Agency owners want to reward their best employees and prevent them from leaving. Obviously, the best way to do both is to offer equity or to become a minority partner in the agency, right?
Not so fast.
Crafting a pair of golden handcuffs for a model employee sounds like a great idea, but when those handcuffs are forged from the company’s own foundation, the proposition gets dicey. A model employee might be vital to the agency’s success, but initiating the transition from worker to owner can have far-reaching consequences.
In fact, the world watched it happen two years ago: Former McDonald’s CEO Don Thompson stepped down after the company saw its worst U.S. sales slump in more than 10 years. Not surprisingly, Thompson happened to be the poster child of an employee-turned-owner. Starting in 1990, he worked his way up the fast food chain’s echelons from project manager to staff director to regional manager and, eventually, to CEO.
As an agency owner who’s searched for a successor myself, I’ve seen the pitfalls. Before taking the leap to take on a minority partner, ask yourself the following:
1. What is a minority partner, really?
Minority partners are a myth. If you offer someone part of your business, that person will act like a fellow owner — and not a minority one. He won’t think in terms of percentage of ownership, but in terms of haves and have-nots. In his mind, even a sliver of ownership puts him in the “haves” camp, and he carries all honors and benefits thereof.
In some cases, that means the minority partner brings great ideas that drive the agency to new heights. In others, he slows down operations and starts fights when he feels his voice isn’t being heard.
You can’t keep some data away from the minority partner without showing it all. You can’t make decisions about the agency’s future without having a discussion. Bringing on a minority partner doesn’t just entail giving more money and stock to a valued employee; it also entails giving up the entrepreneurial autonomy you’ve enjoyed until now.
2. Does this person want the gig?
Not every high performer is cut out for entrepreneurship.
Does your potential partner understand that a bad year might mean writing a personal check to keep the business running? Does he understand the risks and responsibilities you’re offering? If he doesn’t, it’s on the agency owner to explain them. It’s easy to acknowledge only the positives of a partnership — and the optimism is certainly welcomed — but it’s imperative that realities are examined, too.
A fellow agency owner I know once had a casual conversation with two top performers who were interested in purchasing her shop. She did her due diligence and prepared a buyout plan, which I reviewed and thought was fair and reasonable. When the conversation got serious and the two employees saw the commitment that agency ownership requires (both personal and financial), they quickly passed on the offer.
3. Can this person develop the necessary skills?
You still want to offer a minority partnership, and your prospective partner still wants the gig. Are you certain this person can learn the ownership skills that you have taken for granted all these years?
Even for intelligent, driven people, agency ownership is a challenge. Entrepreneurs need interpersonal skills, financial savvy, industry experience and domain knowledge to keep the operation running. If the prospective minority owner is lacking in any of these categories, he needs to learn quickly. He can do this a few ways (some of which involve your help):
Start by putting your prospect in the hands of an in-house mentor, someone in the organization who gradually teaches the prospect and allows him to experiment with these newly introduced skills. This is also where the agency owner comes in: Groom the candidate — sometimes for five years or more — prior to offering a partnership or a piece (if not all) of the company. With hands-on training, in-house mentoring, candid conversations and gradual coaching, your candidate could become your partner.
4. Will your succession plan succeed?
If you want this partnership to begin your transition out of the business, what does that transition period look like? Five years from now, will this person know everything he needs to know to run this agency without your help? If he doesn’t, who would?
Typically, your replacement will need about 10 years at the helm to pay you the amount for which you sold your agency. If you want your agency to outlive you (but you don’t have a clear successor in mind), find that person. Ensure he has identified himself as someone who wants to own a business, is willing to take risks and, most importantly, is aware of the risks involved in inheriting a company. Hire him if you want an internal purchaser, or start wooing potential buyers and merger partners. Just don’t wait until you’re 65 and want out — you’ll risk losing your leverage.
Partnerships can be great things. Minority partners can bring new energy and new ideas to your agency, but they can also create disasters if the fit isn’t perfect or the boundaries are unclear.
Don’t offer partnership blindly or quickly. You have many options to retain your brightest stars, so don’t default to equity shares unless you understand the lifelong commitment that a partnership requires. Ask these questions, and vet your candidates thoroughly.
This article first appeared in Forbes.