The following is a guest post from Bruce Eckfeldt, consultant, coach, author, and speaker on organizational development and performance management.
After many years in product design and development, I founded a technology company in 2003. We did well and the company grew in both revenues and people. We made the Inc 5000 list five years in a row, one year placing 243 on the Inc 500. I started the company with a partner who subsequently left and then switched partners during the life of the business.
In 2014, I sold the company to a third party after the partnership failed and we couldn’t find a way to exit on mutual terms. I’ve been in several mediations and even lawsuits over partnership issues and have learned a lot. Today, I coach entrepreneurs and executives on management and organizational performance and deal with several partnership situations.
Whether it’s individual business partners in a company, a strategic partnership between companies, or partnerships between employers and employees, they all require careful design and ongoing commitment to be successful. Partnerships that put themselves on cruise control run the risk of missing obstacles in the road and failing to see upcoming turns. Partnerships that are committed to continuous review and improvement and are able to effectively resolve issues and navigate change have the ability to grow and deliver increasing value.
There are several factors to consider when developing a partnership agreement and several practices to follow to keep the partnership on track and delivering value for every party involved. Ignoring these can not only put the future partnership at risk, but it can destroy the existing value that has been created. Even if you’re not a formal business partnership, these ideas and recommendations can be helpful to ensure long term success and to avoid destructive conflict.
Partnerships are not until death do you part
One of the first things I coach new partnerships on is that you shouldn’t assume your partnership will last forever. It’s unrealistic to think that a partnership won’t end at some point. Even with the best intentions and the largest of opportunities, people and businesses change. Designing a clear, reasonable, and equity way in which to part ways that protects your assets and the value that you’ve built in the business. It’s much easier to work out how to handle different scenarios while the energy and intentions are collaborative and productive.
Design the process to work regardless who is in which situation. Where you can, create scenarios where either party has equal chances of being on either side. This will incent each side to create a fair and equal resolution process. “You split I pick” approaches force parties to be fair about the choices they make because they could end up on either side of the deal.
Separate initial contribution from ongoing contributions
What someone puts in at the beginning of a partnership can be quite different than what they are going to put in over the life of the deal. Plus, things change. Just because someone intends to contribute something in the future doesn’t mean they will. Even with the best intention. My recommendation is that these types of contributions are be separated and, if need be, accrued over time.
For example, where one side is going to put up working capital and the other side is going to put in time operating the company, I suggest having a equity/ownership model that accrues the second partner’s value over some period of time. The rate of accrual should be based on the difference between the market rate of the operating partners time contribution and the actual draw/salary.
If both partners are operating, come up with market rates for each person’s roles and then accrue at the difference between these. If need be, have a process for adjusting these based on a third party over time with some pre-defined formula. Having these in place means that if one partner can’t or doesn’t want to delivery on the ongoing contribution, then there is a clear adjustment that’s fair and equitable.
Have a clear and equitable process for winding down
When things get heated, rational thought and collaboration tend to go out the window. Having a clear resolution and wind-down process ensures that value is maintained regardless of emotions and unfortunate situations. Partners get divorced, tied up in litigations, suffer health issues, etc. These are unfortunate but a reality of life. And these need not be dispassionate. Provide funds, time, consideration for resolution and assistance, but define up front how much the partnership will invest and how much exposure it will take on.
Have a defined process for conflict resolution and mediation
There are two main reasons to have a clear process for conflict resolution. First, you want to know how things are going to be handled should the partners not be able to collaboratively reach a resolution. Have a clear process for notices and escalating that can be invoked unilaterally if needed. I generally suggest a process that has two or more levels of escalation to allow for time/space to re-engage in a collaborative process before moving to irreversible stages.
Mediation, Arbitration and Collaborative Law processes are generally more effective and can be significantly less expensive than the traditional litigation. Consider mandating use of these methods before allowing resolution by the courts.
Develop a shared future vision and operating values
Parties enter into partnerships because they think it will get them some future state more quickly, with less costs, and/or with less risk. If not, they wouldn’t need the partnership. The challenge comes when the futures each party envisions don’t exactly line up. That’s not to say the parties need the same vision or same reasons for entering into a partnership, but if each side isn’t clear on why they are doing it and why the other party is doing it, it is much more likely to lead to misunderstanding and conflict.
Get clear on what you want and get clear on what the other side wants and know that you’re making commitments to each other to deliver on both ends, not just your own. If you can’t commit to making both yourself and your parter successful, then think twice about entering the deal.
Define expectations and commitments for each party
Many partnerships end up in conflict because the expectations of what each party is going to contribute over the life of the relationship is either not clear at the outset or changes over time without clear mutual agreement. Take the time to really explore what expectations are and how each side wants to handle changes in expectations. Who is responsible for what part of the business? If there is a failure to deliver on expectations, what is the resolution process?
Create a clear and effective decision making process
All businesses need to make decisions. Partnerships need even more structure since values, priorities and impacts might be different for each side. Separating the type of decisions (what copier to buy verses the decision to make an acquisition) can help keep the process effective and timely. Create a few categories of types of decisions and define how each will be determined and which decision making process will be used.
Don’t assume everything needs to be unanimous or just by ownership. There are many decision-making strategies and process you can develop. Think through who has rights for input, developing options, making decisions, approving decisions, and notification. Sometimes the issue is not who gets to make the decision but rather who has input and who get’s notified.
Sometimes bringing in third parties to approve decisions or that decisions conform to external standards or opinion can help. Consider processes for alternating or setting terms for different decision-making responsibilities. The point being, figuring these out up front can help smooth the day-to-day operating process and avoid rows and costly delays.
Have regular and well-structured review meetings
Regardless of good intentions and well-laid plans, people change and things happen. Not always for the worse. Sometimes partnerships struggle with success. Have a regularly scheduled check in points with a defined agenda to catch issues early and make necessary adjustments. I find quarterly is a good timeframe for conducting a partnership review.
The agenda should generally include a review of the previous quarter and a 12-24-month forward-looking plan. Having a facilitator can help make sure you address all issues in an efficient and thorough manner. Also be sure to include things that are happening outside the partnership that might affect the partnership either directly or through either party.
Every partnership will have particular needs and will want to implement these and other practices in a way that works best for them. Great partnerships take work and careful management. But done well, they can also deliver amazing results that would be impossible otherwise.