5. Lowering Risk through Effective Planning: The Partnership Charter
To lower the risk of conflict, adult children who are becoming partners with one another, or with key employees or some other person, need to discuss, negotiate and come to thorough understandings and written agreements on numerous business and interpersonal issues. A structured method for accomplishing this is a tool which we have developed based on our experience working with family businesses and partners in transition—the Partnership Charter.4 The business issues that are addressed in the Charter process include: (1) the partners’ strategic plan for the business; (2) ownership matters; (3) roles, titles, authority and managing the business; (4) how money goes into and comes out of the business; and (5) governance. The interpersonal issues include (1) personalities, (2) personal values, (3) expectations of one another, and (4) the question of fairness.
There are two additional topics covered in the charter process that have to do with the future. One is scenario planning as it relates to the partners. The other is a multistage plan for how the partners will resolve disputes if they arise. Each of the topics that comprise the Partnership Charter was included because some partnerships have foundered over the issue. By discussing and reaching agreements before conflicts arise, partners inoculate themselves for the vast majority of destructive conflicts.
None of the topics in the Charter process is novel. There are, however, several qualities of Partnership Charters that distinguish them from less rigorous and more ad hoc approaches to partner and family business planning. First, they are produced through a systematic process that facilitates effective and thorough discussion of the entire range of business and interpersonal issues that cause conflicts among partners. Second, the Partnership Charter process includes tests (personal styles, personal values) and exercises that provide insights and candid information to give form and substance to the participants’ discussions and negotiations. The structured process, tests, and exercises help keep people from short-circuiting some discussions that are difficult to have without data to work with and a framework that says, in effect, “Ignore these topics at your own risk.” Finally, the Partnership Charter is a document as well as a process. The partners’ have not completed the Charter until they have reached consensus on all of the issues. This forces a degree of specificity and a level of commitment that less formal processes and legal documents will not achieve.
Partnership Charters are non-binding documents that are different in their purpose, form and content than partnership agreements, shareholder agreements, operating agreements, or buy-sell agreements. They embody the “deal” among the partners in all of its tangible and intangible aspects. Parents frequently give their children’s charters to their estate-planning attorneys as one source of information for preparing their estate plans. They also give them to other attorneys for the purpose of helping draft other legal documents. Most importantly, the partners themselves use them for years to come as a guide for working together on a day-to-day basis and to help them make periodic reviews. Charters are meant to be living documents that the partners review and revise periodically to keep their partnership vital in light of changing realities. Continue…
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David Gage, The Partnership Charter: How To Start Out Right With Your New Business Partnership (Or Fix The One You’re In), New York: Basic Books, 2004. The book was written for people with partners, or planning on becoming partners. It is also the textbook for Gage’s course entitled, “Managing the Family Owned Business,” which he teaches in the business school at American University.
1. Introduction
2. Creating Partnerships: Benefits and Risks of Passing Key Assets to More Than One Person
3. Why Is Having Sibling, or Other, Partners So Risky?
4. The Roots of Poor Partnership Planning
5. Lowering Risk through Effective Planning: The Partnership Charter
6. The Role of a Partnership Charter in Succession and Estate Planning
