Read this before you bring on a partner

Show notes from podcast episode 28

First of all there are a lot of different types of partnerships. In this article we discuss the co-founder. Someone who you bring on initially and they get ownership no matter what. No vesting schedule. No cliff. No way out if things go wrong.

This article is the cautious approach. Partnerships can be wonderful. Many of the most successful companies out there were founded by more than one person. I founded my own company with a 50/50 partner and I’m much better off because of it. Don’t be afraid to bring on a partner. Just make sure to think things over and consider the following first.

Partnering with someone 50/50 is just as important as getting married. Your financial life will be tied together forever. You’ll spend every day from 8am-5pm and possibly a lot more working with each other. You’ll be trusting the other person with your present and your future. Its a huge deal.

People date and court each other for years now and still the majority of marriages fail. Business partnerships fail even more often. It kills businesses. It ruins potential. It kills friendships. It costs a lot of money.

Why is this? Its because partnerships are very very hard. Every problem with relationships in general, and especially partnerships, boils down to two main factors:

The first is character. Does this other person genuinely have my best interest in mind or are they acting selfishly?

The second is value. Are we bringing equal value to the table and are we both able to see that the value is fair?

Partnerships are so hard and fail so often because many people are naturally selfish and greedy. These traits get highlighted when large amounts of money come into the equation. These traits get highlighted when tough times come and people get desperate.

On the value side of the equation everyone is so different and their skills are so different. Its rare that two humans can add the same exact amount of value to a businesses overall success. Its also natural that people overvalue their own work and undervalue everyone else’s.

We’re talking about several years in the trenches and then possibly decades running and living off of this business. We’re talking about managing each other’s money. Partnerships are a big deal and shouldn’t be taken lightly.

So lets start with a few questions we can ask right off the bat to try to help us figure out the character and the value.

What is the moral compass of the person? Do they cheat on their wife? They’ll cheat on you.

Do they steal from the gas station when they were kids? How are you going to trust them with access to your bank account?

What is their work ethic like? Are they willing to really put their nose down and grind?

How is their time management? Do they overthink and waste time on non essential tasks?

Are they driven? Would they rather watch reality TV, play video games, and watch football all weekend or do they spend time making themselves better and growing as a person?

Are they a grump all the time? They’ll drag you down and give up when the going gets hard. Now I’m not talking about unwarranted delusional positivity. I’m just pointing out that negativity is contagious and rubs off on everyone around you.

When something unexpected happens do they get emotional and irrational? Can they think with a level head when something stressful happens or do they have a mental breakdown?

Do they spend a lot of time yelling or arguing with their spouse or girlfriend? This is often a tell tale sign of manipulation, selfishness or insecurity.

Do they feed off drama and gossip? Remember that gossip is cancer. If they talk bad about their friends to you they will talk bad about you to their friends.

Do they have an addictive personality? When they play a new video game do they binge and play it for 20 hours a day for a few days? When you go out drinking do you constantly have to take care of them, keep them out of fights and carry them home?

Do they procrastinate and put off the stuff that is important but not fun? Are they constantly cramming to get things done at the last possible moment?

Do they shy away from difficult conversations and uncomfortable situations? Business is uncomfortable a lot. The people who can get comfortable in these situations are the ones that can add the most value.

What drives them? Do they talk about the riches and the boat they’ll buy with the riches? Or do they talk about the process and the excitement and how big the business can become?

What are their career goals? Do they have other plans and opportunities? Did they already take a full time job after graduation? Do they have other projects taking their attention?

Does their personality and skill set align directly with yours? Does the business really need two of the exact same people?

Do they constantly over promise and under deliver? Are they generally late or early for things? Do they think they can be ready to meet you at 8pm but end up rushing around and not being ready until 8:15?

Finding the answer to these questions doesn’t happen right away. It takes years. It takes working with someone in a professional setting for a long time.

That’s why this whole thing is so tricky. Figuring out the answers to these questions isnt easy. It takes a working professional relationship. It takes a friendship that goes beyond the surface level. It takes truly knowing someone.

So say you are considering partnering with someone and you are unsure how it all should look. Lets talk about a few basics.

The person investing the money should get the ownership. They take the risk therefore they should get the reward. Sweat equity is cheap and cash is king.

The spouse of your partner is critical. They are your 25% partner and will be entitled to 25% of the value of your business in the event of a divorce. They’ll also be the person your partner lives with and deals with when work is over for the day. Are they supportive? Are they trustworthy? Do they have healthy spending habits? Do they have a solid moral compass? Are they grumpy and miserable for your partner to be around? A partner with an unsupportive or miserable spouse will not be worth a darn on a day to day basis and is destined for failure.

The delegators and communicators and smart workers are more valuable than the hard workers.

Don’t partner with someone in a tree trimming business just because they are good at trimming trees. There is a big difference between trimming trees and managing a bunch of people trimming trees. You can get a good tree trimmer for $30 per hour. A few years from now you’ll each be earning $100 per hour. You’re losing $70 for every hour your partner spends out trimming trees. The value equation will be thrown off really quickly if this is your criteria for partnership. Putting your head down and working hard is easy. Making the decisions that can cut a hundred decisions and building processes so the work gets easier is the hard part and the valuable part.

Don’t partner with someone who is broke. Broke people make bad partners. If they don’t know how to manage their own money what makes you think they can manage your money? What are their spending habits? Do they have a nice new financed car while living paycheck to paycheck? Do they order a soft drink and a side of guac and turn a $7 lunch into a $14 lunch? Did they work for money as a kid or did their parents hand them money as needed?

In the early days of the business there will be no money to spit off. The longer you can go without needing to pull money out of the business the more long term value you can build and the more momentum you’ll gain. If your partner needs cash to pay off a credit card and you are ready and willing to keep adding value with the goal of profiting later things aren’t going to work out.

Think about the future prospects of your business. How many mouths do you want to feed? You’ll need double the business and double the profit to feed two owners vs feeding only yourself. Does a lawn care company have enough potential to feed two people? Does the business really need two founders? If you are starting small and simple in one town the answer to that is likely no.

So many people rush right into bringing on a partner. Its the natural thing to do. You get excited about something and you run right to a friend and talk to them about it. They get excited too. Next thing you know you have a partner and you haven’t considered any of the questions we just spoke about. You haven’t considered the key traits that make a partner valuable. You haven’t considered the skill sets. You haven’t considered the complexities down the road.

Like anything in life the key here is to stop and think. Don’t let your emotions affect your decision making. Ask yourself if you really need a partner or you are just latching on to a friend to subdue your own anxiety and share everything with someone else?

Alright so let’s say you analyzed everything and asked all the right questions and you have someone in mind that you want to partner with. What now?

Sit down and have the really hard talks early on. What if this happens? What if that happens? What if we disagree? What if we want out? What if we get a divorce? What do you think are wise investments? What type of lifestyle do you want to have? How much money do you need to pull from the business and when? What are your 5 year goals? What are the things that you value most? What do you want your life to be like 5 years from now? How do you see your roles changing and evolving? What are your strengths? What if you or I can’t perform as we initially thought?

As part of the operating agreement put a buy sell agreement in place that explains how shares can be bought or sold and make sure it includes a schedule of the payment. Make sure the partners can’t demand payment for their ownership in a manner that will cripple the business. Put financing terms in the buy sell agreement.

Put a valuation method in place as part of the buy sell. It can be different depending on the situation. Agree upon metrics you will use to value the business in case one of you wants out. This might be a multiple of earnings. Something that will keep you from arguing in the event of ownership changes. If someone requests to be bought out it can be an agreed upon multiple. If someone is forced out it can be different multiple. If someone fails to perform the key duties of the business, etc.

Consider getting life insurance and key man insurance on one another as partners. My partner and I have this in place because if I pass away my partner would be required to pay out my estate according to the overall value of the business. That is what the life insurance policy is for. We have key man insurance to help us pay for a new employee to come in and fill the roles each of us have within the business. This way if one of us passes away the business can survive and it won’t miss a beat.

If you are considering bringing on a partner after the business is already up and running consider sharing the profits at first and make the ownership vest over time so you have a trial period to make sure it is working out.

Partnerships are much more likely to work out when the two people have had a previous working relationship with one another. They know how they operate. They know their strengths. They know each other’s’ weaknesses. Basically they have the answers to the questions above.

Put simple and easy systems in place to check each other. Make rules like no outside expenses on the company credit card. No meals and entertainment. No expenses over $100 without notifying each other. Credit card statement audits done on each other quarterly. Bank Safepass codes sent to both partners anytime an auto payment is set up. No cash transactions between customers and employees.

Very simple things that can keep people honest and close any doors to small infractions that can grow later.

Before we wrap up on this topic lets talk a little about my personal experiences.

I got very lucky with my partner who is still my partner today. We knew each other as friends for three years prior to starting the business but there were still a lot of critical questions I didn’t even think to ask. I just got excited, ran to a friend and agreed to partner.

He just happened to be a great communicator, extremely frugal like me, great in uncomfortable situations and incredibly level headed when the going gets tough. Our personalities mesh perfectly as I’m more dominate and he is more agreeable. He has an amazing ability to think extremely logically and make great decisions when others would get all emotional and worked up. He does not have a temper. He wants what is best for both of us, not just him. He’s not greedy or selfish. And he adds a ton of value. Hes an excellent communicator and delegator. He always has a positive attitude and treats others with respect. We accomplish more together than we ever could have alone. Finding this partner was a huge stroke of luck.

We brought on three other partners over the years that are no longer with us. The first we foolishly gave 20% ownership of the company right off the bat before we even had a real company. Luckily he got discouraged and had other career goals and walked away without asking for any money. We hadn’t really made any yet and it was a long road ahead.

The second partner, who happened to be one of my best friends at the time, got 20% ownership in return for sweat equity when our business was about 2 years old. We thought this person would be able to help us grow the business a lot faster and help us expand to a lot more locations.

About 6 months in we realized the value equation was way off. The partner just wasn’t hacking it on a level that we needed or thought to be fair. Quickly the environment became cancerous and was about to explode. Luckily we all had the courage to sit down around a table and have a very difficult conversation several days in a row. It was clear that the person was getting pushed out. He was heartbroken. So were we. We didn’t try to screw anyone. He didn’t try to screw us. We wrote him a check and sent him on his way. It set us back a good ways financially and we learned never to give away ownership unless you are absolutely positive the value is there.

The last partner didn’t have actual ownership in the company but helped us open up a few new branches in exchange for a profit sharing plan. It worked well initially but then we all realized the business simply didn’t have the potential to support us all and couldn’t really grow to the level that we had initially hoped. The partner wasn’t exploring new avenues to add value and wasn’t willing to relocate to give us 100% of his energy so it also got very testy very quickly. Luckily we all saw this and parted ways in a very agreeable manner and are still great friends to this day. We’re glad we didn’t make the same ownership mistake again because it would have made it much more complicated.

Remember every problem with relationships in general, and especially partnerships, boils down to two main factors: Character and value.

Luckily all three of these were around value. Value issues are much more straightforward to solve. Character problems are much different. Its impossible to deal with a selfish or greedy person who does not have your best interest in mind. Those types of problems kill businesses all together. If that would have happened to us we would have likely not survived it.

When a partnership is deteriorating you can FEEL it. You know something is up. You know there is animosity. You know there is resentment. You know there is something off with the character or the value add equilibriums.

Talk about it and address it right away. Don’t get emotional. Listen more than you talk. Realize its a process and takes a little bit of time. Don’t make a person feel as if you are going to try to rip them off or they will get defensive and it will be a battle. Find a fair solution and try to pick up the pieces afterwards.

Keep in mind that these problems are a lot easier to solve before they happen.

Like anything else you should apply these principles to your situation but you must realize every situation is so different its not a one size fits all approach. Make the best decision that you can and try keep your emotions out of it. Partnerships can be great if you go about them the right way.

If you have a particular situation that you want my thoughts on send me an email to nick@sweatystartup.com and I’ll be happy to shed some light. As always – thanks for reading.

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February 25, 2019 5:59 am