All partners should not be created equal.
Your business is small. You and your college roommate, your brother, or your spouse. As my teenage daughter says, your BFFL (best-friend-for-life) will always be by your side.
When forming your business partnership you agree to split everything 50-50. Maybe your foursome on the fairways generates the “next big thing” over drinks at the clubhouse and split 25-25-25-25.
It seems fair. Sure, you’ll disagree occasionally, but your BFFL and you will work it out.
Indecision Is a Decision
Differences of opinions, philosophies, skill sets and financial investments often lead to indecision in otherwise cordial relationships. If you can’t agree, you’ll just take a step back, breathe a bit and eventually you’ll come to consensus saving the friendship. You have confidence.
For very small businesses it works, however, for rapidly growing businesses or those seeking capital investment, taking a step back to come to consensus can stunt your growth.
This can be most costly when looking for investors. Investors love to see a blend of talent, but they also want laser focus when it comes to direction and they want to see a nice smooth growth line.
For this reason when investors see partners that are perfectly equal it can make them perfectly nervous. In business tough decisions have to be made, and if partners can’t agree, indecision can be almost as dangerous as making the wrong decision.
Identify a Managing Partner
Remember, just because your company may want to share the wealth doesn’t mean they should share responsibility. Generally speaking company owners receive voting rights based on the shares or percentage they own. There are good reasons, however, for new methodology for decision-making when there is the possibility of a tie.
In most situations we find that one of the business partners frequently has the strongest business acumen. They may have a background in management in a different industry, or experience managing budgets or people.
Advertising agencies frequently offer a full partnership to the Creative Director, whose vision is critical to the company, however another partner with strong management skills will frequently serve as President.
There are two ways to use a Managing Partner effectively.
Partnerships of two or four – In the Operating Agreement, identify one member as managing partner. In situations where a decision must be made in a timely manner, agree that the Managing Partner ultimately makes the decision. This may not seem fair, however, because you chose the Managing Partner in advance of unforeseen disagreements (let’s face it, they are all unforeseen) there is a protocol in place.
Partnerships of 3 or 5+ – When you have three, five or seven partners, majority voting is usually appropriate. Some companies take this a step further. They choose a President or Managing Partner, who gives input but abstains from voting. This permits an even number of partners ample chance to make their case and possibly results in a tie. In the event of a tie, the chosen President breaks the tie. This method is used by the United States Senate where 100 senators vote. In the event of a 50-50 tie, only then does the Vice President of the United States (President of the Senate) submit a vote. The VPotUS has very little influence over the vote in most circumstances.
Do not flip a coin.
A coin flip is a perfectly reasonable way to begin a Super Bowl, because it’s just a game, right?
Investors don’t want surprises. They want to know who is making the decision, and how it’s going to be made.
Whatever method you use for avoiding ties when it comes to voting, put it on paper. Make sure your operating agreement or articles of incorporation are very clear regarding the chain of authority with decisions. Every possible decision should have one person that’s ultimately responsible, and even unforeseen decisions should have a clear tiebreaker identified.
Additionally, if ownership is expanding through investors or introduction of additional partners, make sure your decision-making process is clear even as percentage of ownership changes.
Having a clear path through decision making keeps your company attractive to investors, and can make partnerships a bit less stressful to the owners.