Are You Ready for a Minority Partner
David has eight questions he wants agency principals to ask themselves before hiring him to help add a new partner.
Are you ready to make this public? You shouldn’t do it if you want to keep it secret. This involves a public annointing of a specific person. Someone might feel left out.
If the process involves more than one person, are you (at least privately) willing to designate one of them as the lead? They will then assemble their own team rather than an arranged marriage.
Will that public announcement surprise any team members, clients, or contractors?
Will you be ready to face an unsuccessful attempt? This is partly to make sure you don’t relinquish your negotiating power, but it’s also an acknowledgement that the relationship you have with this person, and that this person has with the firm, will be forever changed, in one way or another. Once you ask someone to marry you, you are going to hear a no or a yes. Will you welcome the truth.
Are you ready to be totally transparent about the firm’s finances, including what you make? This is a critical anxiety, and it’s not usually reasonable.
Are you doing this without overreacting to some pressure you feel? Keep them from moving, e.g.
Ready to talk about what, if anything, comes after this first step? Will it move to a full transition or just a semi-permanent minority partner? THese questions will come up, and you have to be ready to address them.
Is this really formalizing what’s already true? That’s a good sign.
Transcript
Blair Enns: David, our topic today is, are you ready to add a minority partner? Where did this come from? Haven't we talked about partners already?
David C. Baker: You start a podcast by questioning the topic, this is going to be great.
Blair: Is there any other way to start a podcast? What were you thinking, Baker?
David: We've talked about partnership. I think we talked about how and when to think about adding a partner, and so on. I do a lot of this work, and what I'm doing here is I'm just peeling off the very beginning of that work and saying, "Yes, I can help you add a partner, I do a lot of that stuff, but are you ready to add one?" This is like, "Don't call me unless you're really ready to add a partner." This is my way of screening out new business calls because the question of whether you're ready to add a partner is very different than how to add a partner, and there are some pretty quick tests to determine where you are on that spectrum. You answer these questions and say, "Yes. Now, I really know I'm ready," Or, "Oh, I'm not quite ready." That's what I was thinking about.
Blair: Okay. You have clients or agency principals who are 100% owners, and they reach out to you and say, "Hey, I'm thinking of adding a partner." I'm guessing it's typically an employer, a senior member of the team, is that correct?
David: Yes. Right. Who is nagging them? This first came up in an interview at the beginning, and you foolishly said, "Oh, I'm always open to talking about that." They remembered that. You don't, but they remember that, and now the chicken's coming home to roost, and you actually feel really good about this person, and you definitely want to think about adding them, but you're not sure, and you jump right to, " Okay. How do we do that?" instead of stopping and saying, "Hey, are you sure you're really ready to add a partner?" Because there are some ways that you could check this first. You don't have to pass all of them, but if you pass most of them, then we talk about how to do it in a way that maximizes the opportunity and minimizes the risk, but this is all about, are you ready? It's like, "Are you really ready to marry that person? Let me ask you some questions."
Blair: The first agency I went to work for, I was 22 years old, and in the interview, the owner said his plan was ultimately to begin to sell the business to the employees. I was only there two years before I moved on, but within that two year period, I'm still in my early 20s, at some point, I was having a conversation with him and the topic came up, and I said to him, "Hey, man, I thought you're going to sell this thing to us." He laughed at me. Now, looking back on that, well, that's ridiculous for me to think that it was in that timeframe, but it was just this kind of offhanded remark that he made in the interview that was overblown in my mind. The first lesson that I'm taking away from this is be careful about that comment about, "Yes, I'm open to you being a partner someday." Be really careful about opening that door at all. Is that fair?
David: Yes, it's very fair because to you, it just seems like, "Oh, yes, of course." You're a risk-taker, you prove your value, you're willing to pay up. Absolutely, I'd consider that. They don't hear all those other things that come along, they don't hear about the risk and the money and all that stuff, but eventually, some people rise to the top. These aren't just the great doers and makers, these are the people who think like owners, and you either don't want them to leave, or you want to honor their commitment to the place, or whatever, and you're excited about adding somebody generally, but you haven't thought about whether you're really ready to do it. There are some ways to test that pretty quickly. That's the subject.
Blair: Okay. You've got a list of eight points here that are essentially tests of your readiness to add a minority partner. Is that right?
David: Yes, exactly right. The first one is, are you ready to make this public? A bunch of times, I'll work with somebody and they apparently are very excited about doing this, and then at some point in the conversation, it comes up that, "Okay, we don't really want to make this public, but I want to satisfy this urge that they have. I want to make sure they don't leave." It's like, "Oh, wait a second, you don't do that." If you're asking somebody to marry you, you are darn proud of this. You stop people on the street, they don't care about you at all, and you tell them about this. That's how proud you are of this. If you don't feel that way about a minority partner joining you, you're not ready to do it. You want this to be a public anointing, you can't wait for people to hear about this and you're not ashamed at all. It's like, "Oh, this is great." That's the first check in your mind.
Blair: Do you ever encounter these silent partners that are team members, that they own a piece of the business and they're trying to keep it quiet?
David: [laughs] No, I haven't seen that, but there are a lot of silent partners. Sometimes it's like the spouse of the primary owner who's the operator. Sometimes it's an outside investor and it's true that nobody really knows. That kind of stuff is fine. I'm not talking about this. I'm talking about adding a public minority partner that you're proud of. They don't have to know the percentage or the mechanism or the cost or any of that, but are you going to be completely proud of the fact that you're adding this person and not worried about who knows about it?
Blair: The next test on your list has to do with adding more than one partner at a time. Is that right?
David: Now, this is more typical of a scenario where you are closer to an exit. You are looking for a succession plan, which sometimes means this basket of minority owners who are going to take it over from you. What you are doing subconsciously, you're probably not doing this consciously, but subconsciously you're saying two things. One, I want to put my eggs in multiple baskets because I don't really know who's going to come up with what kind of money. I want to spread this risk out. The other thing is, and this is the subtle one that you're really trying to get around is I'm not ready to anoint, to hold the scepter over one of these because I don't know what sort of signal that will send to the other.
There's two people here. Essentially, what you've done is you've arranged a marriage with these two people. These two people, they wouldn't meet at Starbucks if they weren't working for you and say, "Let's start a business together." No, they just happened to both be working for you and you want to spread the risk out. You're not sure you really want to pick a lead one. This isn't always the case, but in most cases, you need to be comfortable picking a lead buyer or a lead partner who will then assemble his or her team and decide who else is going to be on that. That isn't always the case, but if there's more than one, then you do need to at least have the private opinion that this is the lead person, and hopefully, be transparent about that with them as well.
Blair: I don't know that we can emphasize this point enough based on what I've seen over the years. I would put all ESOPs into this category where any employee of a certain tenure typically has the right to buy in and you end up forcing the senior and most valuable people- You end up forcing these partners on them that they wouldn't otherwise choose to themselves. While the exiting owner feels like they're being fair and equitable, they're really hamstringing the senior people or senior person who is most likely to make this thing succeed or fail. You're hamstringing them with partners that they wouldn't choose for themselves.
David: Yes, exactly right. Where this illustration breaks down is- I keep using the word arranged marriage, but I think there's pretty good research out there that arranged marriages actually ended up happier than the ones that we do in the west, but let's just forget that for a minute.
Blair: Okay. Third on your list of tests to see if you are ready for a minority partner.
David: Let's say we get through this thing, we make an announcement, and this announcement is in front of your other employees, the team members, your clients, the contractor base. Is anybody going to be surprised by this? Because the ideal is that there's no surprise at all. They hear about it and they nod their head and say, "Oh, yes, that makes sense. I wondered why it hadn't already happened. That's great."
Blair: It's inevitable. It's a natural progression of the leadership position this person has already been occupying.
David: Yes, exactly. That's a test for almost any management decision because to me, formalizing some sort of change in position is really more about publicly acknowledging what's already true, that this person is already thinking and acting like an owner. "I heard that they weren't an owner. I was a little surprised by that. The way I've experienced them, they seem like an owner to me. They seem like a partner." That's the third one, surprises. Anybody surprised by this?
Blair: You made this point in one of your earlier books, Managing (right) for the First Time, but you make it not about ownership, but about leadership, about being elevated to a management position where it shouldn't surprise people because typically that person was already managing or leading in some way. Then the title was merely an acknowledgment of what they were doing already. You're thinking about ownership in the same way.
David: Yes, exactly right. Yes.
Blair: Okay. We're talking about, are you ready to add a minority partner? You've got this list of eight tests. Number three was will the public announcement surprise any team members, clients, or contractors? Number four is, will you be ready to face an unsuccessful attempt? How likely is the first attempt at this to be unsuccessful? What does an unsuccessful attempt at adding a minority partner look like?
David: Well, the difficulty is that if it isn't successful, if we don't meet our initial intent, it's quite difficult to go back to the way things were. This is why sometimes you keep it private at the beginning so that there isn't any loss of face, so to speak if it doesn't work out, and then you make it public later, but then when you make it public, it's not a surprise to anybody.
It's very much like dating somebody for a long time and then deciding to pop the question. On that map of your life, you have drawn an intersection in front of you. When you decide to pop that question, which is just like what's happening here, you're going to hear a yes or a no, and the no is going to not allow you to go back to the way things were entirely. Sometimes that's quite recoverable, but other times it's not. If you have somebody who wants a minority partnership, who is pushing for it, and they have unrealistic expectations, then you say, "Yes, let's pursue this." If it doesn't happen, they are likely to leave. I don't know what the odds are, but they definitely are likely to leave.
You need to enter this deciding that you're willing to change-- This is a change in conversation. We've talked about this next illustration a little bit. It's like holding an employee retreat because shit's hitting the fan at the place and we really need to have a family meeting and figure out what we need to do differently and so on. You have this employee retreat and it's significant. It's momentous. We talk about the right things and then nothing changes.
It's worse to have that employee retreat than just to suffer through all the stuff that's been happening anyway because you have said, "We are going to fix it." When you approach the subject with somebody, you're saying, "We're going try to make this happen." If it doesn't happen, it's going to change that relationship. If you ask somebody to marry you after dating for three years and they say, "No," it's not going to go back to the way it was. That's the point.
Blair: The relationship is likely to be over at that point in a marriage or a marriage proposal. You're saying that there's a high likelihood of that possibility here too. If it doesn't work out, you're going to end up parting company.
David: Yes, but isn't that where we make the most progress is when there's a lot at stake? We can't just attempt things where failure doesn't mean that much. The great firms have faced a dozen of these intersections and they've lost a few of them, two or three of them, and they've won the rest. That's exactly how firms progress. I don't think that risk should dissuade you. I just don't want you to be surprised by the risk.
Blair: You were talking about the employee retreat. I had a big grin on my face because I remember being in a dysfunctional office. I was the number two person in that office, and the number one the boss had called this company retreat to fix the problems caused by her toxicity, and it just made things worse. It was horrible.
David: You know what I'm going to do? I'm going to find an intern and I'm going to sign them to listen to every one of the episodes and put together all the comments you've made about the place you worked. Then I'm going to write an article about it and I'm going to out all of your former bosses, whoever they were.
Blair: All right. On this point, are you ready to face an unsuccessful attempt? There's also this issue of negotiating power.
David: If you feel like you must make this happen, then you're going to agree to some things, you're going to concede to some things that you shouldn't. You don't want to enter this with a hundred percent certain outcome. You want to enter it knowing that this might not work, which gives you the freedom to still negotiate smartly on behalf of the firm. You have to lift your eyes way forward and say, "What is in the law long term best interest of the firm," not what will relieve the tension at the moment.
Blair: It also speaks to the previous point about making the announcement public. If you make it public too early, then you're giving up some negotiating power.
Blair: All right, we're talking about, are you ready to add a minority partner? We've gone through the first four tests of eight. Number five is, are you ready to be totally transparent about the firm's finances, including your own salary? That's a big one.
David: It's crazy. I don't know how many people come into this with me, and one of the questions I'll ask is what do they know about the financial performance of the firm so far. They'll tell me they know everything. Then when I probe a little bit, it's like, well, they've never really received a complete financial statement. They have no access to the accounting software. They have no idea what the principal makes, and that's the last thing that the principal wants to share.
Sometimes it's because they're paid in a piss-poor way, but most of the time it's because they make a lot of money, and they're afraid that for the first time, this new person they're adding is going to see this huge imbalance between what the principal makes and what this other- and they're afraid that part of this negotiation is that this new partner that they're adding is going to want to make a lot more money.
For one thing, it just usually isn't true. Their first impression when they hear how much money you make is, "Whoa." They raise their eyebrows, but it's not jealousy. It's like, "I am impressed. I want to own this firm someday even more than I did before, this is fantastic." They don't resent that. They think like an owner, they know that you take risk. If this is the right person that you're thinking about adding as a minority partner, you do not have to worry about anything on a financial.
In fact, I just don't see how you could even withhold anything. They need to know everything and you shouldn't be embarrassed about it. If you don't pay yourself very well, part of the reason for adding this minority partner is to fix that because they're now hitched to you. You're both pulling this cart and you're pulling in the same direction. If you make a lot of money, then they should be motivated by the opportunity down the road. One of these tests is, are you willing to be transparent about the firm's finances, including what you make? Because it's ridiculous to think about- it's ridiculous to marry somebody and have-- Well, okay, I'm going to make some people mad here. I think it's ridiculous to marry somebody and not combine your finances, but anyway, in a business partnership, it's everybody's finances, so they need to know everything.
Blair: Yes. You're saying this is a critical anxiety. It's felt by a lot of owners and it's usually misplaced.
David: Yes, exactly. It is.
Blair: Okay. Next point in the list. Are you doing this without overreacting to some pressure you feel? What kind of pressure would that be?
David: That the person is going to leave if you don't do it.
Blair: That's the wrong reason to add them as a partner. You're afraid they're going to leave, so you give up some ownership.
David: Yes, but it's tricky because you don't really want to add an owner who's not entrepreneurial and pressing for this. That's exactly the kind of person you want to be your partner. If it's being held over your head as a club, that if you don't do this, I'm going to leave, well, that's not the spirit of partnership that you're looking for. If this person has a deep entrepreneurial itch and they have expressed- they've demonstrated all kinds of commitment to the firm and the firm is better off because they are there, then you really want them to need this, to drive for it, to push for it but not to cross that line where they're going to use it as a club and just say, "Listen, if you don't do this, I'm going to leave." That makes me nervous.
There's this optimal amount of pressure where they're pushing for it. For instance, on one side of the spectrum, you would never add somebody as a partner who wasn't asking for it, who wasn't pushing for it. That would make no sense at all because that's an indication that they're not much of an entrepreneur, but if somebody is pushing too far and using it as undue leverage, that's wrong too.
There's something in the middle here and you want to make sure that you're not overreacting because this person, they're incredibly successful in how they've helped the firm. They are enough of a cultural fit that you don't feel much pressure about that. For the first time, because of how good they are, they've enabled you to shove a bunch of things off your plate and you're in love with that, but that can't in turn be turned around and be used as leverage. Just an honest acknowledgment of the value they're bringing to the table, but you shouldn't feel like this is a hostage negotiation. That's the point.
Blair: So there's a fine line there between you want your new minority partner to want it, but not to be belaboring it, pushing too hard.
David: Yes.
Blair: There's something to be said for having your incentives aligned with the incentives of that key team member who you're considering for partnership because sometimes if they don't have P&L responsibility, then their incentives might be towards the top line and you want to reorient them towards profit.
David: Well, you've probably seen this in sales too, where you'll see some people who really- they just want to be able to call themselves a partner and they don't care if it's 1%. "Fine, I don't care. I don't even care about the money. I don't need to make more. I don't care about the firm's performance. I just think it'll make me a lot more effective as a salesperson if I'm a principal." Then you have other people who have no interest in taking over the whole firm, they just don't want to be an employee the rest of their lives. Even if it's a 10% partnership level, they don't have many ambitions beyond that. That's fine as well.
Then you have somebody who says, and this leads to the next point, "This 5% 10%, this is not the end, this is the beginning of something. I want you to know that I should be in the consideration set for the succession plan." It's okay to have all those different steps along the way and different motivations, just make sure you understand them.
Blair: This is your next to the last point, which is be ready to talk about what if anything comes after this first step. The idea is, as you just said, it's not the end, you're now really opening the door to the only thing that's further down that hallway is increased ownership and maybe ultimately taking it over.
David: Yes, and a lot of that depends, of course, on where you are in your career path compared with where they are. Let's say that you're a lot older than they are, you see yourself phasing out before they do. Well, that's a natural lead into a succession plan. Let's say they're older than you and they also are at a time in life where they don't want to take on a lot of financial risk. They just want to be a 10% partner.
Understanding that and all of those reasons are quite valid, but if this person views this as the first step of many, if they don't bring up the question, then it doesn't ever have to come up, but many of them are going to say, "Okay, what's going to happen after this? I know there are no promises, but we at least ought to draw the target, load the gun, and cock it. Then all we have to do at that point is pull the trigger, if we're going to do something next." As the majority owner, you just need to be prepared to answer that question, what is the next step? Or what happens if they change their mind and move on? If I'm giving you this percentage, are you telling me I'm going to have to buy it back from you a year later?
Those are lots of questions that are more technical about how to make this happen from a negotiation standpoint. Mentally, the point here is, you need to think at least one step ahead and be prepared to answer those questions if this is the first step along an eventual complete purchase path.
Blair: I think it's great to hear that point. I wouldn't have previously considered that, and I guess, more importantly, our listeners probably want to know how much time do you spend coming up with these metaphors of cocking the gun, pointing it at the target, raising the scepter over somebody's head. This is like a full-time job.
David: Throwing weak kids off the playground.
[laughter]
Dragging something back to the cave after killing it. Some psychologist is taking furious notes and turning me in.
Blair: I know you had an unusual childhood, raised in the mountains of Guatemala. We'll do another therapy podcast coming up where we could dive deeper into that. Eight tests of, are you ready to add a more minority partner. We're on the last one. Test number eight. What is it?
David: We've touched on this before, but would this exercise if you do it well, is it really just formalizing what's already true? That's a fantastic sign. I think these legal machinations, they should always be a little bit behind. We've tested working together, we know what strengths and weaknesses are, we know how to do this, I realize exactly the value you bring to the table, it's like, "Bam, let's do that." That's a very different perspective than somebody who doesn't work for you but wants to come in as a new employee, and bam, out of the gate wants to be a partner.
That's a different story and it doesn't mean that that's always wrong, or anything like that, but this kind of a thing, what I'm talking about here is sharing minority partnership with an existing employee. Really what you think about is, is this really just making true what already exists, what's making public what already exists? Because what you don't want is to think, "Okay, this person's behavior-- Everything's going to change after this. Finally, I'm going to be able to not worry about X or Y or Z because this person is a partner." Nothing changes at this transaction, all you're doing is you're formalizing something that is already true. I'm not going to change this person after I marry them. You've given up on that goal because you've tried it once, maybe twice. No, I'm getting what I'm getting here, and this is just a natural public recognition of what's already true. That's the best way to think about that.
Blair: I think that's really well put. It's inevitable. In some ways, it is like you've already described, it's this threshold, you're at this crossroads and things will never be the same after this decision in terms of your relationship with that person. On the other hand, if it does go ahead, it's not the sea change, it's a decision to continue along which should seem like a natural progression. The sea changes when you decide not to take this partner on and embrace or accept the fact that it might lead to you parting company.
David: Some people are probably listening to this and thinking, "What world do they live in? I don't have anybody that I've envisioned being on that path," and I'm here to tell you that this does happen. I'm going to tell a story here of a specific person, I hope he doesn't mind. A friend of mine, Mark O'Brien runs Newfangled. He was an intern when I first met the owner at the time. [chuckles] I don't remember saying this, but Mark told me that I told the owner at the time-- The owner asked me what did I think of Mark and I said, "He makes too little money to fire him. Let's talk about the next thing." [laughs] I don't remember saying that, but apparently, I did. Anyway, the principal had other things that were really interesting to him, and he started doing those, and that leadership vacuum, Mark started to fill it.
Blair: From the intern seat.
David: Yes. Well, he wasn't an intern at that point. He'd become a key employee. I don't remember, maybe it was over a decade or whatever, and he started to fill that leadership role. Then succession discussions we had, I managed those, and then Mark paid a lot of money for the firm. He stepped up, and he was an entrepreneurial risk-taker. All we were doing at that point was formalizing what had already happened.
Mark was already running the firm and doing an incredibly-- That firm is so well-run from a financial and a service offering standpoint. It's just an example of how this could happen. You don't necessarily have any of those people on staff, but maybe you do. Even if you don't have somebody on staff who wants to buy the whole thing in X number of years, you might very well have somebody on staff that would lighten the leadership burden for you.
You just want somebody whose butt is on the line like yours that you can have slightly different conversations about and you don't want that slight divide between owner and key employee. You want this person to be an owner too. I'm really ambivalent about this process because I've seen terrible situations, and I've seen fantastic situations. It just takes good exploration to figure out which one it is. One of the ways that you can do it on yourself without hiring anybody is just to test yourself in these eight areas to see if this might make sense. That's the point of today's episode.
Blair: Okay. The topic has been, are you ready to add a minority partner? You have eight tests. Number one, are you ready to make this public? Number two, if the process involves more than one person, are you willing to designate one of them as the lead? Number three, will the public announcement surprise anybody, team members, clients, contractors? Number four, will you be ready to face an unsuccessful attempt? If this doesn't happen, this person might possibly leave.
Number five, are you ready to be totally transparent about the firm's finances? Number six, are you doing this without overreacting to some pressure that you feel, most likely that that person would leave? Number seven, are you ready to think bigger picture and talk about what happens if anything after this first step? Number eight, is this really just the formalizing of a progression that's already been underway, or is it something new out of the blue?
I was skeptical, David, that we had anything to add to the partner conversation. I actually think we could probably go deeper into this subject. Not the subject of, are you ready, but how to do it, unless you correct my faulty memory and tell me that we've already talked about that.
David: No. This stuff is so fun to talk about because imagine the joy that the principal feels when they've successfully brought on board a partner and they feel great about the process. Then imagine how that changes the family tree generations later because somebody became part of an ownership group. Now, there's obviously the flip side where it doesn't work well, but that changes people's lives and you look back on the highest and the lowest moments at a firm. They almost always relate to partnership, either great or really shitty. It's not the client, it's not the employee, it's like the quality of the partners, so there's so much potential here for good and for bad.
Blair: Yes. Good luck, listener. Thanks, David, this has been great.
David: Thanks, Blair.