmund Warburg, the founder of the Swiss banking giant UBS, proclaimed, “All events should be crossed in imagination before reality.” The time for this work is certainly as early as possible once the players are identified, bearing in mind that the process also helps in the identification of the eventual partners.

In family businesses, deciding who should be involved in the charter process can be a tricky question to answer. Siblings may work in the business, leave, and later return. The safest thing to do is err on the side of inclusiveness by inviting every sibling who has an interest in being a partner. I have heard many adult children complain that they were treated unfairly by not getting a chance to be part of the business years before.

If adult children reach an agreement and it passes muster with the parents, the estate planner can commence work on tax and other strategies. Formal legal documents are drafted based on agreements in the siblings’ Charter. Families often will need other professional help with financing, professional development, business and cash flow planning, etc.

Conclusion

The success of the Partnership Charter process doesn’t depend on confirming people’s initial expectations or desires regarding the future successor team. Rather, companies can reach a favorable conclusion when each of the key players gains a greater understanding of who will constitute the leadership team, as well as the ability of the partners to take over the business, work well together, and maintain and grow the asset they’ve acquired.

 
David Gage, Ph.D. is a mediator, psychologist, and co-founder of BMC Associates, a multidisciplinary mediation and consulting firm in Arlington, Virginia. He is the author of the book The Partnership Charter: How To Start Out Right with Your New Business Partnership (Or Fix the One You’re In). Gage is also an adjunct professor in the Kogod School of Business at American University in Washington, DC, where he teaches a course for MBA students titled “Managing Private and Family Businesses.” Contact him at dgage@bmcassociates.com or 703-465-1262.