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Partners for Life?

Exploring Partnership Options in Closely Held Companies

Partnerships represent one of the most tried and true methods for managing a dynamic business.  Partnerships can change the math to allow complementary skills to create a sum better than the parts while providing a natural mechanism for dividing duties.

Nevertheless, partnerships are made of partners (people) which opens the door for the mischief of varying assumptions, divergent visions and changing circumstances.  The best way to reduce the risk of partner friction is to plan for it up front (or at least address it early in a partnership) and design mechanisms to address and control it. 

Starting out the right way

“We’ll launch and get the lawyers involved if the business takes off.”  How many new ventures have started this way or have continued well after “take off”? While an expeditious path, it leaves the partners at risk for a disruption in their work relationship to distract them from the business challenges at hand.  Unevenly divided roles and murky responsibilities is a bad recipe for starting a business that needs to get traction quickly.

The answer is basic, although hardly intuitive for partners excited about the opportunity to work together and focused on the business’s development:  write it down.   A written partnership agreement outlining roles, responsibilities, ownership, performance, and how the partnership can be exited forms the foundation for building the partner relationships and the business.  Agreeing to key details up front helps to formalize assumptions and prevent small misunderstandings from turning into serious problems.

Working through assumptions early in a partnership – even if it is a partnership already formed and in business – and formalizing key decisions in a partnership agreement provides the same set of clear expectations for all partners.  This goes a long way towards preventing disagreements among well-intentioned partners and protects partners against some key miscommunications.

Staying aligned

While partners often select each other for their distinctive strengths, mutual learning makes each partner stronger and more able to contribute to the effort.  Each partner will likely have capabilities and talents that are not obvious at the start of the partnership but may become highly valuable as they are discovered and applied.

Linda likes to “think in the clouds” about new opportunities.  She can’t help herself when her mind begins to generate ideas and possibilities.  She sometimes gets so excited explaining a new idea that she cannot sit still.  To her, passion and mission are everything, and she naturally leads into new areas with enthusiasm.

Her partner, Ryan, is far more of a pragmatist.  He wants to be able to see the benefit to the business in concrete terms, preferably with costs and revenues worked out.  Otherwise, what’s the point?  He thinks that dreaming is nice, but the here-and-now pays the bills.

These two people partnered in order to match Linda’s ideas and leadership with Ryan’s get-it-done pragmatism.  While it may appear at times that Ryan is slowing Linda down, they have learned to listen to each other and trust the other’s judgment.  Linda understands that Ryan keeps her from wasting energy on impossible ideas, and Ryan appreciates Linda’s knack for leading the business constantly to new opportunities.

The focus of most partnerships is the business, which means the customers.  Keeping decisions focused on customer welfare and the long-term interest of the business can help keep interests aligned.  At times, though, partners may differ on exactly how to best serve customer interests:  industries can change, technologies disrupt, and customers’ preferences change.  Successful partners who learn to stay focused on solving the business’s issues prevent business headwinds from undermining the business relationship.  Sometimes it may take a key business advisor or consultant to keep business challenges from becoming partnership challenges. 

Trapping conflict early

Even in the best of times, partnerships in fast growing businesses offer the perfect conditions for conflict development.  With roles divided up, each partner is ideally off focused on his or her area of expertise, addressing difficult issues and tackling problems that are uninformed by past experience.  Add in high expectations and stress and the smallest imbalance in workload or failed coordination tasks can set off a conflict.

Regularly scheduled partnership reviews can preempt or control partner conflict.  Regardless of the reasons why a partnership was established, it should be reviewed regularly.  Partners may have changing interests or be thinking about leaving the business.  Goals may have changed for individual partners or the business.  Life changes may affect interest in the business or specific roles within it.  Regular reviews during which partners can voice concerns, put shape to changing plans, and discuss life changes can help partners plan for possible changes.  This – along with a clearly written partnership agreement — helps to keep strong emotions out of the conversation.

Ryan was reluctant to tell Linda that he and his wife were considering early retirement.  But the annual partnership review provided a platform for him to bring up the topic long before it was an issue to the business.  Linda was able to take time to think about the implications for the business and what options were open to her.

Before the next annual partnership review, Linda and Ryan had worked together on a buy-out agreement that both of them thought was fair.  They had recruited two staff members who could take over some of Ryan’s duties, but Linda knew the business would miss Ryan.  With further discussion, Ryan agreed to provide consultative services several times per year to keep the business grounded and work through key decisions.  But the day-to-day operations and most decision-making would remain with Linda.

Linda was able to manage with Ryan’s distant help for several more years until she, too, began thinking about her own retirement.

Partnerships are designed to bring key skills and assets together in a way that neither partner is able to do independently.   However, a growing business often needs a lot more than that to be successful (don’t forget funding investments and growth, collecting receivables, managing supplier payments, etc.)  A key business advisor can provide the guidance, business focus and balance that many business partners need to become leaders of a successful business.  Your SunTrust relationship manager can help you build the structure around your company and keep your partners working together to build your business.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.