Partnerships

Most partnerships fail. In fact a large percentage don’t make it past 3 ½ years. Most are over by the end of 7 years.

“Why?” is the most common question and the answer is quite complex. Sometimes, it emanates from a poor structure in the very beginning. It can be affected by a lack of a clear delineation of responsibilities and authority for each of the partners; or a lack of work ethic by one of the partners; a lack of capital; business doesn’t meet expectations (or break even); or the business over trades it’s equity. Sometimes the interests of the partners drift apart. The list is long and virtually endless.

We have been involved in the dissolution, or restructuring of ownership including the outright sale of 78 businesses that were involved in partnership issues. We have done family restructurings, best friends who have found they could no longer work together, and partnerships between companies who discovered they could no longer work together.

The greatest tragedy is that with a little more attention to detail at the beginning, the partnership would not have had to end in failure.

A simple document called a shareholders agreement clearly spells out the “rules of Engagement” of how the business should operate and who is responsible for what, along with a clause that clearly spells out the process to terminate.

We once sold a business where two fellows had been in business together for 28 years. One partner was 68 and in charge of sales and the other was 56 and in charge of production. I had looked up to both of them because I felt they had a “perfect partnership”. The business was small, and profitable and each made about 2 ½ times what they could have earned doing the same job as an employee. We found a buyer who wanted the younger partner to stay on for a couple of years and the transaction was structured to facilitate that. On the day of closing, as we left the lawyer’s office with checks in hand, the older partner stopped dead in his tracks and called ahead to the younger man who turned to listen. The older gentleman berated him for 27 years of being every dastardly thing you could imagine, and with quite colorful language, to say the least. It turned out that the older partner had wanted to end the relationship after the first year, and couldn’t figure out how to do it (there was no shareholder agreement) and so things festered for 27 years. The irony was that the younger man had no idea there was a problem.

The key to successfully dismantling an unhappy partnership is to have a thorough understanding of the business, and of each party’s goals, ambitions, wants and needs. In order to be effective in this arena, the intermediary must have no relationship with either partner and must be able to convince both of them that he is working for the best interests of the business. We often use our Industrial Psychologist to help us understand the personal dynamics that are in play and to assess who could stay, who should go or should both of them go. Emotions can run quite high and sometimes extend to other family members.

One of our most challenging assignments occurred when we were called into a family business that was struggling with the decision of which of the four children should inherit the business from a tremendously successful entrepreneur who had started it 40 years earlier. Now 70 and having suffered a debilitating stroke, he could only stand by and watch as his children and their spouses fought over the spoils, to the point that the grandchildren were “too busy to visit their grandparents”.

The challenge was quite formidable, but we started by developing a plan that included a business evaluation, a business analysis of the future for this particular company, along with psychological testing of all the children and their spouses, and the father and mother. We took control of the business from the perspective that we were to work for the best interest of the business and in turn for the family. The psychological testing clearly identified the most likely candidate, and identified the strengths, weaknesses, likes and dislikes of each of the children. The family was wealthy and a family trust was established which took control over all income generating assets of the parents. The operating business was sold to the most qualified of the children with some financing from the family trust to ensure there was enough equity for the business to survive. The trust then financed two other children into their own business and the last child into law school with enough funding to set up his own practice when he was called to the bar. The family’s lawyer and accountant became trustees of the family trust, because the whole family believed they would do what is best for the family.

This project took almost four months to complete the various studies and make recommendations, and more than five years to see the last son through law school and into his own practice.