Did you see the “The Profit” this week? Marcus Lemonis, CEO and Chairman of Camping World and Good Sam’s and business investor, hosts a CNBC tv series called “The Profit” where he helps troubled businesses by investing with money and expansion plans. In the most recent episode Marcus travelled to Jacksonville to help owners of “Sweet Pete’s”, Pete and Allison Behringer grow, expand and make profitable their candy business. The profitless business showed a lot of potential, but growth was being stifled by lack of capitol to find an appropriate location with an adequate commercial kitchen and terrific foot traffic. Online sales would be possible if capacity was increased…Easy Peasy, right? Wrong!
It turns out that Sweet Pete’s has a 50% partner, Dane Baird, that does not participate and hopes to keep the location the same (since he owns the building). Marcus obviously does not want to invest in such a raw deal, so he attempts to buy out the partner, but was rebuffed with outrageous counter offers repeatedly. Like millions of others, Allison and Pete are stuck in a failed partnership. Working full time for years with a measly salary of less than $5,000 a year each, Pete and Allison are indentured servants to this bad deal with a non-working partner. After the partner denied an opportunity to participate in the business and the profits hoping for a larger payoff, Marcus found a loop hole in the partnership agreement to invest massive quantities of money in the business on behalf of the Behringer’s and dilute the partner’s stock eventually down to zero.
Unfortunately, this kind of soured-partnership is all too common. There are three must-knows about partnerships that need to be in your arsenal.
Partnerships Often Look Most Attractive in a Moment of Weakness
Think about it, when does a partnership look attractive to you? If you are like most people you have thought about partnerships at times when the task seems so big that you think a little help would be great. When you start the business, when you are embarking on a big expansion, when you are having financial trouble, when you are strapped for time, etc. Partnerships look attractive when you perceive great risk, and you want some help with that. And, sometimes a partner can be a good solution at that time. The problem is that things change over time, and if starting a partnership is a business marriage of convenience then when the business evolves, goals change, roles change, personal lives change, and estrangement takes its erosive toll. Be alert when entering a partnership. Think carefully about 5 years down the road how will the partnership be if the business does well, AND how will it be if the business does not do well.
All Partners Need to Work Toward the Same Goals, and Add Value
Contemplate and agree about what each partner’s role, time investment and money investment will be. Again, be sure to consider not only the best case scenario, but the worst case scenario. Since it is common for personal lives and goals to change through the life of a business partnership, I like arrangements where actual physical time working in the business is compensated like an employee in that role, and then profits are split after time has been compensated for. That way, if a partner decides he/she needs to work less in the business the playing field remains fair. For example, you own a retail shop with a partner and ne partner needs to move across the country to take care of a family member, leaving partner #1 to manage the shop alone. Partner #1 receives compensation as a manager just competitive pay of other managers, and then remaining profits are split.
Spend a Good Amount of Time on a Partnership Agreement
In almost 100% of the cases where partners contact me needing help either restoring or dissolving their partnership, they either don’t have a partnership agreement, or not an adequate one. The reason, I think, is when you are forming a partnership the dreams of the future are usually all flowers and unicorns (we can’t help it, we are optimistic entrepreneurs ) and it is easy to overlook any troubled waters that may be unforeseen ahead, and agree to get started on a verbal agreement. Give your business the seriousness it deserves. Your business is probably the biggest investment you will make when you consider the money, blood, sweat and tears that you will put into it. Drafting a good agreement needs to be done by an attorney, and it needs to cover and exit plan in case of any of the major D’s (death, divorce, disability, dissolution, delinquency, debt, drugs). If conflict arises when you are assembling a fair partnership agreement then “Great”! You may have just saved yourself years of anguish.
So if you are creating or working within a partnership follow these must-knows and make sure your Partner-ship is the not the only ship that does not sail.