There may be nothing quite as contentious or polarizing for a business as an old-school equity tussle. Tensions, tirades and tears can take hold as otherwise cool heads find themselves in a pressure cooker situation.
It doesn’t happen overnight. Disagreements over the distribution of equity may simmer for several years, finally reaching a boiling point that can have dire consequences for a firm.
An individual’s perception of their value to a firm, their expectations and their aspirations for future ownership can create an emotionally charged situation. If you’re an owner or an aspiring owner right in the thick of it, you will probably relate.
I often encounter ownership struggles among consulting clients seeking advice on business growth or human capital issues. These firms are generally managing over $1 billion in assets, usually with multiple owners. Often there is a majority owner planning to retire in a few years, give or take.
It’s the “give or take” that can be problematic for firms. It is common for soon-to-retire owners to start working fewer hours or spend less time with clients or managing the firm. After all, haven’t they earned the right to do so after decades building and leading the business?
I would argue yes, they do deserve to take the proverbial foot off the gas. But that’s a somewhat simplistic answer that ignores some important points. There are other things to consider.
It’s not unusual for majority owners to receive greater compensation for their labor than similarly experienced partners or people with comparable roles in the firm. In some cases, it could be a whole lot more compensation. That has obvious implications for firm economics.
Let’s take this common scenario one step further. What happens if a majority owner, in the twilight of their career, prefers to sidestep important decisions to maintain the status quo? They may reject the growth plans of minority partners, defer the adoption of new technologies or fail to formalize succession details.
You can see why tensions might start to intensify, right? This is the type of scenario that gives minority shareholders many sleepless nights. Have they become immobilized as owners? Potentially.
Despite experiencing ownership challenges, these firms are often exceptional performers relative to peer firms. They boast highly skilled talent. The stakes are high for all concerned.
Such ownership differences could be ironed out through a well-crafted equity plan that addresses the needs of all parties, is well documented and communicated. But for many firms, the attempts to develop an equity plan stall out, repeatedly, which shows the depth of the challenge.
It would be unwise to assume that partnership challenges go unnoticed. There are serious indirect flow-on effects when owners become dissatisfied with their equity position.
For instance, minority partners may see these challenges and reconsider their future in the firm. There are going to be issues if they have no clear path for acquiring more equity or altering the balance of power that would enable them to build the firm they envision for the future. Their retention cannot be guaranteed.
Beyond partners, owners in waiting are still on hold as well, listening to the same promise of opportunity without evidence that progress is being made. If they were to acquire equity, they would wonder if they have any impact as a minority owner or if they really want to join the ranks of ownership under the current circumstances.
Talent will also observe the actions and inactions of partners, raising many valid questions. A firm’s most promising talent might just call it a day, opting to work with competitors or go it alone rather than stay the course on the promise of ownership.