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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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Having Partners, A Bad Idea?

Industry Week Growing Companies

by David Gage
IW Growing Companies
December 1999

Conflicts may seem inevitable, but they’re not.

A few years ago, an Inc. magazine poll found that almost two-thirds of the businesspeople surveyed believed that having partners is a bad idea. The two most frequent reasons: “interpersonal conflicts” and “unmet expectations.” A poll by researchers at the University of Minnesota uncovered similar misgivings at family businesses. About half the second-generation family members working at such companies were having second thoughts about the wisdom of joining the company. The main source of their unease was, again, interpersonal conflicts.

Because such conflicts are so widespread, they may seem inevitable. But friction between partners can often be prevented or minimized, starting early in the life of the business–if the partners will recognize and address the potential sources of discord.

The following is a true and typical story of partners starting out together. Five very experienced businesspeople could not quite agree on how they would share ownership of their new company. Each brought something very different to the table. One had the idea. One had been CEO of a large company. One had a legal background. One was nationally prominent. One had significant money to invest. Only four of the five partners would take an active part in the company.

Because their roles in the company were so different, setting a value on each partner’s contribution was extremely difficult. Each partner wanted to wind up with a percentage of the ownership that would satisfy their own sense of self-worth. Is having business partners a bad ideaAfter difficult negotiations, they finally agreed on percentages. Legal documents specified their equity shares, along with their positions, titles, and compensation packages.

Unfortunately, precise-sounding legal language can conceal serious disagreements if the partners haven’t discussed their arrangements in sufficient detail. Even the most rigorously drafted contract will have some unavoidable ambiguities, and they can lead to big trouble if the partners haven’t bought in to the agreement on an emotional level.

Something like that happened with the five partners. After their new company had been in business for a year, the CEO partner and the investor partner went to the other three and said, essentially, “We now know enough to establish percentages that are more fair for everyone.” They claimed that revisiting the percentages was something they all had agreed to do. Two of the other partners didn’t remember it that way. They balked at changing the percentages. The fifth partner, who was chairman of the board, tried to stay neutral, although he probably would have sided with the CEO partner in a crunch.

The two partners who insisted on the status quo had the right to do so; there was nothing on paper that said anything about adjusting the percentages. The CEO partner could have thrown those two partners out of the company–that was his right, as CEO–but he didn’t have the legal authority to make any changes in the way the equity was divided up. All five of the partners understood that their fortunes and their futures would be at risk if their differences wound up in litigation. That was why they ultimately agreed to seek mediation of their differences.

I have seen many other partnerships wind up in similar straits, with mediation often the only path out of the morass.

Partners rarely talk enough about their working arrangements. They go into business without a clear understanding of how they’re going to work together. They shy away from emotionally charged topics, avoiding conflict by papering over their differences–but leaving enough ambiguity to guarantee even more serious disagreements down the road. Partners imagine keeping things a little vague will work out to their advantage later on. It never does. And when conflict finally arrives, every partner who suffers through it walks away saying, “If only we had dealt with that sooner.”

What Partners Can Do

Even though each case of conflict between partners or family business members is unique, the good news is that such conflicts typically involve only a few fundamental issues. The bad news is that addressing those issues and achieving real consensus–not just superficial agreement–is very difficult. The discussions take time and commitment and usually require the guiding hand of a neutral third-party mediator.

The New York Times reported that former Treasury Secretary Robert Rubin and his co-chief executives at Citigroup, Sanford Weill and John Reed, spent “five full weeks of almost constant meetings” to negotiate how they were going to work together and the terms of his employment–before Rubin ever agreed to take the job. Rubin’s package is probably more generous than most potential partners would expect, but extra zeroes on a company’s balance sheet do not make getting along day-to-day significantly more complex or difficult.

Partnership Charters

A convenient way to spell out all of the understandings that will govern a partnership or family business is to draw up a charter for the business–not a contract, which is legal document, but a charter that explains how the business will be run and how responsibilities will be parceled out.

Writing a charter is a way for business owners or family members to look squarely at the issues that could divide them. They can come away from the drafting of a charter with a heightened understanding of each other as people and of how their different values and personalities can be harnessed to the benefit of the business. Drafting a charter can be a way to establish stronger lines of communication and greater capacity for planning and decision making.

Creating a charter requires intense effort from each partner, thereby nourishing a sense of teamwork and buy-in that is difficult to achieve any other way.

As the Inc. magazine poll made clear, unmet expectations are a major problem for partners. Most often, though, partners do not know what each expects of the other. Partners need to explore their expectations in three distinct areas: for each other as individuals, for the business, and for the partners as a group.

Another source of friction is the sense of a lack of fairness. To thoroughly address this topic, each partner should list what he or she thinks all of the partners contribute and what they get out of the business. If people think broadly enough, this exercise is very enlightening. When you know what your partners value about what they put into the business and get out of it, you are able to give them more of what they value. That in turn makes them more satisfied with the partnership, more motivated to contribute, and more motivated to recognize you and what you want.

Creating a charter also entails detailed discussions about equity interests, employment and compensation, governance, managing the company, and resolving disputes. Drafting a charter is also a way for the business owners to anticipate crises–including the death or departure of a partner and the end of the partnership itself.

How Charters Differ From Partnership Agreements

In contrast to the broad purposes of a charter, partnership agreements have a very narrow purpose: to serve as a legally binding contract dealing with the rights and duties related to specific items, such as ownership shares.

A second and more important difference is that a charter is basically a process and a partnership agreement is basically a product. For example, one partnership agreement simply stated that the partners were 50-50 owners. In the charter process, the partners explored the implications of being 50-50 partners. Did 50-50 mean both would put in equal hours? Under what circumstances could 50-50 change? What would happen if one person wanted to bring another partner on board?

Charters As Road Tests

Creating a charter is not for the faint of heart. Not all partners, or partners-to-be, reach the finish line. Herein lies some of its value.

Many partners are unsure about whether they should become partners. Many siblings in family-owned businesses are unsure they can work together without problems once their parents are out of the picture. Do the parents decide for them? Do they call in experts?

Rather than deciding for adult children, a healthier and more respectful strategy is to have the siblings attempt to create a blueprint for themselves. Can they figure out exactly how they would work together, including how they would deal with a whole host of hypothetical scenarios? If they falter in this exercise, they will see the handwriting on the wall–and they will see it themselves instead of being told by someone else.

On the other hand, when partners make it through the intricacies of crafting their own charter, they will have the confidence they need. They will feel like full-fledged partners.