When the Founder Leaves the Room: What Really Changes

Helping Founders Pass the Torch to Partners, Safely

Every exit is an act of faith. Founders step into an uncertain future when they take the plunge. For many, this will be the largest financial event of their lives. They’ll rely heavily on exit planners to get the numbers right – valuation, deal structure, taxes, financing, timing – but underneath those numbers is a related question: Who will carry the business forward, and if there will be co-owners, how will they work together once the founder is gone?

More than half of departing owners pass their companies to one or more insiders – their children or key executives – who share their values and care deeply about the company’s legacy, rather than to a private equity fund or a strategic buyer.[1] Many of these internal transfers involve more than one successor, which means the owner is effectively birthing a partnership as they’re going out the door. Even when passing ownership to one insider, the seller may become partners with the buyer, in a gradual, phased buyout.

Why Owners May Want to Give Birth to a Partnership…

When partnerships work, they can create extraordinary value. A well-constructed partner group can bring more resilience, a broader range of perspectives, and continuity that outlasts any one individual. Research has found that partnerships outperform solo entrepreneurs in multiple respects.[2] And a small group of successors is more likely than any single successor to replicate the full range of a founder’s strengths – values, business judgment, and understanding of the culture. In sum, partnerships can approximate the whole more effectively than one person alone.

For many founders, insiders are the only replacements they’ll fully trust. After years of working together, internal successors know the company’s history, informal norms, and “how we do things here.” They know which customers and employees are indispensable, and where the founder draws the line. An internal sale can also lower the likelihood of carve-outs and spin-offs. Many owners believe deeply in the way they built and ran their company, and fear radical changes driven mainly by a new owner’s financial agenda. The relative stability insiders can provide is the insurance many founders are seeking.

Partnerships can also make an internal handoff financially feasible for next-gen owners who otherwise couldn’t afford ownership. Owners hoping to keep the business “in the family,” whether through children or long-time managers, often find that a single successor can’t afford the buyout. That was true for Ralph Madson, who built a successful insurance agency in Northern California. When the company’s value made it impractical for his son, Glenn, to purchase it alone, Ralph sold to Glenn and three other key executives. Together, the partner group could finance the buyout while keeping ownership in trusted hands.

An insider sale gives founders a final opportunity to reward – and invest in – the people who helped them build the business. Having insiders benefit from the equity can matter as much as, or more than, the top-line price. Selling internally rewards loyalty and ensures the upside of ownership lands with people the founder cares about.

There’s also a comfort factor: better the devil you know than the devil you don’t. Internal buyers are known quantities. They understand the business, the clients, and the team. They’re more likely to keep the company intact and maintain relationships that took years to build. And on the flip side, customers, vendors, and other employees often find it easier to accept a transition to familiar faces than to an outside buyer they’ve never met.

Finally, selling to partners can give owners more flexibility in structuring the buyout. Internal transactions can be designed with creative compensation and financing that meet the needs of both sides – for example, earn-outs, gradual step-downs in ownership, and profit-sharing arrangements. They may also allow founders to stay involved longer, in constructive post-exit roles.

Two brothers became partners in their third-generation funeral home in the Midwest. Part of their mother’s exit plan included a multi-year buyout, which allowed her to continue in a meaningful role as her sons assumed more responsibility and ownership. Now, years later, the brothers watched a friend sell his family’s funeral home to a national firm for a very high price. That stimulated the brothers’ thinking about their own priorities, and led one of them to realize he might be inclined to accept less money if it means their employees could become owners and he might be able to continue serving families in the funeral home’s community. Similar to owners like him, the exit is about purpose, continuity, and meaning, not just the check at closing.

Given these advantages – resilience, legacy, financial viability, loyalty, familiarity, and flexibility – it’s not surprising that so many founders aspire to sell to a small group of insiders, which raises the next question: If creating partnerships offers so much promise, why do owners ever think twice about selling to a group of partners rather than a single outside buyer?

…And Why Birthing any Partnership Can Be Frightening

For all the appeal of internal transfers, many owners become anxious at the thought of partners. Some owners never had partners themselves, so partnership can feel like a strange, foreign concept. And for solo entrepreneurs with hard-driving, dominant personalities, it can be a stretch to imagine how partnerships built on close cooperation and collaboration actually work. They may cling to the idea that someone in the partnership will still need to have an extra level of control.

Owners may also question whether their successors are truly ready. While PE buyers tout the credentials and experience of their chosen leaders, insiders – though trusted in some sense – may not yet have demonstrated the full set of skills required to run the company after the founder’s departure. And if insider successors falter, the downside is steep: a founder’s life’s work can unravel, valued relationships can be damaged, and the legacy they hoped to protect can disappear.

Compared with a clean PE deal (ample capital, clear process, a defined closing timetable) creating an internal partnership can look messy and impractical: complex structures, step-downs in ownership, payments over time, seller notes. Worse, founders may fear that passing control to a partnership that stumbles will leave them financially exposed and vulnerable long after closing.

Compounding these specific concerns is an underlying skepticism about partnerships in general. Many advisors actively steer clients away from co-ownership arrangements. Business podcaster Dave Ramsey’s oft-repeated line – “Partnerships are the only ships that don’t sail” – is an exaggeration, but it contains more than a grain of truth.

Many people have lived through – or watched family members suffer through – agonizing partnership breakups. They’ve seen partnerships collapse under their own weight, taking the company’s valuation and strategic options down with them. Failures can be so common they start to feel inevitable. As Harvard Business Review has reported, estimates suggest that 50–80% of business partnerships fail in their first few years.[3]

It’s little wonder one clear caveat emerges from this “school of hard knocks”: steer clear of partners if you can. At the core of that fear is an expectation that where there are partners and shared power, there will be conflict.

Why Conflict Is So Common in Partnerships

Because conflict is so prevalent and such a predictable concern for owners who might otherwise prefer to sell to insiders, exit planners need to understand why it rears its head so often in partnerships. At its root, a partnership is structurally complex. Compared to solo ownership, every significant decision may require input, negotiation, and alignment among co-owners.

Money is a prime example. A solo owner can make virtually any financial decision they like (at times to the consternation of their accountants). Partners enjoy no such leeway. Even among the most relaxed partners, if one partner makes a unilateral financial decision affecting the others, it can send shockwaves through the partnership.

The complexity inherent in partnerships often leaves partner groups with fuzzy lines around roles, authority, and accountability – and sometimes even around things as basic as equity splits. To make matters worse, few partners share a common language for discussing personal styles, values, or conflict, so problems tend to surface only after tension has already built. And because the system is complex, it’s difficult to predict in advance where any particular group’s vulnerability will lie. A partnership’s Achilles’ heel depends on the individuals involved and the dynamics between them.

Poor communication and avoidance then magnify the risk. Miscommunication is common in any relationship, but among business co-owners the stakes are higher. And straightening out misunderstandings is harder than getting communication right from the start. When partners avoid tough conversations – whether about money, control, or personalities – small irritations harden into assumptions and begin eroding trust.

In partnerships, the boundary between what’s personal and what’s business is notoriously thin, causing problems in one sphere to bleed into the other. For example, unmet expectations are a common flashpoint. When partners rely on unspoken assumptions instead of clarifying expectations early, frustration over unmet personal expectations (e.g., about respect, responsiveness, and who’s pulling their weight), often spills into business issues. What starts as quiet annoyance about who’s doing what can escalate into conflict over authority, compensation, or equity.

Problems can just as easily flow in the other direction. Disagreements about strategy, hiring, or spending become personal and assume an emotional charge that makes them harder to resolve because partners are no longer debating tactics; they’re protecting egos.

Trying to make sense of the complexity and conflict, people often ask: “What causes all this conflict in partnerships? Is it money and greed? Is it power struggles? Personalities? Unmet expectations? Equity fights? Value conflicts?” The answer is: “Yes. Yes. And yes. But at the heart of it is poor planning.”

How Exit Planners Can Lessen the Risk

Exit planners are uniquely positioned to help owners navigate these uncharted waters and avoid the metaphorical shipwreck. Here are seven key course corrections advisors can share with founders to improve the odds of success for both sellers and their successors.

1. The “Soft” Stuff Is Often the Hard Stuff

Because personal characteristics and interpersonal dynamics are less concrete – and less widely understood – than valuation and capital structure, they’re often overlooked or dismissed as “soft” issues. In reality, their impact on partnership performance is anything but soft. Interpersonal dynamics shape decisions, trust, execution, and ultimately outcomes as much as any financial variable.

For decades, executives and partner teams have used assessment tools to measure (1) personal styles, (2) conflict-handling styles, and (3) personal values. These three tools give partners a shared language for discussing interpersonal dynamics. Detailed feedback in these three areas can also provide insights into patterns that shape how partners work together – insights they’re unlikely to uncover on their own.

Two brothers in their mid-forties who founded and co-owned a financial advisory company with 350 employees spent four hours in a guided discussion of their personal-style reports. Although they’d always believed their styles were quite different and a primary cause of the tensions between them, they instead discovered how similar they actually were.

With a deeper and more accurate understanding of themselves and their dynamics, they ended the afternoon with clear behavioral commitments to one another based on their similar styles. Reflecting on the exercise later, they said those commitments were largely responsible for their ability to work through decisions about roles and decision-making rights – work that soon led them to restructure the executive teams running their $400 million company.

2. The “Right” Ownership Group May Not Be Obvious 

On paper, the “obvious” ownership group often looks like the senior team, or the siblings, or a mix of both. A story of two Chicago siblings illustrates the risk inherent in such assumptions. A sister and younger brother, widely regarded as unusually close, saw their relationship deteriorate quickly once the brother joined the family business as a co-owner. Looking back, the sister said, “If anyone had predicted this, I would have told them they had the wrong siblings.” Everyone had thought they were a sure bet. There are two take-aways from this story: past performance as siblings does not guarantee future results as business partners, and it’s risky to assume you can predict who will make good partners.

“Moving up” to co-owner status can seem enviable. Who wouldn’t grab the opportunity? In practice, we’ve seen both siblings and managers go along with the idea that they’ll be part of the next-gen group. One trusted manager explained that, after working on a new partnership design with the owner’s daughter, she hadn’t wanted to seem rude by rejecting the offer. She later confessed it wasn’t a responsibility she wanted to assume, so she stayed in her management role while the owner’s daughter took over ownership on her own.

Some adult children of founders have been subtly – or not so subtly – steered toward taking over the family business. The reality of taking over from a founding mother or father is often more challenging than it looks, and the challenge is exponentially greater if next-gen ownership must be shared with siblings. Researchers have found that some adult children in business families want something different for their lives, and others have no interest in complicating a sibling relationship with a business relationship. They experience that prospect as “double jeopardy.”

3. Getting Along Now Doesn’t Guarantee Getting Along Later

Getting along as siblings or co-managers is often taken as the best proof that people will do well together as co-owners. Unfortunately, it’s not highly credible evidence. While conflictual relationships are clearly “diagnostic” and should be avoided, agreeable relationships aren’t convincing proof.

The founder’s presence often creates a mirage of harmony. And even when that harmony is real – when people genuinely get along – it may not translate once they become co-owners. The shift from co-leaders working under an owner to co-owners under no one but themselves is anything but subtle. It’s a radical change.

Owners sometimes create their own mirage of harmony by “testing” successors – stepping away for weeks or even months. But being away is not the same as being gone. For managers, an extended absence is just a longer version of the owner being out for the day. If there’s a crisis, the leadership team knows the owner expects a call. The team is managing, basically holding course. When ownership actually changes hands and the founder is no longer the captain, the natural order of business shifts in a way no vacation can simulate.

The rules are forever altered when an owner leaves for good. The simple hub-and-spoke hierarchy with one central authority transforms into a web of lateral relationships where each partner is accountable to every other partner. Co-ownership is more demanding and less forgiving: roles, decision-making, finances, and expectations all become more personal, and even exiting the relationship is harder. You can fire an uncooperative employee; you can’t fire an owner, not even a 1% owner.

The rules change permanently when an owner leaves for good. When an owner is replaced with a partnership, a simple hub-and-spoke hierarchy with a single, centralized authority becomes a web of lateral relationships where each partner is accountable to every other partner. Co-ownership is more demanding and less forgiving: roles, decision-making, money, and expectations all become more personal, and even exiting the relationship is harder.

4. There’s No One-Size-Fits-All Partnership

Given the inherent complexity and risk in partnerships, Albert Einstein’s advice for complex phenomena applies well here: “Make things as simple as possible, but no simpler.” From over three decades of mediating family and non-family partner conflicts, we’ve seen partners run into conflict across 13 distinct areas: decision-making (at three levels – management, governance, and ownership); dynamics at both the personal and interpersonal levels; strategic issues; financial matters; and a half dozen others.

Will every partnership struggle in all 13 areas if they never discuss or reach understandings and agreements upfront? No. But there’s no crystal ball for predicting which areas will become problematic for any given partnership. What proves lethal for one group may be irrelevant for another. And even within the same partnership, a deal-breaker for one partner might not even be on the others’ radars.

The only safe strategy is to address the full range of issues that have repeatedly caused confusion and conflict for other partner teams. If a topic is noncontroversial for a given group, they will cover it quickly, document their agreement, and move on. But few partner groups glide smoothly through the entire set of topics.

5. Solo Owners Often Mis-design Partnerships

Owners are arguably well positioned to design a partnership for their insider successors. They know the players (since birth, in the case of their children). They’ve guided them in various roles in the company, accruing more knowledge than anyone about their respective strengths, weaknesses, and limitations. They’re genuinely invested in their successors’ success, and they know the business inside and out. So why wouldn’t everyone – including the next generation – want the founder deciding who will do what and doling out “fair” equity percentages?

Another owner-designer argument is simple: it’s their company! Since the owner ultimately decides to whom, and when, to sell, it seems logical that they would choose the individuals and determine how much to sell to each of them, which (at least in theory) determines who will be in command. But the owner’s prerogative rarely stops there. Owners typically go on to assign roles based on their assessment of each successor’s performance to date.

In an effort to avoid showing favoritism, they may hire a consultant to evaluate the capabilities of all next-gen members and to make recommendations for how to proceed; however, even a wise owner with the advice of a skilled consultant is prone to “mis-design” the partnership. While owners may appear perfectly situated to make these decisions, they’re not well suited for the task.

A 69-year-old owner with five middle-aged children in a fourth-generation family company was pressed by his estate planning attorney to begin succession planning. The owner was certain all five children would succeed him, but he wasn’t sure about their relative ownership or how they would work together once he was no longer there to referee the inevitable disagreements.

One of his sons convinced the owner to hire two Partnership Charter “Guides” to help the siblings design how they would co-own and co-lead. They worked diligently through a wide range of partner issues tied to co-owning and co-managing the company. They reached agreement on roles and authority, a number of sensitive strategic issues, and even compensation – many of the same matters they’d previously been at odds about. They also explored their styles and values, and made behavioral commitments to one another based on those conversations.

When the siblings reached the most consequential ownership and governance decisions, however, they hit an impasse. Four believed each sibling should have an equal voice. The oldest son insisted that each partner needed veto rights on major decisions. These weren’t details; they were fundamental design choices, and the siblings needed more time to negotiate them.

Although the father had professed a willingness to let his children design their own partnership, once he heard they were stuck, he inserted himself, decisively siding with his oldest son. His reasoning reflected the leadership model that had worked for him as a solo owner for 50 years: centralized control, clear veto power, and limited reliance on collaboration. But by stepping back in, he effectively short-circuited his successors’ negotiations. He sabotaged their chance to work through their hardest decision together, effectively undermining their confidence that they could lead after he would one day leave the room. Imposing a solo-owner logic on a shared-ownership reality is exactly how well-intentioned founders end up mis-designing successor partnerships.

Even before he jumped back in, his influence was anything but subtle. That kind of gravitational pull is common. Without trying, the owner’s mere presence can change what gets said, what goes unsaid, and what feels “safe” to propose, tilting the outcome before successors have truly had a chance to design the partnership for themselves.

6. Future Partners Design Their Own Partnership

Similar to the 69-year-old father with five children, the husband-and-wife co-founders of a mechanical contracting firm in New England were prodded by their estate planner to clarify the future disposition of their company. Five of their seven adult children worked in the business, in positions ranging from line worker to President.

The parents met on a Thursday evening with their five children and two Partnership Charter facilitators for a kickoff dinner. They wished their children luck with their “due diligence,” explaining that it was up to them to decide – collectively – whether and how they could operate as partners. “We don’t presume to know what will work best for you as future co-owners,” they explained. “Only you can determine what that should look like.” They also reminded the group that the parents would ultimately decide whether to approve what the children designed, since it would affect their retirement and the inheritance of the two children not involved in the business.

The siblings prepared thoroughly, and from Friday through Sunday they tackled the full range of partnership issues: their respective roles, what they expected of themselves and each other, who would participate at different levels of decision-making, and what exit strategies they might consider some day. Compensation proved to be the most challenging topic, but with some creative mediating, they ultimately reached an agreement every one of them considered fair.

The five siblings effectively passed the litmus test for partners: those individuals who may become partners take full responsibility for designing the unique partnership structure they believe will work best for them. And everyone the owner believes could – or should – be part of the next generation must be included in that prospective group, so each person can discover two vital things: (1) how will this partnership work, and (2) do I want to partner with these people?

The Guides documented the siblings’ understandings in a Partnership Charter, first for the siblings’ approval and then for their parents’. None of the siblings took that approval for granted. They knew their parents had other options – and a healthy skepticism about sibling partnerships. The parents were impressed with the siblings’ work and readily approved the plan.

As they had agreed in their Charter, the siblings met annually to review and update it. Their partnership worked extremely well, culminating years later when the siblings successfully transitioned the company to a 100% employee-owned ESOP.

7. When Owners Are Bought Out over Time

There are cases in which the exit plan isn’t “clean” in the sense that the owner departs, and a fresh group of new owners enters to replace them. In this case, the exiting owner remains, becoming one of the new co-owners.

Whenever a buyout stretches beyond a year, the seller and successors aren’t just completing a transaction; they’re entering a temporary partnership that’s surprisingly complex, even if time-limited. In these situations, even when there are only two partners, i.e., the seller and a single key employee, child, or other buyer, it’s worth investing in partnership design because the payoff is often greater effectiveness, fewer misunderstandings, and less conflict.

Some would argue that clean breaks are easiest and safest, because long-standing patterns of relating are hard to change when ownership change in phases. But once and done isn’t always possible. On paper, everyone can comprehend what it means to go from 100/0 to 75/25 to 50/50 to 0/100. But in real life, ownership percentages don’t automatically translate into clear authority, decision rights, or day-to-day control. It’s one thing to understand “75% ownership”; it’s another to define what “75% in charge” actually looks like. And at 50/50, unclear authority can quickly turn ordinary decisions into standoffs.

If a phased buyout will unfold over a year or more, it’s best to treat the relationship as a true partnership, just one with a shorter lifespan. That means addressing explicitly not just the buyout terms, but rather the full set of partner issues. Sellers may also benefit from individual coaching to learn how to participate in the design process without reverting to old patterns of control.

Improving Owners’ and Partners’ Chances of Success

The sailing metaphor still fits. Exit planners are uniquely positioned to help owners and their successors build the right “boat” for their circumstances, and ensure the crew is prepared to work together once the founder has left the room.

There’s no guarantee of smooth sailing – partnerships always carry real risk – but when successors design a structure they understand and believe in, and trust one another enough to commit to it, their odds of long-term success rise sharply. By encouraging and supporting a serious partnership-design effort, exit planners don’t just reduce risk for the next generation; they also increase the founder’s confidence and satisfaction in the most important transition of their business life.

 Written by David Gage and Joel Scott.

To learn more about becoming a licensed user of the Partnership Charter System and the online Design Your PartnershipTM tool, click here. [This should link to the hidden webpage with the “TPCI Info Packet 26-01-13.pdf”]

To set up a meeting with David Gage or Joel Scott, click here.

[1]   According to the Exit Planning Institute’s 2023 Minnesota State of Owner Readiness survey, 57 percent of owners say they prefer an internal exit. https://blog.exit-planning-institute.org/how-owner-readiness-in-minnesota-has-improved-in-the-last-6-years.

[2]   National Bureau of Economic Research. 2011. Working Paper 1718. http://www.nber.org/papers/w1718.

[3]   Harvard Business Review, 2024. https://hbr.org/2024/01/7-steps-to-repair-a-damaged-business-partnership.