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In the previous article of this series (Finding a growth model that's right for YOU), we looked at three growth models - remaining solo, forging a partnership and building a team around you. We talked about three big advantages of a partnership model: (1) Strength of sharing (2) Expanding expertise and (3) Sounding board. Collective unlocking of value is a big fourth benefit. But, before you charge ahead with your urge to merge, consider this sobering thought: according to one international study, 62% of partnerships fail due to conflicts between partners. So, is a partnership model a good idea at all for growth oriented IFAs?
Why do 62% of partnerships fail?
In order to get some context to this depressing 62% number, lets look at the main reasons behind partnership failures.
Too close for comfort: Many studies suggest that picking a friend or family member as a partner may not necessarily be wise. Business is business but it may be difficult to make those practical decisions without having to take into account the personal relationship. Fighting over vision: Conflicting directions for vision often lead to a "my idea is better" argument. So any decision made can still leave one partner feeling bitter that their vision was discounted. Unless there is absolute clarity and alignment on the overarching long term vision before forging a partnership, this can be a significant source of break-ups. The steering wheel: Who is the decision maker or authority in the partnership? Sometimes it is not about equity but who controls the steering wheel can simply come down to personalities where one partner is more dominant and forceful with his/her ideas. Before forging a partnership, its best to agree who will have the "casting vote" in case of differences. If this cannot be agreed upon, look at a third party such as an advisory board who will guide your firm on major policy matters, and whose opinion will be binding on all partners. You need to either have a clearly acknowledged leader or a clearly defined conflict resolution mechanism if all partners are indeed equal, for a partnership to work. Not having clarity on this aspect almost always leads to misunderstandings down the road, and your partnership could well be the next contributor to that 62% statistic. Attitude: While this may not seem like an obvious source of conflict, but different attitudes towards success or failure of a business can lead to conflicts. So if one partner is constantly stressing and worrying, while another partner has a more optimistic approach, this can lead to conflict in decision making where one partner may be more favourable to making some risky calls while the other is conservative in approach. Styles that meld: Every individual has his/her preferred style of working, and often partners may have starkly different styles. One may believe in "work for short hours but be more productive" while the other may firmly believe that putting in long working hours and sacrificing weekends is the only way to outgrow competition. Its small things like this which then blow up into more serious conflicts. Ideally, partners who share the same work ethic are more likely to succeed together - as they have at least one irritant out of the way.
Partnership model: getting it right
Despite the heavy odds, there are clear benefits in forging alliances with like-minded professionals and building a larger practice together. In addition to avoiding the 5 pitfalls mentioned above, here are some ways you can look to building winning partnerships.
Trust: Beyond all professional considerations is the most important one: do you trust your potential partner? Ask yourself this question: if you were laid up in a hospital for 6 months after a bad accident, would you trust this individual who you want to partner with, to do the right thing for the business and to look after your interests with integrity? If there is even a slight doubt on this score, don't go ahead with the partnership. Wait till you find the right person - someone you implicitly trust. There will be many occasions once you get into partnership, where tough choices will have to be made on a number of business issues - mutual trust is what will enable you to make the right choices. Complementary skills: The best partnerships are often those between people with different but complementary skills. Each brings his/her unique skills to the table, which makes the firm a whole lot more competitive. So, if one partner is a natural "hunter" - a person who is great at winning new clients while the other is a great "farmer" - one who is great at advising existing clients but not necessarily the best acquirer, getting together will be a great idea. If one partner is adept at financial planning while the other is a tax expert, that's another great partnership in the making. If one is great at HNI advisory while another has expertise in building a retail sub-broker/franchisee model, that's another example of complementary skills. The thing about complementary skills is that together you make the firm more competitive and complete, while at the same time, carving your independent areas of expertise so that you don't tread on each other's toes. Compensation: Spend enough time upfront in discussing and agreeing compensation/profit sharing issues threadbare. Consider a variety of scenarios - like one where one partner brings in a lot more incremental business than the other - which may be very different from the ratio of AuMs at the time of merger. Look at how a partner will be fairly compensated for overseeing back office and research work, which is critical, but where the linkage with revenue is not clear. You will need to envisage a variety of scenarios, agree how the monetary arrangements will work in each case, and document these in your partnership deed / LLP MoU. Arbitration: You need to recognize that there will always be some conflict at some stage, despite your best efforts to clarify everything at the outset. What you can do at the outset is to set up a mutually agreed arbitration process - an agreement on how such conflicts will be resolved. Very often, this would mean going to a neutral person or persons who all partners trust, or an advisory board, and agreeing formally that decisions made by this neutral person or body will be respected and abided by all partners.
Partnerships ultimately are like marriages. Marriages that work, do so because both parties involved want it to work and find ways to make it work, especially when it hits a rocky patch. You go into a marriage without this commitment, one half of your mind will always look at what would have been, if you were not in the marriage. Same is the case with a business partnership.
Content is created by Wealth Forum and must not be construed as an opinion by DSP Blackrock MF.
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Futurist Edge: Practice Management