Partnership Perils: Planning to Prevent Them
The Practicing CPA
February 2006

This article discusses creating and maintaining productive relationships with partners. It is based on an interview with psychologist and mediator, David Gage, Ph.D., and on a tool he has developed, The Partnership Charter, to help partners form a productive relationship.

Horror stories about business partnerships float around in the business world and business media. The stories strike a chord of fear in the hearts of many business owners. Despite their fear and often against the advice of their lawyers and accountants who warn them of the dangers of having partners, “every year, hundreds of thousands of people get into business or professional partnerships. Even though they are told, ‘It’s too risky,' they do it anyway,” according to David Gage, Ph. D., a mediation specialist and author of The Partnership Charter: How to Start Out Right With Your New Business Partnership (or Fix the One You’re In). “Sadly, they [lawyers and accountants] have a valid point; within a few years of their formation, the majority of partnerships will have fizzled or gone up in smoke, often because the partners couldn’t get along.”

Despite the risks, Gage is sanguine about the prospects of people who want to have partners and encourages people to consider the long list of benefits of having partners. “In practical terms,” he says, “partners provide the missing link, possibly money, expertise, skills, ideas, and connections, and even patents. Partners enjoy camaraderie, they support one another emotionally, and together they can access the benefits of synergy.”

Furthermore, business partnership rather than sole ownership increases an organization’s chance of success and fosters faster rowth. To support his assertion, Gage cites the following statistics in his book:

• Typically, partners founded two-thirds of the companies listed annually by Inc. magazine as among the hundred fastest-growing companies.
• Similarly, Entrepreneurs' annual list of the "hottest companies" is dominated by partnerships.
• In a study of almost 2,000 companies conducted by Marquette University’s Center for the Study of Entrepreneurs, among the top performers, 94% were founded by partners; the remaining 6% by solo entrepreneurs. Many of the top performers had three or more partners.

The viability and efficacy of partnership arrangements are of interest to many CPA firms at this time when many firm owners and their client company owners look forward to retirement and consequently will initiate the transfer of businesses to succeeding owners and managers. To ensure successful transitions, firm and client owners will need to bring in new partners, help develop leaders among current firm partners, or perhaps consolidate with other firms. In any case, they will be creating new groups of partners.

The quality and viability of such partnerships will depend on several factors, including having the requisite business skills, their alignment with current owners’ and managers’ goals for the organization, and their ability to preserve the firm’s wealth and foster growth. Last but not least, it will depend on their ability to work cooperatively, collaboratively, and productively. To ensure the new group of partners can achieve all this, it is critical for the owners/partners who are transitioning out to see that the new group of partners negotiates a partnership charter that spells out in great detail how they will co-own the business and how they will work together.

To accomplish a successful transition to the new management or ownership, an organization should document the strategies to be executed in a succession planning document. This should ensure that all firm members are following the plan. The new co-owners also need a process that helps them plan for all of the possible contingencies they may face together that could threaten their future, including what they would do in the case of intense disagreement or conflict.

“Too many people think that if they put the appropriate legal documents in place, they’ve done everything they need to do to be partners. In fact,” Gage says, “the legal documents give people a false sense of security.” He believes the legal documents, although necessary, only scratch the surface of what people need to discuss, negotiate, and come to agreement on. “Too many people, even professional advisers, do not know all of the critical issues.” People are experts in their business, not in the business of having partners. Without knowing what they’re getting into, Gage says, people become “accidental partners.”

Gage believes the ultimate utility of the partnership charter process is that it functions like a short course in how to be successful partners, and like a road test, it sometimes helps people decide that they really don’t want to become partners. The charter is a structured process that gets people talking not only about the business issues (ownership, money, roles, for example), but also interpersonal issues, such as personal styles and values, fairness, and partners’ expectations of themselves and each other. (See the outline of a sample partnership charter below.)

It is the conflicts that arise over “soft-side” issues—personal styles, values, and expectations—that often poison partnerships and can bring otherwise successful companies to their knees. Prospective partners need to “take the road test” Gage says, “because negotiating sooner is always better than negotiating later, after trouble arises.” If issues on both the personal side and the business side are discussed and resolved, the partnership has a better chance of succeeding. He calls it “a risk-reduction tool.”

Gage also believes that partners need to take time to explore their personalities and personal values, using short tests that provide objective data for their discussion. With some inexpensive test feedback, people can learn an incredible amount about themselves and one another." He cited a case in which two physicians wanted to co-own a medical practice. They had already purchased a million-dollar building together to house a practice. The pair’s attorney and CPA thought their idea for a practice was a sure thing, except for the fact that the two doctors became deadlocked and couldn’t negotiate the terms of their shareholders’ agreement. They asked Gage and his partner, a mediator with a business background, to help them develop a partnership charter. Although they knew they had different personalities and values, in the process of working on their charter they discovered the precise nature of the differences, as well as similarities. “By slowing down and first working on the interpersonal issues, they resolved the financial and ownership details and got to working on their practice.”

Do you need a partner?

Despite the research that says partners offer great advantages and Gage’s own intense optimism about partners, he believes that some people shouldn’t have partners. Among his list of seven caveats for would-be and existing partners (see box above) are three reasons for people to steer clear of co-ownership arrangements. One is “If you really do not need a partner, don’t go there.” The other two warn against becoming a partner if you are not a team player or you don’t feel good going into a partnership. Regardless of the advantages of having partners, there are many inherent risks in teaming up and they should not be ignored. Gage cited a case of two women who started working on a charter in the hope of becoming partners. One of the women was taking over her mother’s firm and wanted their long-term, key employee to become her equity partner. After the daughter and prospective partner were deep into their second half-day of discussions, the key employee asked for a caucus session with Gage and told him that she really wanted to continue as a key employee. Although the outcome wasn’t what the daughter hoped for, she recognized that it was far better to learn it then rather than becoming a partner of someone who would be happier as a valued employee.

A team effort

Gage, a clinical psychologist, grew up in a family business in which he observed the potential for conflicts. He became interested in the intricacies of partners after seeing the tremendous cost, both financial and personal, that partners pay when they attempt to resolve their disputes through litigation. He founded BMC Associates in Washington, D.C., with a multidisciplinary team of mediators with backgrounds in law, finance, psychology, and business. The team provides conflict prevention and resolution services to professional and business partners around the country in industries as diverse as manufacturing and medicine.

Transitions in professional services firms and family businesses stimulate the need for the team’s conflict-prevention services, mostly associated with various types of succession planning. Parents, for example, may want to gift or sell their company or other assets to members of the next generation. Although parents frequently believe that they know what’s best, the assumptions and expectations on both sides—owners and successors—often vary and need to be resolved before any plan is put into play.

Planning for the unpredictable

The charter process is all about planning but near the end of the process partners are instructed to step back and engage in scenario planning, a “what-if” exercise for their partnership. Gage urges partners to prepare “for those future events that are rarely planned for, less likely to occur, and not easy to control if they do happen.” What he has seen in mediating 15 years of partner disputes has convinced him that if partners had imagined the kinds of situations that could happen to them—before they actually happen—and created guidelines for what they would do, they could easily resolve them when they actually occur. But after the circumstances take effect, the scenario becomes incredibly more difficult to resolve because the chips have fallen and they inevitably affect the partners in different ways, forcing them into entrenched positions.

As examples of possible challenges to the partners’ ability to function optimally, Gage includes such events as two major shareholders wanting to cash out and retire simultaneously; three key employees leaving for a competitor; a partner’s ability to perform compromised by a personal or family crisis; or the company running out of money. Gage also advises partners to consider the impact of overwhelmingly positive scenarios as well because these, too, can create strains among partners. He writes, for example, “Countless business owners have expanded rapidly following an initial rush for their products or services, only to become overwhelmed by massive debt and eventually dragged into bankruptcy. Anticipating such prospects and including them in a list of scenarios can help prevent such disasters.” Gage describes a seven-step process in his book for developing guidelines to manage what-if scenarios.

When neutrality is needed

Despite thorough planning to prevent conflict, partners need to plan for what they will do in the event of conflict. It is helpful to plan on a stepwise approach. Partners first try negotiating among themselves when they have a disagreement. If negotiation doesn’t end the conflict, engaging a mediator to assist with the negotiations is the next step. The mediator’s role is to rekindle the embers of collaboration, ensure that all voices have an opportunity to be heard, and help partners understand what the issues are. Gage says that facilitators play a similar, neutral role but there are two main differences between mediators and facilitators. Mediators must become fully immersed with the details and substance of the disagreement in their effort to help the parties reach specific agreements that resolve the existing conflict and prevent future conflicts from arising. Second, mediators are more likely to use separate, confidential caucus sessions to move the process along.

CPAs are sometimes dragged into the middle of their clients’ partner disputes as either expert advisers or mediators. Gage believes CPAs play an extremely valuable role as expert adviser in these situations but should resist playing the neutral-mediator role when clients are involved in a dispute. "The clients of CPAs will initially see them as neutral, partly because they are more comfortable with someone they know as their mediator," says Gage, "but when negotiations get really sticky, it is common for one of the warring partners to perceive their adviser as biased in favor of the other partner." The risk is that the CPA mediating between client partners may lose the mediation, and worse, the client.

The Partnership Charter is published by Basic Books (www.basicbooks.com). The first two chapters of the book are available free on the Web site, www.BMCassociates.com. David Gage can be contacted at dgage@BMCassociates.com or 888-465-1262.