Case Study – 50/50 Partnerships Impact Business Decisions

Industry: Franchise

Company Overview: First generation, multi-unit and multi-brand business across several state lines

Challenge: 50/50 first generation business owners. One partner actively involved in the day to day operations, while the other has become less active, yet very much involved in overall business decisions.

Second generation family members and a few “friends of the family” are becoming interested in the business. The partners have different opinions about the strategic direction of the business, compensation plans based upon their contributions, and the appropriate way to integrate and develop family member employees in the business. Partner conflict is impacting teamwork and performance.

Actions Taken: 

• Clarified each partner’s roles and responsibilities based upon strengths, weaknesses, expertise and areas of interest to remove ambiguity and to clarify reporting and decision making authority
• Developed compensation and bonus structure unique to each owner’s role in the organization
  • Took into consideration each owner’s exit strategy and 3 – 10 year “phase – out” period to make room for successor development
  • Implemented a strategy for each owner to develop financial independence from the business to support their exit strategy and vision for the future
• Developed Operating Covenants between the partners to specify communication, participation and decision making expectations of each partner
• Developed a strategic plan with action steps, due dates and responsible parties to align strategic vision and drive the organization towards the unified goals of the owners
• Implemented strategies to avoid potential relationship damaging deadlock between the partners
  • Identified 3 independent professionals to sit on Board of Directors to vote on strategic issues
  • Refined Shareholder Agreement/Operating Agreement for “Issues of Major Importance” to specify issues needing a super-majority or unanimous vote, such as compensation changes, buying or selling the business, and capital expenditures above a certain dollar amount
• Facilitated the development of Family Governance Agreements uniting the perspectives of both owners
  • Created Family Member Employment Policy outlining criteria to be considered for employment in the business
  • Developed Family Member Performance Criteria communicating what is expected as an employee
  • Implemented a Perks policy that indicates what benefits are available to employed and non-employed family members from the business

Results: 

• 50/50 partners now have a Deadlock Provision that allows them to amicably discuss and decide business direction when there is difference of opinion
• Covenants set clear relational expectations removing ambiguity about how to manage conflict and decision making
• Developed exit strategy for each partner which provides opportunity to develop successors, develop financial independence from business and also puts both partners at ease that one will not be left carrying the ship while the other sails away
• Implemented Family Governance Polices providing clear expectations to immediate or extended family specifying what is required to participate in the business

Interview with the Succession Planner

1. What was the relationship dynamic of the clients prior to your involvement versus after? Was the relationship stronger?

On the surface everything appeared to be just fine between the partners. However, once we had an opportunity to interview them separately it was clear they were both frustrated with each other, which was mostly driven by assumptions and miss-communication. One partner was slowly distancing himself, and the other didn’t really know why or how to engage him more.

Once we got involved and facilitated a few difficult discussions to uncover and directly address the issues we were able to move forward and develop a strategy that was geared specifically towards each of their interest and motivation for the business today, as well as their vision for interacting with the business in the future. As a result, ambiguity was removed, they both understand each other’s motivations and future vision, and their relationship couldn’t be stronger.

2. Even though the business did not start as a traditional family business; with the next generation showing interest, what adjustments had to be made to ensure family dynamics didn’t begin to negatively impact business decisions.

Often times, business owners who don’t currently view themselves as a family business don’t consider that family/friends may want to work in the business down the line. As a result, they may initially be slow to express interest, but quick to seize high-level, high-pay opportunities that arise, with the expectation they don’t have to work hard due to their relationship with the owner(s).

Luckily, in this situation we began to work with our clients right in the nick of time before having to unravel a potentially awkward situation with one partner’s best friend and the other partner’s son who were both showing strong interest in the business. We sat down with both partners and discussed their views about employment requirements which, at a minimum, included: a college degree, successful employment elsewhere in the area of expertise they were applying for, and an open position in the business. We also discussed performance expectations and a Perks policy that indicated what benefits active and inactive “Family” would receive from the business. Once both partners felt they were on the same page, we formalized the document as an official company policy and communicated to all employees and family members as a standard for employment.

One of the owner’s sons has since entered the business, after he fulfilled a few criteria, and is currently successful in his role and gaining the respect of employees and managers. A “family friend” ended up opting out of the opportunity, as he realized employment in the business would not be a cake walk to a new boat and vacation home.