Leadership speaker and guru Brian Tracy has been quoted as saying, “If you like a person, you say, ‘Let’s go into business together.’ Man is a social animal after all, but such partnerships are fraught with danger.” He’s right. Countless men and women have said “let’s go into business together,” become partners, and built successful companies. Often, these partnership relationships launch with enthusiasm and excitement, aligned around a common vision of company growth and success. Yet many business partners wake up one day to realize they are unhappy in this relationship “fraught with danger.”
The change can happen shortly into the relationship or curiously can occur years or decades into a harmonious relationship. When you are unhappy with your partner, the potential dangers include slowed company growth, a tension-filled office environment, a divided company culture, and lowered profits. If left unchecked, unhappy partnerships can lead to unhappy or failed business exits.
So why do some partners become unhappy with each other?
Many business observers have commented that being in a business partnership is akin to being in a marriage. This is partially accurate. Like a marriage, for a business partnership to be healthy and last it must be rooted in shared values, effective communication, and mutual respect. However, company partners have different goals for their business relationship than those that exist within a marriage. Also, the tools used to sustain a healthy marriage are different than the tools used in a healthy business partnership. When the proper tools are not applied, the danger of an unhappy partnership rises. In our experience, owners fail to use many of these tools, typically because they either don’t know they exist or don’t know the role these tools play in maintaining partnership alignment and harmony.
The six most common tools that get overlooked or under-utilized in partnership relationships are:
1. Written Job Descriptions
Partners working in the business often exempt themselves from this common employee management tool under the premise that the document is unnecessary because they are owners first and employees second. However, it is difficult for partners to achieve and maintain alignment if their roles and responsibilities within the company are unwritten and thus left up to individual interpretation and application.
When partners do not have current written job descriptions, a common byproduct is the blurring of decision-making authority and accountability. This, in turn, reduces efficiency and increases partner tension. It is easy to envision the problems created if every company decision and issue were subject to a vote of the partners. Not all partners can be—nor should be—involved in all decisions. Some issues are ownership-level matters that require discussion and input from the partners. Other issues are management-level matters dealing with day-to-day operational and tactical areas. Yet without written job descriptions, which partner has input and authority to make which decisions and in which circumstances remains unspecified. This ambiguity invites partners to interpret the answers for themselves—not a method that leads to alignment.
Partners can rely on precedent and ad hoc efforts to fumble their way through this ambiguity for a surprisingly long time, as long as their goals are in alignment. But, when exit draws near for one or more partners and their goals change, partners are left to reinterpret their responsibilities and reevaluate their priorities as they see fit. At that point, the lack of written job descriptions can cause significant partner difficulties and inhibit creating exit-goal alignment.
2. Job Performance Benchmarks and Evaluations
Like with written job descriptions, partners working in the business often exempt themselves from defined job performance benchmarks and periodic evaluations against those benchmarks under the premise that the exercises are unnecessary given that they are business owners. In situations where the partners are equal partners, they may also find it difficult to evaluate one another’s job performance and hold one another accountable for performance, given that they see themselves as peers rather than subordinate to one another. Each partner is left to individually interpret not only his or her responsibilities and performance, but also each other’s. This fuels misunderstanding and a lack of accountability.
3. Compensation Tied to Market Rates
Partners with identical ownership percentages (i.e., two partners with fifty-fifty ownership) often take identical compensation, rather than using the tool of tying compensation to market rates. Equal partners usually aspire to treat themselves equally, and therefore they agree early in their relationship to allocate everything equally, including compensation. In the beginning, this seems advantageous. While the business is small and cannot yet afford to pay market-rate wages to the partners, taking equal below-market compensation evenly spreads the risks and burden. Once revenues and profits increase, the partners usually enact identical wage increases, even though the partners’ positions within the company evolve.
If this continues unabated, the partners end up with wages grossly inconsistent with market rates for the position each occupies. Even the most good-natured and selfless underpaid partners may come to resent the imbalance. Grossly overpaid partners often come to resent even discussing the matter; in fairness, they are adhering to an arrangement that all the partners willingly entered into years earlier. Few issues can leak into a relationship and erode happiness like the issue of frustrations with take-home-pay.
While it would be easy to conclude that the solution is for the partners to simply adjust compensation to be consistent with market rates for their positions, this is easier said than done. Once this genie is out of the bottle, it is difficult to get it back inside.
The proper place for business partners with equal ownership to treat themselves equally is with profit distributions. Profits are surplus earnings to either be reinvested or distributed for the benefit of the business’s owners. When distributed, profits are usually shared in direct proportion to ownership (unless their ownership structure or a prior agreement dictates otherwise). Wages, on the other hand, are different. Wages are payments to people for services rendered to the business. Wages should be consistent with market rates for similar positions and for persons with similar skills and experiences.
4. A Written Strategic Plan for the Company
Many businesses manage to achieve significant revenue and profit growth without formal long-term strategic plans. Therefore, to some owners, strategic planning and plans seem unnecessary, a misuse of time, and potentially counterproductive if the process creates rigidity in the company. However, this tool helps preserve partner happiness. An effective long-term strategic planning process requires partners (and their leadership team) to debate and determine a unified course of action for the business. Their decisions are summarized in a written document—the strategic plan—to share within the organization to increase buy-ins and enhance accountability. Without an effective planning process, partners often find themselves pursuing individual initiatives and ideas, pulling the organization in different directions and undermining or outright sabotaging alignment. It’s fairly easy to become unhappy with somebody who is continuously rowing your boat in a different direction than the one you want to follow.
5. Financial Budgets
Just like many companies can grow without preparing business plans, many companies can grow and many partnerships can be happy for an extended period without preparing annual budgets. However, a well-thought-out and actively reviewed budget is an important tool to maintain good partner relations. Just as with a strategic planning process, the budgeting process requires partners to debate and determine how they will annually allocate and prioritize financial resources. The finished product—the written budget—serves as the financial song sheet for the partners (and their leadership team) to sing from. In organizations lacking a healthy budgeting process, partners likely find themselves engaged in an ongoing tug-of-war over the next surplus dollar and discretionary expense.
6. Regular Partner-Only Meetings
Partners of small- to medium-sized businesses are notoriously inconsistent about conducting regular meetings for just the company’s partners. Many partners are comfortable dispensing with the formalities of regularly held meetings, especially if all of the partners are actively involved in the business. When partners work inside the company, they may see little need for dedicated meetings for the partners separate and apart from the business’s leadership team, because they likely know most of what is happening within the company and are busy dealing with pressing issues and priorities.
Making matters worse, since the 1990s and 2000s, the limited liability company (LLC) has become the most prevalent legal form for businesses within the United States. Before then, the most common legal business form was corporations: regular C and subchapter S corporations. Corporations must have clearly designated boards of directors and officers and must hold regular owner (i.e., “shareholder”) meetings at least once per year. In contrast, LLCs usually are not legally required to name boards of directors and officers, nor are they required to hold meetings among owners (i.e., “members”). Thus, business partners today have even lower sensitivity to the need to hold regular partner meetings than was true in the past.
Without a regular, predictable, and safe forum to discuss partner-level issues, too often partners fall into the destructive pattern of leadership by committee. This blurs relationships, erodes accountability, and undermines trust. Regular partner-only meetings are the proper place to address partner-level issues. For example, “Should we sell the company?” is a partner-level question. In contrast, “Do we upgrade our photocopy machines?” is probably a management-level decision that not every partner needs to be involved in. It is difficult to maintain trust and good relations among partners if they lack regular, predictable opportunities for ownership-level conversations.
There are other ways in which business partners may grow unhappy with one another. Sometimes values fall out of alignment. Personal circumstances may change, spilling over into business relationships. However, the six tools discussed here are familiar and commonly recognized business tactics that too many partnerships overlook or skip past, wrongly concluding that these best-practices are unnecessary. Without these tools, the partnership relationship is weakly supported. Over time, cracks develop and compound, until finally one day you wake up unhappy and wondering what happened to the good times.
Note: This material is adapted from A Tale of Two Owners: Achieving Exit Success Between Business Partners, by Patrick Ungashick, CEO of NAVIX.
This information was published originally by NAVIX Consultants and is for educational purposes only. Please consult your tax, legal, and other advisors to evaluate how this material may apply to you and your businesses. NAVIX does not provide tax or legal advice nor services.