by David Gage
Many business owners think of their offspring when they contemplate retirement. Similarly, many children dream of owning their parents’ businesses. There are many advantages for both generations in such a scenario.
Whenever such business handoffs create new partnerships in the next generation, the chances for success increase, but so do the chances for conflict. There are precautions families can take to improve the likelihood that the next-generation partners will achieve their potential as a team and never fall into destructive conflicts with one another.
Transferring a company to more than one child, or to a child and nonfamily member, such as a key employee, may be an ideal succession strategy for many reasons. Partners taking over a business have a greater chance of success than one person alone because of the increased resources that additional owners contribute (money, skills, experience, personalities, etc.).
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 co-ownerships may be laying the groundwork for future success; however, they simultaneously are creating risks not present when a company is transferred to one heir. 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 “30-13-3”: only 30% of all family businesses survive to the second generation (meaning 70% fail); only 13% 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.
A Risky Business
Partners have a complex relationship that is both business and personal in nature. On the business side, they may have different visions of what the business should be; fight over who’s president; fight over money – how much to put into the business, when and how to make distributions; or disagree over how to spend money.
Some successors fail because they cannot get along on a personal level. They may have personalities that rub the wrong way or personal values that conflict. Even siblings raised in the same household may have personal values that are so disparate they cannot work together in a cooperative manner.
Some may have unrealistic expectations of their partners and feel let down by them, despite never having shared their expectations. Other partners are plagued by the belief that the arrangement among the partners is not fair and that they have been disadvantaged in some way.
In most cases, conflicts between partners span both the personal and business realms. The best explanation for why partners experience such difficulty is because they fail to plan in sufficient detail how they will work together. Most co-owners will plan for their business, but not for their partner team.
Poor Partnership Planning
With the stakes so high, it is curious that partners don’t plan their partnerships better, although there are numerous reasons why people give short shrift to partner planning. There is a surprising lack of information (books, classes, seminars) on what goes into creating and maintaining successful partnerships, so most people don’t know the kind of intense planning that’s required. Many advisers simply warn people, “Don’t get involved in a partnership!”
Many people think that if they have the appropriate legal documents (shareholders or partnership agreement, buy-sell agreement, etc.), they have done everything they need to do to structure their partnership. These legal documents are necessary but give people a false sense of security that they have sufficiently prepared for the rigors of a partnership.
Planning is short-circuited in many cases because some of the most important issues that require discussion and negotiation are highly sensitive (e.g., power-sharing, authority, decision-making, money, perks, personalities, work ethics and values).
In many families, people think that if successors already have been functioning like partners then they don’t need to plan. They fail to realize how different it is for siblings when the parents no longer are involved.
Lastly, and perhaps most importantly, successors need to plan their own partnerships. Many parents believe it is their job to set up the partnership team for the next generation, but partnership planning is more likely to be successful when it is led by the prospective partners, without the parents’ input or monitoring.
The Partnership Charter
To plan their partnerships thoroughly, adult children who are becoming partners with one another, or with key employees or some other person, need to discuss, negotiate, and come to thorough understandings and written agreements on numerous business and interpersonal issues.
One structured method for accomplishing this is the Partnership Charter. The business issues addressed in this process include: 1) the partners’ strategic plan for the business, 2) ownership matters, 3) roles, titles, authority, and managing the business, 4) how money goes into and comes out of the business, and 5) governance. The interpersonal issues include: 1) personalities, 2) personal values, 3) expectations of one another and 4) the question of fairness. Also covered in the process is scenario planning as it relates to the partners and a multistage plan for how the partners will resolve disputes.
The Partnership Charter is a document as well as a structured process. The charter isn’t complete until the partners have reached consensus on all of the issues. The document embodies the “deal” among the partners in all of its tangible and intangible aspects. Parents – provided they approve of their successors’ plan – frequently give their children’s charter to their advisers to draft estate plans and other legal documents. Most importantly, the partners themselves use their charter as a guide for working together day-to-day and to help them with periodic reviews as circumstances change.
Planning from the Start
It is said that succession planning should be on the minds of business founders from the moment they start their businesses the same way pilots have to think about landing from the second they take off.
A typical example of the way the Partnership Charter is used in helping successors assume control of a business occurred recently in the ownership transition within the Matsen Insurance Brokerage Co. Like most seasoned entrepreneurs, Ralph Matsen, company founder and CEO, had a solid management team in place as he neared retirement. His son and three other executives had been groomed to take over, and largely had been running the business for a couple of years. Nevertheless, Matsen knew the difference between co-executives and co-owners. He encouraged the foursome to work out their own charter, and told them that he would not meddle while they worked on it.
The four executives hired two mediators to conduct a three-day retreat. With feedback on their leadership styles and personal values, they developed new, clear agreements about how they would work together more effectively. They clarified their expectations of one another, their roles and responsibilities, and how they would hold one another accountable.
They 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.
There were certain ownership and management issues that likely would not have been dealt with except for two reasons. First, the executives dedicated a large block of time to looking at every aspect of their partnership, which is unusual. In most cases, people will spend intense time on business planning but rarely on partnership planning.
Second, the mediators conducted thorough, confidential interviews with each of the parties. A major advantage of the mediation approach is the confidentiality it provides people in private meetings with the mediators.
These meetings have the power to uncover hidden agendas and to get differences discussed constructively. A mediation retreat format capitalizing on the confidentiality of individual interviews often is key to a successful partner retreat.
The process allowed the four successors at the insurance company to decide for themselves that it was a good idea to become partners and agree on exactly how they would do it. The process gave everyone more clarity about the details of the plan and more confidence that they truly were addressing the topics they needed to cover. If the successors developed something Matsen didn’t believe was workable, he was not obliged to transfer the business to them.
Parents need to know whether a team 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.
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.
David Gage is a psychologist, mediator, and co-founder of BMC Associates. which specializes in preventing and resolving disputes among business partners, senior managers and boards of directors.