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.
Beyond retention, low morale is likely to result if equity ownership issues are not dealt with. Fragile relationships between partners and the next generation are a common theme. These problems will also overshadow other critical activities the firm is pursuing, such as aligning behind a growth strategy or compensation planning.
Partnership frustrations can and will seep into other areas. As a result, the firm’s culture and output may be, well, kaput.
The obvious question is this: How genuine are owners in their commitment to effect an internal succession?
According to the “2019 TD Ameritrade FA Insight Annual Study of Advisory Firms: People and Pay,” 64% of advisory firm owners anticipated an internal succession as their primary succession solution. One-third of these owners had yet to develop a succession plan. A further 45% had a “loosely defined” plan only.
The study also showed that 17% of firms intended to sell or merge to effect their succession plan. As a co-author of the “People and Pay” study, I cannot help but wonder if the current buoyant M&A market has further tested levels of commitment to internal succession.
According to the study, 9% of firms expect primary owners to depart within three years. Most firms, 59%, have a longer runway of 12 years or more before primary owners intend to depart.
For some firms, a longer time frame for the departure of owners, especially majority owners, gives less tenured talent the opportunity to grow into ownership. For other firms, long-term ownership holdouts can become a frustrating and deflating issue for the next generation.
Disputes over the transition of stock, control and decision-making authority can take an almighty effort to resolve. Without doubt, these issues cannot be navigated without mutual trust. So what exactly does this look like? Transparency is fundamental.
Majority owners generally have the right to induct new owners, or not. They have the right to leave the firm on their own terms. They also have a responsibility to make their intentions known to their partners and set realistic expectations for the future.
This is where self-reflection is important. As an owner, when it comes to succession, are you clear on what you want for yourself, your partners, your team and your clients? Despite the best of intentions, flip-flopping on succession decisions can diminish trust, undermining the strength of important relationships.
Talented team members are owed clarity on the opportunities that exist within the firm. Vague intentions to establish a succession plan can be disheartening. Off-the-cuff comments that raise hopes can be harmful if not followed by action. Where owners are not particularly committed to the work required for an internal succession, it’s best to call it.
Be aware that individuals are operating on their own internal clock, marking progress toward their goals. A delay in the transition of equity could mean the end of the line for talent who feel they have persevered long enough. This includes minority shareholders.
Trust and transparency are as essential in business as in other aspects of life.
Where trust is breached, the consequences can be far-reaching and irretrievable. Mutual respect among partners and team members is a precursor for effective internal succession.
Leaving ownership issues unchecked is not really an option, and often, an external perspective is needed to break the deadlock. As they say, “The only way out is through.” While ownership challenges can feel insurmountable, when shareholders work together to get it right, they create the greatest potential for restoration and renewal.
Eliza De Pardo is Founder and Director of De Pardo Consulting.