6. The Role of a Partnership Charter in Succession and Estate Planning
It is sometimes said that succession planning should be on the minds of business founders from the moment they start their businesses the same way that pilots have to think about landing from the second they take off.5 Whenever it becomes clear that “the successor” will be more than one individual, the planning should entail putting the successor team to the test using the Partnership Charter process.
A typical example of the way the Partnership Charter is used in helping successors assume control of a business occurred recently in the ownership transition within the Matsen Insurance Brokerage Company. The insurance and financial services firm that Ralph Matsen founded in California was in the business of helping people make intergenerational transitions, so Matsen had a feel for the challenges inherent in partner situations. Like most seasoned entrepreneurs, he had a solid management team in place as he neared retirement. His son and the three other executives had all been with his company for at least a decade, and the four of them had been largely running the business for a couple years. Despite their track record and despite the fact that they appeared to be naturals for taking over, Matsen knew the difference between co-executives and co-owners. He encouraged the foursome to work out their own charter and he told them that he would not be meddling or hovering around while they were working on it. He understood that doing so would distort what they were doing.
The four executives hired two mediators (a psychologist and a former estate-planning attorney) to conduct a three-day Partnership Charter retreat. Even though the future owners had been working together for years, with the help of feedback on their leadership styles and personal values, they were able to develop new, clear agreements about how they would work together more effectively. They clarified their expectations of one another, what their roles and responsibilities would be and how they would hold one another accountable. They brainstormed every conceivable type of scenario that might threaten the health of their partnership and devised guidelines for how to deal with them. They agreed on a multi-step procedure for resolving conflicts that might arise.
There were certain ownership and management issues that the four executives would likely not have dealt with except for two important reasons. First, they dedicated a large block of time to looking at every aspect of their partnership. It is rare for people to dedicate that kind of time to focus just on their partnership. People will spend intense time on business planning but rarely on partnership planning. Second, while it is common for people becoming partners to have conflicting needs and interests, having business mediators involved in the charter process helps ensure that all of the hidden agendas and differences will get surfaced and negotiated. Mediators conduct thorough, confidential interviews with all of the parties. Although reluctant to admit it, most people becoming partners have some information that is important to them that others are not privy to or aware of. A major advantage of the mediation approach is the confidentiality it provides people in private meetings with the mediators. These meetings, when conducted by experienced mediators who know what to look for, have the power to get people discussing uncomfortable issues that may seem petty but are important to deal with. Many partner disputes we have mediated revolve around what sound like petty issues, but they were simply issues that should have been discussed but never were.
The charter process allowed the four successors to decide for themselves that it was a good idea to become partners, and they agreed on exactly how they would do it. The process gave everyone more clarity about the details of the plan and more confidence that they were truly addressing the topics they needed to cover. Of course, successors have to understand going into the process that the business owner has the right to turn down what is essentially a succession plan of the successors’ making. They also have the right to determine the timing of the transition. While the successors deserve the right to work on a charter to help them decide if they want to work together and how they will run their own, future partnership, the owner certainly has the right to examine what they devise and decide if he or she wishes to one day turn over the business to the ownership and management entity that the future partners have designed. If the successors develop something the owner believes is unworkable for any reason, he or she is not obliged to transfer the business to them.
To insure future partners against the risks inherent in co-ownership, people need a structure in which to discuss sensitive, difficult issues and a process that fosters open and candid discussions. This candor is critical for dealing with issues in great detail and removing the sliver of ambiguity that exits in most partnerships and sooner or later provokes conflict. A mediationretreat format capitalizing on the confidentiality of individual interviews is often a key to the success of the process. Utilizing feedback from personal styles and personal values tests and structured exercises makes the discussions of how to create effective working relationship more productive. Finally, memorializing the agreements covering both the business and interpersonal sides of being partners protects partners from destructive conflict.
Parents who are planning on transferring business or real estate assets to a successor team often need the help of advisors to determine the timing of the work on the successors’ partnership. The parents can take the initiative by telling their children that they would like to start succession and estate planning and by sharing their thoughts about their needs and preferred succession timetable. The parents and estate planner may also discuss with the children the need for them to take the next step. Parents need to know whether or not a team is viable before plans are designed. Successors deserve to know whether or not they can and want to work with one another before it becomes too late to pursue alternatives. Sigmund Warburg, the founder of the Swiss banking giant, UBS, proclaimed, “All events should be crossed in imagination before reality.” The time for this work is certainly as early as possible once the players are identified, bearing in mind that the process also helps in the identification of the eventual partners.
In family businesses, who should be involved in the charter process can be a tricky question to answer. Siblings may work in the business, leave, and later return. The safest thing to do is err on the side of inclusiveness by inviting every sibling who has an interest, however nascent, in being a partner. If this is not done, a child may later complain that he or she was treated unfairly by not being given a chance to be a partner.
“Partner” in this sense may mean simply owning as well as working in the business, but this is an issue that needs to be addressed within each family. We have seen many siblings have mature, businesslike discussions about who should be an owner and the problems with having both working and non-working owners. These discussions become critical as the partner, or co-owner, team expands from the second to the third generation. It is important for co-owners to renegotiate their Partnership Charter whenever the composition of the ownership team changes. Although that seems like a lot of work, because owners are so critical to the health of a business and because the charter is the owners’ basic insurance against conflict, it is efficient as well as effective in the long run to renegotiate it each time.
There is no guarantee going into the process that the children will like what they experience in this “road test.” In many instances, we have seen siblings, or a sibling and a key employee work on a charter and realize that they do not wish to commit to a partnership with each other. Typically, in these situations there is much relief because people realize that their partnership probably would have experienced problems later. People are then free to begin making other career plans, and parents are able to find alternative exit and estate strategies.
When an agreement among parents and successors is attained, the estate planner can begin developing an overall estate plan that incorporates the understandings the parents and the future partners reached. Families will then also have a need for professional help with activities such as financing the purchase of the business, creating professional development plans for children, conducting cash-flow planning, etc.
The success of the Partnership Charter process is not dependent on confirming people’s initial expectations or desires regarding the future successor team. The success of the process stands on people having clarity about who will constitute the team and greater confidence in the ability of the partners to eventually take over, work well together, and maintain and grow the asset they acquire.
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
