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Succession planning tips for partners who didn’t choose each other

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Can successors raised in different families learn to become productive partners with colleagues they didn’t get to choose?

By Ellen Frankenberg

David Packard and Bill Hewlett, two engineering grads from Stanford University, founded Hewlett Packard, the IT giant, in Packard’s garage in 1938. They flipped a coin to see whose name would go first. Packard won the toss, but both decided that Hewlett Packard had a stronger ring than Packard Hewlett. That brand, and the partnership it represents, is now a household name worldwide.

Hewlett and Packard, knowing well each other’s competencies, chose each other as partners. They were playful in their choice to flip a coin and displayed a remarkable lack of ego in making one of their first significant decisions. And, of course, they had the all-important entrepreneurial DNA.

HP didn’t become a family business; it grew into a complex corporate structure after going public in 1957.

Most family firms evolve within one family line. In partnerships, by contrast, either one partner’s family buys out the other or the company goes public or is sold. And yet currently in my consulting practice, I am working with three unique companies, founded by partners who chose each other, now in the process of succession planning to stakeholders in two or three families. Is this a trigger for sale, or can successors from more than one family work together as partners?

Partnerships are precarious: They require enormous trust, complementary talents, a shared vision -- and a sense of humor. Some endure for decades; others crash into red ink or nasty litigation. When partners who chose each other transmit ownership to their heirs, the complementary talents, the trust and the shared vision may be missing ingredients. How do heirs who become partners (without a decision of their own) build a partnership?

Succession planning in a family business is arduous under the best of conditions. But what if there are two families, each transmitting 50% ownership of a significant asset to their heirs? Can successors raised in different households with different levels of education, values, work ethics -- and, perhaps, percentages of ownership -- become productive partners?

If you never got to choose your partners, building a partnership will require more time and energy and grit than the “easy” path that biological families face. Partnered families may end up working more like corporations than their family business neighbors do. Take all the requirements of any successful partnership and use them to determine whether the new partners have what it takes:

1. Define the vision and goals for the company. Long-term dreams for the company are best written down after comprehensive retreats during which members mark common ground and build a shared plan for the future. Since the average life of most companies is about 25 years, each generation must reinvent the company. If this can’t be done, perhaps one family should make an offer the other can’t refuse.

2. Develop a strategic plan for the company, in collaboration with key managers. Where will the company be in five years? What is your vision for 2020? What will be required to reach those goals in terms of investments and personnel? What metrics will be used to define success? Who is committed to the plan and the reinvestment it will require? Lack of agreement on the plan provides another signal that someone should opt out.

3. Reverse-engineer job descriptions for current key executives, based in part on real-time observations of their functions (logs of activity over a month’s time). How much time and energy are devoted to strategic thinking? Key relationships? Quality control? Routine tasks? What changes will be required for these executives to take the company to the next level? Do they each have a No. 2 who can step up in a crisis? Do family successors have growth plans to prepare them for leadership? If the talent is unevenly distributed between the families, consider a buyout.

4. Define the competencies that are needed to take the company to the next level, and determine where to find that talent. In a company owned by more than one family, professional standards for hiring become crucial. Objective inventories can measure competencies, 360 assessments can indicate who works well with others and on-the-job track records demonstrate performance. Provide enough education to increase the odds of success, but recognize that outside talent may need to be hired, even though both families may still retain ownership of the company. If the shareholding families are not willing to identify or hire strong professional talent, consider a buyout.

5. Reach an agreement about who will have the opportunity to own stock. Succession planning happens not only in management, but also in ownership. How stock is divided among successors determines who will have control. Are the original partners willing to share plans, wills or trust agreements for transmitting stock to their heirs? Consider offering family members who qualify for management the opportunity to earn enough stock to gain control. With appropriate legal advice, consider setting up voting and non-voting shares. If one of the families doesn’t have members who are competent or motivated to make complex business decisions as owners, or qualify for management, consider a buyout.

6. Develop conflict management skills. Fear of conflict may be a greater problem in closely held businesses than conflict itself. Conflict management is a skill set that isn’t usually taught in school, but it can be learned. By developing clear agreements for working through conflict, usually with the help of a professional facilitator, partners can learn to make collaborative and creative decisions together. If conflict remains persistent and disruptive, ask the troublemaker to leave, or consider a buyout.

7. Develop the right rhythm of communication among partners. Some partners meet monthly to review financials and solve problems. Partners in smaller firms may meet once a week, perhaps for lunch offsite; others meet quarterly as members of the board of directors. Shareholders’ meetings, which provide information about the company and offer an opportunity for informed discussion, may be held annually. E-mails should be reserved for sharing facts and information, not emotional issues. If communication remains sparse or secretive, even after appropriate training in conflict management, consider a buyout.

8. Write a partnership agreement. Robert Frost wrote, “Good fences make good neighbors”; likewise, good guidelines make good partners. Some issues to consider: How will partners’ compensation be determined? What percent of profits will be reinvested in the company? What kinds of information will the partners share (A pending divorce? Bankruptcy? Other partnerships they are involved in?) How will the buy-sell agreement be structured? How will disputes be settled? Who has responsibility and authority for which decisions? Whose favorite charities are supported? What kinds of exit plans and retirement goals are shared? If there are more disagreements than agreements, consider a buyout.

9. Build a board of directors or advisors. When there are multiple owners, structures for governance become essential. Some boards include the partners or representatives elected by each family, as well as business leaders from non-competing companies that are one step ahead of the partners’ firm. Two or three competent advisers can provide objectivity, expertise and fresh ideas. If there is no willingness to accept accountability to a well-functioning board, revisit the buyout option.

10. Do more of the things required to grow any successful business. Competent people, clear policies, effective systems, a strong balance sheet, a culture that values innovation and a strategy tailored to profitable markets -- all the components that build any successful company will allow a partnership to grow, regardless of the origin of the shareholders. If all this is good, enjoy owning and managing a profitable company with partners you never chose.

Amway is one surprising example of a successful business partnership that has weathered the succession process. Founded in 1959 by Rich DeVos and Jay Van Andel, the company is now run by Chairman Steve Van Andel, Jay’s eldest son, and President Doug DeVos, Rich’s youngest son. In 2010 the company generated revenues of $9.2 billion in worldwide operations.

Amway’s success has not been accidental. Their website www.amway.com clearly indicates that the concept of partnership permeates their business culture: “Amway is built on the concept of partnership between our founders. The partnership that exists among the founding families, employees, and business owners is our most prized possession. We always try to do what is in the long term best interest of our partners, in a manner that increases trust and confidence.”

All partnerships involve work

Remember that in second- and third-generation family businesses, heirs don’t get to choose their partners either. Some siblings or cousins may contribute mightily to the business; others may demonstrate that “pruning the family tree” is a necessity. Family businesses that become multigenerational partnerships require extraordinary courage, time, energy and talent. Even if bolstered by DNA, the bonds of family heritage or the founders’ dreams, no company evolves successfully without a clear vision and the hard work of making partnership a reality. FB

Ellen Frankenberg, Ph.D., ABPP, based in Cincinnati, works with succession planning and family business partnerships (www.frankenberggroup.com).

 

Dr. Ellen Frankenberg, President & CEO

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