In an equity partnership everyone needs to win. It should not be a competition as to who wins the most, so long as everyone benefits, writes Peter Flannery.
A large number of equity partnerships have been created over the last 20 years. Some have been hugely successful while some have been spectacular failures. What have we learnt?
It may seem obvious that equity partnerships seldom fail when everything is going well. However, as we know, everything does not always go according to plan.
Two of the keys to success in equity partnerships are having good governance and good management. The better these two key aspects are done, the higher the probability everything will go according to plan. However, even with best practice governance and management things will still go wrong. So how do you prevent failure when they do?
As any successful property investor will tell you, the first three considerations for property investment are Location, Location, Location. The first three considerations for an equity partnership are exactly the same, except different: People, People, People.
Success in any business and indeed any relationship is enhanced by having alignment on Values, Purpose and Vision.
Like it or not, we all have an inherent set of core values. Values influence our behaviour, and it is our behaviour, or what we do, that influences our results.
When the pressure comes on, we will revert to our core values. Here are some examples.
- Someone who values honesty will revert to the truth under pressure, whereas someone who does not, will revert to lying.
- Someone who values self over others will be first in the lifeboat when the ship starts going down.
- Someone who values teamwork and collaboration will work well together when the pressure comes on, whereas if they don’t, they are likely to head off in their own direction and make decisions, without consultation, which impact on others.
So back to People, People, People. The first person to analyse is yourself. Have a good long and honest look in the mirror and
answer this question truthfull:. “Am I the right person to be going into partnership with?”
If you put too much value in control, independence and self, you are definitely not the right person. However, if you truly value collaboration, teamwork and win/win you probably have the right set of core values to be someone’s business partner.
The second group of people to analyse are those you are potentially going into business with. What are their values? They do not have to have the same values as you, but their values must at least be complementary. For example, you may value big picture thinking whereas your business partner may value detail. So, while you may find each other frustrating, if you both value teamwork and collaboration, you can combine to get good synergy.
The third group is the partnership as a whole. The partnership is a group of individuals with their own sets of core values, coming together to form a business partnership. Under what set of core values will they agree to do business with each other?
You can agree to a set of business core values, but if those values are in conflict with any of the individual’s own values, they will struggle to adhere to them. That will be the root cause of the start of a relationship breakdown. Once the relationship starts to break down it can be difficult to stem the tide.
Values are one thing, but purpose also plays a part. Other than making money, what is the purpose of the new partnership, and what are the reasons for investing? Consider the following two examples:
A retiring farmer, who wants a young couple with energy, enthusiasm and capital. The retiring farmer wants someone to do the work and provide some capital to remove from the business for their own purpose. That is fine, but if the retiring farmer wants to remain firmly in control, and still sees the farm as “my farm”, then they are not entering the partnership with the right purpose, and it will most likely fail.
Similarly, if a young driven and enthusiastic couple wants to find a retiring farmer to “leave money in the farm” and expects them to just sit quietly in the corner with no input while they run the farm to their own agenda, it will also most likely fail. Once again, the wrong purpose.
There needs to be strong clarity as to why the partnership is being formed, and there needs to be something in it for everyone. Everyone needs to win. It should not be a competition as to who wins the most, so long as everyone benefits.
Finally, you need to have alignment and clarity of vision. What does this business look like in five years’ time, and in 10 years’ time? What is the end game and then what? How do you exit?
It is easy to gain agreement on the vision at the start. The trick is, agreeing on the plan to achieve the vision and then implementing it. Values and purpose will remain constant but the vision and plan to achieve the vision will constantly change. Therefore, it needs to be constantly reviewed and revised.
The vision needs to be designed and agreed to by the partnership’s directors – governance. The plan to achieve the vision needs to be designed by management and agreed to by the directors, and once agreed, needs to be implemented by management.
This gets complicated and murky, because often, the management team are also part of the governance team. The lines of responsibility get blurred, and it is common for governance to interfere with management and management to interfere in governance.
Unless there is a very special relationship with each other, this will not bring out the best in the individuals and the partnership.
If you get all the above right, the probability of success will be enhanced. Get it wrong, it will undoubtedly fail. How do you get it right? Sort it out at the start, and in my view, there has not been enough of this done.
Do your due diligence, take your time and get someone to help you and be prepared to walk away before it starts. Marry in haste and repent at your leisure.
- Peter Flannery is a Southland and Otago-based agribusiness consultant with Farm Plan, specialising in business planning, financial management, family succession and equity partnerships.
