When a business has two or more owners taking an active role in running the business (acting as employees), it is necessary to distinguish between decisions made as owners and those made when in the employee role. Significant conflicts can arise and contribute to the inability of the organization to act. The best strategy is to define these roles and the decisions made at each level when the business is established.
Ownership decisions typically include long-term strategic decisions, financing decisions (loans, other investors, etc.) and any acquisitions or divestures. As the owners assume leadership roles such as president, CEO, COO, and other key positions, establishing job descriptions which spell out the decisions, scope of authority, and performance evaluation enables the organization and the other owners to know where things stand.
Employees are accustomed to the dealing with managers who have the authority to act in specific roles. For instance, many people have experience dealing with a president or CFO role; each of those roles is well-defined in most companies. The type of decisions each make are somewhat unknown, as is the reporting relationships.
When establishing the roles each owner has in leadership and day-to-day activities, consideration must be given to the definition of these roles if the position were filled by someone other than an owner. This objectivity is critical to the long-term health of the business. Why? When a business is successful, it often grows to need skills in the key leadership roles beyond or different from those the owners possess. Without a mechanism to evaluate and make changes, then owners in lesser or greater roles do not have the ability to make changes necessary to keeping the business healthy.
If you have ever been a part owner of a business where a co-owner has not been able to adequately fulfill or execute his/her role, then you know how complicated things can become. Emotions often become a major part of the equation. Without objective criteria and set guidelines for action, those emotions (on all sides) can get out of hand and do even more damage.
No one starting a business expects to have issues with a co-owner, but reality is that at some point there will be disagreements and conflict – minor or major. Having well thought out guidelines is one means of keeping a minor disagreement from being a major deal breaker in and of the business.
Here are eight key areas to define in a business with multiple owner/managers:
- What is the maximum discretionary expenditure any officer or executive in the company can make without owner vote and approval?
- How are hiring decisions made for key executives, managers, and board members?
- What specific job/role is a specific owner filling?
- Is that owner qualified or experienced in the position?
- What are the criteria for determining that owner isn’t performing adequately in an employee role?
- How can changes be made in owner/manager roles when the business needs change and not everyone agrees?
- How are owners compensated in the employee role?
- What is the policy on hiring family members and how are performance issues addressed should they arise?
There are many more things to consider, depending upon the type of legal and tax entity of the business. For instance, if your business is established as an LLC, the distribution of profits and losses can differ from the ownership amounts. In LLCs, then, the owners need to set out the distribution plan for profits and losses – these can be constant or may change from year to year.
It is natural to think that the relationship you have today with your business “partners” will always remain the same. It would be exceptional, however, if it did remain constant. The fact is that personal situations change over time and these changes can significantly affect your business. Divorce, remarriage, spouse’s job loss or promotion, and many other personal factors ultimately impact the business relationship because of the demands they place on the business owner. Being prepared is the best strategy for limiting the potential impact these events would have on your business.
Copyright ©2005 Lea A. Strickland, F.O.C.U.S. Resource, Inc.