As a business succession planner, I encounter the full gamut of dealership business structures, Regular C corporations, S-corporations, partnerships, and limited liability companies. I have had clients owned by public corporations and foreign corporations, and even one client who boasted he was the only sole proprietorship dealership in the United States. That relationship was short-lived – he was not pleased with my response.
Of all the business structures encountered over the years, the most challenging situations are fifty-fifty ownership. The outcome of this type of structure is often the dreaded deadlock – the nemesis of succession. Continuation of success demands decisive leadership. A business vulnerable to deadlock is vulnerable to all sorts of messy management, family and business issues.
As an interesting sidebar, I have a pair of clients who designated themselves as Co-Presidents. Yes, facts are stranger than fiction. Notably these two brothers not only looked alike, they also thought alike, had large families, and lots of partners. So they decided they would job share. One would oversee operations for two weeks, they would then work a week together followed by the other brother taking two weeks off and so on. The two brothers would, on occasion, incorporate additional overlaps or “come-ins” for planning, banking and factory interaction. The amazing outcome was they provided full-time leadership, worked half time and pursued all their hobbies including a jointly owned boat.
In reality, although ownership may be equal, leadership and management ability is rarely equal. Due to environmental pressures, one of the equal partners usually assumes leadership and the other follows. Pure harmony is uncommon due to no expressed agreement of who will lead and who will follow. With one equal partner assuming leadership and the other following, there are usually various levels of underlying resentment by each of the partners, their spouses and/or their kids when successors come into play.
The fifty-percent owner who has assumed the leadership role usually puts in more time, eats more rubber chicken, engages more vendors, argues more with bankers, and deals with more employee headaches. Consequently, the leading partner usually rationalizes they are not receiving appropriate recognition for their efforts, believing the split of the money is unfair. However, the lead partner usually does not want to relinquish any control and wants more money and power in recognition for their hard work.
The fifty-percent owner who has not assumed a leadership role usually resents the perceived maneuvering of the more aggressive partner. They believe they are equally if not more capable but just not as pushy. More important, they believe they are the secret to organizational success because they have “taken it for them team” by stepping back, choosing not to have ugly confrontations and “allowing” the louder, quicker or just more pushy partner to lead. As a result, the follower partner resents the attention, praise, acknowledgement and/or respect the lead partner receives. In light of this perceived sacrifice, the follower partner is rarely receptive to reallocating the division of profits. There we find one of the many sources for “the dreaded deadlock.”
In terms of the 50/50 angst, I have only witnessed families in business choosing to perpetuate a 50/50 deadlock ownership environment into the future. Unrelated parties are generally driven more by logic and lack the tolerance to consider perpetuating a deadlock. Whenever I encounter a fifty-fifty partnership, I know I have my work cut out for me. My general plan is try to resolve and find alternatives to perpetuating the deadlock. Emphasis is on “try.” Not all partnerships are feeling pain, yet. Also, irrespective of pain, some partners don’t want to change as they are enjoying the assumed advantages (leadership or free ride) and are not willing to engage in the give-and-take required to resolve a deadlock.
With few exceptions, fifty-fifty is not as nifty as one might believe. In the absence of succinct, decisive leadership, a fifty-fifty dealership generally does not perform to potential. This implication is affirmed by manufacturers who rarely stipulate co-dealer principals. Manufacturers fully understand the value of decisive leadership.
Based upon my experience, fifty-fifty ownership creates leadership “support camps,” creating rifts in organizational unity. Key managers “camp out” or hide under one of the owners assuming they are being promoted and protected by their preferred 50% owner. Usually, the resentment or jealousy of one or both partners and their families works its way into management and employees, creating a rift in organizational culture. Then there are the succession planning challenges where each partner independently wants to see their children as the next generation leader. Fifty-fifty siblings who lived together and were under the supervision of the same parents typically give each other the benefit of the doubt. However, cousins are prone to be fierce competitors. In a deadlock dilemma, cousins typically abandon collaboration in hopes of being the last man standing. The ultimate frustration occurs when each fifty-fifty partner has a different number of successors and the one with the most kids thinks his/her kids are getting screwed because they are destined to individually own less stock. All of these circumstances create issues that ultimately detract from the mission and erode productivity and business value.
So what’s the best way to deal with a fifty-fifty deadlock? As a first effort, identify a “deadlock break”. This could be a dicey challenge but with enough time and effort, an independent unbiased party can be identified to confirm leadership and break any deadlock. I generally suggest the accountant or attorney serve in this role. This third party will spring onto the Board of Directors or Management in the event of a deadlock. Amazingly, I have found that after designating a “deadlock break”, there are rarely any deadlocks. Neither of the fifty-fifty partners wants to be vulnerable to a vote-down so there is more pressure to achieve agreement. Nothing is a substitute for enthusiastic unity and harmony but order and direction provided by a “deadlock break” are a close second. An unwillingness to designate a “deadlock break” is usually due to a perceived advantage that one of the partners is unwilling to jeopardize.
Proper business documentation can also provide easier resolution in the event of a potential deadlock, saving ownership from costly legal bills. By-laws, minutes, operating agreements, etc. provide the 50/50 shareholders direction as to how to handle predictable, probable and possible leadership decisions should they come to any disagreements.
Specifically stipulate in the by-laws the President and CEO’s responsibilities related to hiring, leadership, management and satisfying the expectations of the Board of Directors. Establish and maintain order and direction by following the stipulated responsibilities of the President. If this is not acceptable, have a Directors vote to designate a President. If there’s a deadlock of the Directors which is usually the case, then you will have to proceed with the President you have assuming that if you cannot designate a new President, you cannot fire the existing President. Unfortunately, the formality of a designated President does not create unity or harmony but it can break a deadlock. In the event that a 50% partner objects to this process remember that the reason organizational by-laws stipulate officers and their responsibilities is to assure governance even in the shadow of a deadlock. Any court petitioned to challenge a deadlock regarding corporate governance will be responsive to the responsibilities set forth in the By-Laws. Those who cannot minimally achieve order and direction will fall victim to the demands of the market that shows no mercy to owners who dwell on personal rivalry versus business productivity.
When there is inherent incompatibility and two partners cannot achieve decisive, effective leadership it is probably time for a buyout. With one partner expressing a willingness to sell, the process typically warrants an independent appraisal. If either partner takes issue with the appraisal they have the option to engage another mutually agreeable appraiser and take the average of the two. The driver of the terms is affordability and security for the selling partner. Generally, with sufficient interaction these two issues can be resolved.
Otherwise, my overriding succession planning advice is, if you are struggling with a fifty-fifty that’s not so nifty, don’t pass it on! Discuss your options, consider expansion of the Shareholder’s Agreement to protect minority partners and resolve the deadlock or establish a timeline when it will be resolved.