Preserve and Strengthen a Business Partnership

Partnerships can have tremendous benefits for the participants such as sharing financial risks, providing emotional support, broadening key organizational competencies and expanding perspective when grappling with strategic issues. Unfortunately, many ventures flounder because of the inability of partners to resolve disputes. Rather than allowing valuable relationships to be destroyed, business collaborators can seek help to resolve their differences and build upon their common ground. This article will briefly outline a ten-step process and provide an example to follow when faced with the challenge of preserving a business partnership.

The Framework: A 10-Step Process

Partnership and ownership issues arise frequently, creating significant troublespots at the early developmental stages of an organization. These issues might include questions of stock distribution, investment of key resources, growth, leadership style, contributions and fairness in benefits, buy-outs, strategic direction, performance accountability, roles and responsibilities, and management philosophies.

Partners must be willing to collaborate to resolve such issues. The ability to objectively review the facts in an atmosphere of conflict is imperative. Analyzing the situation through the skilled facilitation of a 10-step process, as outlined below, can confirm the partnership or joint ownership commitment and preserve the relationship and business value created.

Step 1: Determine common ground and value of the relationship. By recognizing areas of common ground and the value of the relationship, partners are able to highlight the reason for the business relationship as well as determine whether it is worthwhile to preserve the relationship. “Common ground” can include such aspects as a desire to increase net worth, develop people, or see an enterprise grow.

Step 2: Recognize each party’s contributions to the enterprise. The contributions of partners are typically synergistic, and trouble can arise if these contributions, roles, and responsibilities are not clearly defined and recognized.

Step 3: Acknowledge the benefits each party enjoys. Index the benefits each party receives from the relationship. Each partner can then evaluate the logic of the relationship for himself or herself. This will also highlight inequities if contributions greatly exceed benefits received. Perceptions of inequity need to be addressed or they will damage the health of the relationship.

Step 4: Clarify functional roles as distinct from equity ownership. The concepts of equity ownership and functional business management are often confused. The separation of these two concepts becomes increasingly important as the company grows and formalizes roles and duties. Management and day to day contributions are separate and distinct from ownership, and should be treated as such. Equity owners do not necessarily need to be involved in the day to day management of the business.

Step 5: Indexing desire for success. Each partner’s desire for the venture to succeed must be understood. This desire will most likely indicate the desire to work through ownership issues and resolve differences. On a scale of 1 to 10, how motivated are the partners to work out an agreement? Low motivation on the part of one or more partners often translates into a weak working agreement.

Step 6: Confidence index: “We can do it.” Wanting to succeed is not enough — partners need to be confident that they can reach a successful resolution. Using a scale of 1 to 10 again, do the partners believe that they are able to develop a fair arrangement? Truthfulness is imperative – issues that could potentially block a successful resolution should be surfaced. The number and intensity of obstacles seems to correlate with lower ratings. Anything lower than a “5” presents a real challenge for the parties involved.

Step 7: Preparing for win-win negotiations. In win-win negotiations, the playing field needs to be as even as possible for all parties. There are different approaches one can take to “level the playing field.” This helps make the face to face encounter more valuable and cost effective by clarifying goals, underscoring the interests at stake, and developing supporting arguments while seeking to better understand the other party.

Step 8: Identify, define and grasp the issues. Partners need to distinguish between interests and negotiation positions. Interests are the concerns, needs, desires and fears underlying a negotiator’s position. It is ultimately a person’s interests, not his or her positions, which need to be understood and accommodated. “Why” and “what” questions can help identify interests. A partner’s position may be much more flexible if broken down to underlying interests.

Step 9: Generate, evaluate and select alternative solutions. Having laid the groundwork for collaboration, the parties are now ready to carefully review the facts, identify options, and select the best alternative or combination of alternatives.

Step 10: Decide on a fair arrangement and document the agreement. Once a decision has been reached on major deal points, parties need to outline what needs to be done to finalize the agreement. Decisions should remain conditional until all aspects of the arrangement are complete. In many situations, especially when ownership value is concerned, the arrangement should be documented by legal counsel.

The Application

Partners for four years and friends for ten, Tom and Sandy own a growing, multi-faceted insurance services company. Their company has experienced significant success through its beginning years. The principals have secured solid relationships with many large and small customers, grown revenues to more than $18 million, and enjoy a respected reputation in their marketplace. They are each stubborn, self-confessed “control freaks.”

Tom and Sandy, as business partners, were experiencing significant difficulties. They had the opportunity to buy out their company’s majority owner, however, they were at odds as to how the ownership of the company would be structured after the buy out. They called upon me as an outside resource to help them work through their partnership challenge. What follows is the application of the 10-step framework to their situation.

Step 1: Determining Common Ground and Valuing Their Relationship

Sandy and Tom’s relationship was important to each of them on both a personal and professional level. They had reached a productive stride in their synergistic efforts. The results of this relationship were apparent in the solid continued growth of the business.

They recognized the common goal of wanting to build financial value and preserve their long-term relationship. Their relationship was the vehicle for economic gain and professional satisfaction.

Step 2: Recognizing Each Party’s Contribution

In the early stages of their business, both Sandy and Tom were responsible and involved in all aspects of the enterprise. Over time, however, Sandy tended to be responsible for day-to-day responsibilities and operations while Tom was in charge of sales and customer relations. To formalize their roles, performance-based job descriptions were completed. As a result, they each had a clear idea of the key results for which they were responsible.

Step 3: Acknowledging the Benefits Each Party Enjoys

While ongoing responsibility and benefits received by each party tended to be comparable, Tom believed his contribution was greater because he had brought in the original majority owner of the venture who, by facilitating the financing of the company, had been integral to their success. This, however, was not an ongoing contribution and was not a reflection of each party’s current contributions or benefits received. Sandy felt that her ongoing contributions to the business were equal to Tom’s and that he should not receive additional benefits on an ongoing basis for bringing the “angel” to the party.

Step 4: Clarifying Functional Roles versus Equity Ownership Positions

Sandy complained that Tom was getting overly involved in too many aspects and decisions of the business. Frequently he would not follow up on tasks, making him unreliable in many areas of day to day operations. By distinguishing between business management roles and equity ownership, Tom and Sandy were able to develop performance profiles for their roles that clearly specified the results for which each partner is responsible.

Step 5: Indexing the Desire for Success

Both Tom and Sandy were perfect 10’s — highly motivated to resolve their differences — which was a strong indicator that a successful outcome could be reached.

Step 6: Indexing Confidence or “Can we do it?”

Tom and Sandy were both at “6” on the 1-10 confidence scale because they had been unable to effectively address their key issues, and they were unsure about their ability to fashion a mutually satisfactory agreement. If partners are unable to effectively talk about key issues, it’s doubtful that they will reach a mutually satisfactory agreement.

Step 7: Preparing for win-win Negotiations

Tom and Sandy each participated in an individual planning session with me. We clarified their goals, reviewed their interests, attempted to gauge their respective responses during the impending discussion (Step 9) and increased their understanding of the other’s situation. They also role-played the presentation of their respective positions and their associated supporting interests and needs with me.

Step 8: Identifying, Defining and Grasping the Issues

Tom’s position was that he ought to own the majority of the outstanding stock because he had brought in the financial backer who was instrumental in their success. Sandy needed to understand Tom’s underlying interests, needs, desires and concerns. He confirmed that he was afraid to lose control of the company. Tom, quickly approaching retirement age, had to realize that if he ever wanted to retire, he would need to turn operations over to Sandy who was in the middle of her professional life. He ultimately needed his ownership position to be bought out upon retirement. Given Tom’s need to control and reluctance to trust, what better person to give ownership to than Sandy, a friend and business partner with a proven track record of fairness, success, and ability?

Sandy’s position was that their relationship needed to be fair and equitable, with an even split on stock ownership. She also wanted the ability to buy Tom out upon his retirement. Her interests were, first, to grow the company and attract key people. She wanted to be able to bring in other people on an equity basis – a concept that Tom vehemently rejected. Second, she wanted to run the company her way, ultimately creating an estate for her family and a vehicle for her college age children to create wealth. Third, when she became the majority owner, she wanted to set up a succession plan for her own retirement, which might include her children and others she brought into the company on an equity basis. Finally, on a personal note, Sandy needed to hear that Tom trusted her and realized that she was his ticket to retirement. This process of identifying issues highlighted that they had the same issues and concerns (i.e., of not having control as a minority owner) and that they needed to affirm their trust in each other.

Step 9: Generating, Evaluation and Selecting Alternative Solutions

Sandy and Tom actively participated in this step over three lengthy sessions in which they identified different permutations of a possible solution and proceeded to a mutually satisfactory solution.

Step 10: Deciding on a Fair Arrangement and Documenting the Agreement

After clarifying their respective interests and roles in the organization, Tom and Sandy hammered out an arrangement that addressed their respective concerns:

• Tom would receive a significant majority of the stock upon buy-out of the financial partner. The differential in ownership interests was to recognize Tom’s contribution in securing the initial investor.
• The ownership interests would systematically change over time, with Sandy having the option of purchasing, in small increments, a portion of Tom’s interest at a mutually agreed-upon price, over three years.
• In the fourth year, Sandy would have the option of buying up to one-half of Tom’s remaining interest in the business at fair market value (as determined by an independent appraiser).
• In the fifth year, Sandy would have an option to purchase Tom’s remaining interest at fair market value.

The solution included several other secondary points. They agreed to have an independent attorney document the agreements.

Summing It All Up

Sandy and Tom have confirmed their common desire to grow the business, mutually agreed to support each other, and sent a message to their employees and customers that they are at one in serving their needs to create high customer and employee satisfaction.

A word of caution: It is best to have an outside facilitator help owners work through this 10-step process. Sandy and Tom both admit that, left to their own devices, they would not have reached an agreement and may have joined the ranks of companies that do not make it beyond their fifth year. As a result of this soul-searching process, Sandy and Tom resolved their differences and developed a stronger business relationship.

Partnership Preservation Checklist

Identify areas in which a partnership can be strengthened by rating the following statements on a scale from one to five.

1. Never
2. Sometimes
3. Often
4. Usually
5. Always