Ian: : Welcome to the Business Coach Podcast, an advice-oriented series for Canadian entrepreneurs. I’m Ian Portsmouth, Editor of Profit Magazine and I’ll be your host as we tackle the hot issues and opportunities facing Canada’s small businesses. We’ve developed this podcast in cooperation with BMO Bank of Montreal. Over the course of the series I’ll be drawing on experts in a number of fields including some BMO experts in order to provide the credible information and prescription you need to run your small business better.
The idea that entrepreneurs are lone wolves is a popular one but its more fiction than fact. In reality a large percentage of owner-managed businesses are run by two or more partners. According to the most recent Profit 100 survey, exactly half of Canada’s fastest growing companies were launched by co-founders. When business partners bring complimentary experience and skill sets to the table they can be powerful allies that help companies out perform the competition. The flipside of course is that sharing control of a company has many attendant challenges. A little later in the show we’ll address the legal side of partnerships but joining us first to explore the human side of business partnerships is Dr. Marvin Snider. Based in Waban Massachusetts Dr. Snider is a practising psychologist and organizational consultant. He is also the author of “Compatibility Breeds Success: How to Manage Your Relationship With Your Business Partner”. Dr. Snider thanks for joining The Business Coach.
Marvin: Glad to do it.
Ian: : Your book is called “Compatibility Breeds Success” how much of a partnership success boils down to natural fit?
Marvin: It helps but its not essential.
Ian: : And is there anything that people can look for in terms of matching themselves with a more ideal partner?
Marvin: Yes for example sharing values, having common goals, a shared work ethic and being able to have forthright communication for a few.
Ian: : Now it sounds to me like you’ve identified the areas where married business couples so to speak need to work on their marriages. Lets start with communication. What are some of the keys to successfully communicating in a business partnership scenario?
Marvin: Well I think one of the most significant issues is being able to respect difference and have a commitment to reach consensus because once you do that then you can solve anything.
Ian: : Absolutely. Now I’ve heard quite often of the two boss syndrome where employees are unsure of whom they need to report to on any given issue and this creates a lot of redundancy, it creates cross wires, broken telephone. How important is the clear delineation of roles and responsibilities in a business partnership?
Marvin: Well I think its very important because otherwise they employees have mixed message and don’t know who to pay attention to.
Ian: : How should partners, in your experience, go about delineating their roles? Hope, hopefully they’ve come to the table with clearly identifiable strengths in various areas.
Marvin: Well I think the simplest thing is for each partner to have specified areas in which they manage. So then a subordinate will know who to go to for what.
Ian: : Does it help partners to I guess appoint a final decision maker? You know I’ve often run into companies where there are two or three founding partners, they each own an equal share in the business and in many cases they have been able to appoint a CEO who acts as final decision maker, the final arbitrator but in other cases they actually try to run the business by consensus and¦ and I’ve heard that that can be dangerous. What’s your opinion on that?
Marvin: Well there, there’s a place for consensus but if you want to run an efficient organization you need to have some definite line of decision making and one person to be the one who makes the final decision as to what can or cannot happen.
Ian: : Can you offer any advice quickly on how business partners can come to that very difficult decision of who is ultimately the boss?
Marvin: Well I think when each partner recognizes what they bring to the partnership and based on that they then define what areas each one will be responsible for. They may collaborate but the final decision will be one or the other partner.
Ian: : Have you noticed any patterns that would help our listeners identify when they might be heading towards partnership trouble for instance in your work with entrepreneurs and business partners have you noticed that the ship sort of head towards the rocks when the companies reach a certain size or a certain stage in their life cycle?
Marvin: No I don’t think its so much a matter of size I think it’s a matter of the partners having a way to negotiate differences when they arise and the problem comes up when winning becomes more important than accomplishing the collective goal.
Ian: : Quite often partners may be completely aligned on their objectives for the business and the goals of the business but their personal goals become misaligned. For instance two partners may start a company when they’re both single and and without children and then one of them gets married and has a family of three and suddenly priorities shift. Is this a problem that you see with partners quite often?
Marvin: Oh yes one has to recognize that families are part of the partnership in the sense that they could either support the partnership or they can create problems in it because a given partner may have a conflict of interest between his family and his business obligations.
Ian: : M’hmm and when we see that a partnership is in a little bit of trouble what can partners do to try to rehabilitate their relationship?
Marvin: Well I think they go as far as they can and once they recognize that they’ve gone as far as you can then its desirable to call in somebody like an organizational consultant who helps them to sort out where their problem is and hopefully find a workable solution.
Ian: : That’s great advice and of course when that doesn’t work and they end up with irreconcilable differences I guess its time for the ugly thing called divorce. Are there any techniques that partners can apply to make the dissolution of the partnership less painful?
Marvin: The best way to do that is when you start the partnership cause when you start you agree on how to get married, you agree on how to get divorced and how to operate in between.
Ian: : So everyone should have a pre-nup in business?
Marvin: Oh absolutely because otherwise you get into a great deal of contention when you’re trying to divorce when you haven’t prepared for it.
Ian: : Dr. Snider thanks for joining The Business Coach.
Marvin: You’re very welcome.
Ian: : Based in Waban, Massachusetts Dr. Marvin Snider is a practising psychologist and organizational consultant. He is also the author of “Compatibility Breeds Success: How To Manage Your Relationship With Your Business Partner”.
Ian: : As we just discussed in part one of this episode of The Business Coach partnerships and entrepreneurial companies require lots of care and attention if they are going to thrive. But even when they are carefully managed partnerships can be eroded by the changing needs of the business and those of the partners who are after all only human. For these reasons every group of partners should have a partnership agreement. Also known as a shareholder’s agreement it’s a legal document that can help groups of owner-managers stay the course during times of trouble or if worse comes to worse make a business break up as painless as possible. Here to discuss this critical partnership tool is Steve Westfield, a partner in Miller Thompson LLP one of Canada’s largest law firms. Steve is a commercial and corporate lawyer. He joins us from his office in Toronto. Steve welcome to The Business Coach.
Steve: Thank you very much.
Ian: : I’ve run into so many companies out there where its run by a pair or more of people who co-own the company and they have nothing in writing stating what their roles and responsibilities are, how they would divorce, etc. How many owner-managed businesses in your experience have or don’t have partnership agreements?
Steve: It’s hard to put a percentage on it I would say that many do have partnership or shareholder’s agreements, many don’t. Whether it’s a partnership agreement or a shareholder’s agreement depends on the legal structure of the business. Certain firms like accounting firm and law firms have to operate in a partnership and under a partnership situation there’s joint and several liability between the partners. I think my experience is that most entrepreneurs will use a corporate vehicle and would have a shareholder’s agreement and whether or not someone has a shareholder’s agreement is really a question of risk aversion because things may be okay without it but the problem is, especially as the business grow, issues may come up and without a specific agreement that gives a framework for how matters are to be dealt with, uncertainty can be created and there could be additional risk.
Ian: : So when should a shareholder’s agreement be drafted?
Steve: It should be drafted as early as possible in the process when persons are deciding that they want to join together in a business effort. Its at that stage though that people need to consider where they would like the business to head, how they feel in the future it will head and to try to deal with a number of points which we’ll address a bit later that ought to be in this agreement. But clearly the earlier the better in the process.
Ian: : And there’s nothing to stop a couple of partners from drafting a shareholder’s agreement mid-stream after the business has been around for two or three years right?
Steve: Absolutely nothing to stop that.
Ian: : So what are the key components of a shareholder’s agreement?
Steve: Well there are certain matters that will typically be covered. One is dealing with things like business operational matters. Now under the Business Corporations Act typically matters are dealt with by the Board of Directors and you need 51% of the Board to approve it and there’s certain matters dealt with by the shareholders. However, a shareholder’s agreement will typically move off the page and will set forth the specific approval requirements for matters. And so on business operational matters such as hiring and firing employees, sales strategies, establishing budgets and other decision making matters a shareholder’s agreement can set forth required thresholds and it will also set forth unanimous requirements on certain fundamental matters involving the corporation such as borrowing money, issuing new shares, decisions with respect to dividends and payments to individuals deviating from full time and attention being spent, etc. etc. So operational matters and unanimous consent matters for fundamental issues are things that are typically dealt with in a shareholder’s agreement. It may also indicate Board representation, that is which members of the board can be nominated by which shareholders. The other important thing that is dealt with are share transfer issues and share issue matters. So if the corporation is going to issue new shares there may be pre-emptive rights given under which all the shareholders may participate. And in fact it may require unanimous consent to issue new shares. Perhaps the most important thing though is that if somebody eventually wants to transfer their shares a regime or a framework should be set out that will deal with how this is to happen because when two persons join in a venture together, one may not want the other person to easily transfer shares and have a new partner that was not intended in the business. So that’s the sort of thing that’s dealt with in these agreements.
Ian: : And one interesting thing the last point you made brings up is divorce, not between two business partners but when they divorce in their marriages and quite often we have settlements where a spouse takes on a share of a business and the other business partner says I don’t want your spouse helping us run our business. And obviously that is something that should be covered in a shareholder’s agreement.
Steve: Well that’s right and a good shareholder’s agreement is something that after its entered into basically sits in a drawer and is not needed because everything goes along well and people get along and everything’s in harmony and the business is doing well. But unfortunately in the real world things don’t, don’t always work out that way and that’s when you do want to pull out a shareholder’s agreement. And for example if the business grows and if things are going well and one partner wants the other out or if a person wants to leave, if you don’t have a set framework to deal with it the partners they end up in court or there could be court actions between them and it could get quite messy. So when you deal with specific provisions under which there are things like Rights of First Refusal, that is one shareholder has to offer the shares to the other or various Puts and Calls on shares at least there’s a specific framework and the parties know what the framework is that they have to deal with.
Ian: : Now of course every shareholder’s agreement cannot anticipate every possible scenario so it probably makes sense for a shareholder’s agreement to incorporate some sort of dispute resolution process. Would you agree with that?
Ian: : And what would a good partnership agreement spell out in terms of dispute resolution?
Steve: Well you would have different levels of dispute resolution. First would be internal resolution and that would be obviously the shareholders themselves try to work it out. If the corporation grows and is big enough or if there are many shareholders you may, might even establish a committee of different shareholders to deal with these types of disputes. So obviously internally resolving it is the most efficient and less expensive way to deal with it. If that can’t be settled that way then a shareholder’s agreement can provide for a specific mediation type of a provision whereby a third party mediator is appointed to try to point the parties in the right direction. Or it may have an arbitration provision so instead of the parties having to go to court there could be a framework for appointing an arbitrator to deal with and resolve the dispute on a much less costly basis.
Ian: : So when all is said and done hopefully people have drafted a good shareholder’s agreement and have always been managing their partnership in a manner that prevents them from having to exercise any such clauses or review their partnership agreement?
Steve: Well I, I think that’s correct but I think the point to be raised is that there is no such thing as a specific boiler plate or agreement that fits, fits all circumstances and its very important that the partners sit together and figure out the sort of terms that they would like to have in the agreement and maybe the lawyer can help whoever they retain for the for the duty to point them in the right direction and if they can sit amongst themselves and consider the type of transferability provisions whether a shotgun’s appropriate or other matters, then that will make the drafting of the agreement much easier.
Ian: : Steve thanks for joining us on The Business Coach today.
Steve: Thank you very much.
Ian: : Steve Westfield practices Corporate and Commercial Law with Miller Thompson LLP. We spoke to him at his office in Toronto.
Thanks for listening to this episode of The Business Coach Podcast. I hope you discovered a few insights that will help you grow your business.
Your feedback is always welcome. Drop me a line at Business Coach at email@example.com. Meanwhile be sure to visit us online at profitguide.com or bmo.com. Until next time I’m Ian Portsmouth Editor of Profit Magazine wishing you continued success.