BUSINESS MANAGEMENT

Eliza De Pardo

If you don ’ t deliver on your internal succession plans , it can lead to malaise at your firm .

HERE 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

It is common for soon-to-retire owners to start working fewer hours or spend less time with clients or managing the firm . 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 .

34 | FINANCIAL ADVISOR MAGAZINE | MAY 2022 WWW . FA-MAG . COM