Partnerships: Enter with Care

In this episode, we discuss the different types of partnerships and how to align them with the right business structure. You'll learn why clear agreements, regular updates, and tough conversations are critical for long-term success. Whether you're planning to buy, sell, or grow a company, this episode offers practical advice to ensure your partnerships thrive.

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TRANSCRIPT:

Welcome to Integrated Insights with ICCG. For more than 30 years, our team has

partnered with small business owners to prepare for and navigate the business

transaction process. Pull up a chair as we share stories and insights from our

experience on all sides of the M &A table. Alright, welcome to this week's podcast.

I'm Michael and I'm here with Grant and Dave. Today we're going to talk about

partnerships. So to start out, what are the types of partners?

Yeah, good ones and bad ones. No, I think, you know, structurally, there are

different kinds of partnerships. Obviously, there's a general partnership. There's,

you know, the most common one these days is actually an LLC which is driven by an

operating agreement but there are limited partnerships which limited partners are

typically not involved or they are by definition not involved in the operation at

all sometimes they financial people that bring some capital to the table the general

partner of the know -how's or the governors of the organization and and managers.

And so, there are different kinds of partnerships that have been put together for

different purposes, sometimes to protect some of the partners, like a limited

partnership, the limited partners are protected from liability, whereas the general

partner is not. Yeah. Can I put onto that? I think that the question,

what are the different kind of partners? And I think that was very accurate. There's

good ones and bad ones. But all partnerships are, you know, they're undergirded,

so to speak, by some sort of an entity. And that's what what's Grant's talking

about. And since you brought up LLC's grant, I think we really helpful for a lot

of people. I think, you know, because it's LLC's are kind of the thing, you know,

for the past decade or so, or more than that, I guess, you know, we formed our S

-Corp, what, 1996 or something like that, and so, Grant, I've been officially business

partners for 25 years, and our entity is an S -Corporation,

but an LLC is formed a little bit differently, right, and you mentioned that, and I

think people don't necessarily understand the difference between the operating manager,

you know, the limited members and all that. I think that would be really helpful to

explain. Yeah, I think you can, you can spend a lot of time on what entity should

be chosen. But I think for purposes of today, I think, uh,

just like you said, Dave, partners get into business together for a specific reason.

And matching that with the type of entity that they choose is really important.

You know everybody everybody can you know go to all kinds of posts on the internet

about what entity is best but you really can't pick the right one until you know

the the the basic scenario between the the partners right if there's two if there's

10 if there's 50 you know, what is, what does a partner mean? You know,

if you're a partner in a law firm, for example, or a CPA firm, it doesn't mean

you own any equity whatsoever. It's a position, it's a title. And so is,

is, is the partnership because the person has equity or because they don't have

equity? Is it because they are, you know, in a grill in a grill to the operation.

So you're gonna give them a title that keeps them there. Or is it, you know, a

few guys or girls that are getting into business together to benefit together,

to run the business together, all of those types of different kinds of partnerships

exist. And again, you know, whether you're wrapped in an entity or wrapped with an

agreement, a partnership agreement, it really doesn't matter. It is,

I mean, it obviously matters in accomplishing your goals, but ultimately, your

partners. And so, doing business with another person or other people can be really,

really great. And it can be really, really bad. Yeah,

and actually, and some people try to kind of hide, nothing will happen if we have

these limited partners, so to speak, in the, they're a member of an LLC or they're

limited partners in a limited partnership and your general makes all the calls or

your managing member makes all the calls. But the reality is that we, I mean, we've

seen lawsuits fly between two parties multiple times, right? So yeah, yeah,

ultimately, it comes down to who do you want to be in business with and who do

you think you can be in business with for the time frame that you've got in mind?

And a lot of people I could do this may forever. Yeah, I think I think a lot of

people draw the analogy of business partners with marriage, right? And it's not

marriage, but it is very much like a marriage where you have to,

um, you know, go into it with, with, uh, a lot of care, uh,

you know, I nearly said trepidation, um, but, you know, a lot of people go into a

partnership with some romance like, oh, this is going to be great. I like spending

time with you, you know, we get along so well, well. And it's,

it doesn't always end that way. That my first, I won't go into details, but my,

our first partnership and our first venture didn't went exactly, this is going to be

awesome. It's going to be awesome until like the second week of operations. And all

of a sudden, that is, I mean, I'll say that they wigged out. And to this day,

I don't really understand how or why, But bottom line is it left the people who

wanted to basically walked away from it and and that's happened It happened to you

and I grant, you know a couple occasions when someone just walked away from their

responsibilities and It wasn't anything we had done. It was just They're stationed

alive or whatever and those things can't always be flushed out in advance But I

would do everything you can to flush them out in advance So - So go into that a

little bit more, Dave. Like you just talked about it started well for you guys, but

obviously after 25 years, it must have changed some. How has y 'all's partnership

changed over the last 25 years?

- This is where the kind of like the marriage thing comes (laughs) comes about.

- Hey, you know, well, yes. (laughs) - So Grant and I,

I think it's really important. So we are, we went into this, I think cautiously,

but excitedly, you know, and we were both ready for some changes in life.

And, you know, we had the opportunity to buy one of his client's businesses. He was

he was had a CPA firm. And that allowed us to kind of launch out and do

something. But there became some life changes for me and my wife that that we ended

up moving from from the Texas area up to Seattle and And so and that was to help

that was to help start a church years ago And that was something that we weren't

planning on but you know

We did it and and that caused that caused us to have to kind of reposition what

we were going to do and that was There were some really tough years in there.

We're very I mean, we're very open about that. They're not really fun to think

about But here we are years later, and I think one there's a couple things that

held us together through that number one Our our families were great friends from

the beginning. We made sure that our families got to know each other and and that

was a that was a catalyst our quite frankly our our faith drives what we do and

so And it you know so we started out with some of the same basics foundations,

which I think was really important and And important. And so I think that was

something that kind of held us together. And would you agree, Grant? Yeah, I think

I would go all the way on the other side of that. I would say if all that held

us together was your expertise or my expertise, then we would have parted ways a

long time ago. I think the friendship and the common values that come out of our

faith just held us together or really held us at the table through some hard

conversations. And I think that determination to make it work because of those things

because the sum of this is at the bottom line, this is what you have to be

convinced of. You have to be convinced of in our sort of situation that Dave and

Grant are better than Grant by himself or in vice versa.

And I think once you know that and you bank on that then you say okay let's go

and you go you know just you understand that that separating is hard uh you you

put things in place ahead of time that would script what that might look like that

that's helpful but at the end of the day you fight for it because you are

convinced that the sum of the parts is more valuable and better and more fun than

just being the parts by themselves. - Yeah, and that takes a lot of work up front.

I mean, you have to really think through this. And a lot of people are like, "Hey,

this guy's got $200 ,000. "I'll make him a partner and it's gonna be awesome." But

what are the expectations surrounding And what if it doesn't go well then what you

know all these different things I think sometimes people are afraid to ask those

questions up front and they just jump you know jump into this and I think that's

where getting You know honestly getting someone in the middle, you know, we had we

had a We had a father years ago come and say hey I want to I want to pass my

company generationally down through a purchase type deal, can you help me determine

if my kids are gonna be able to be good partners? And that was fascinating for us

because we got to help with this generational. And it was a fascinating discussion

because there had to be some hard discussions but it's going great today.

And so I think getting someone to help determine what that looks like for you and

your partners before you start signing legal paperwork that's gonna bind you legally

is really, really important. And then I think having the tough conversations about

things like compensation and how funds are gonna be distributed and dividend,

all these types of things, that's really, and ours has changed through the years,

you know. For a while I was not able to be as involved with the business as Grant

was, and so for the last several years I've been just as involved as Grant. So,

you know, we've had to change things along the way, but that comes out of a deep

commitment and integrity that I think we both strive to have. And that's not saying

we've never talked about, you know, we had that discussion about every five years.

Hey, you think we ought to, you know, is there, do you see for CF time, we maybe

ought to like, you know, dissolve the relationship, not the relationship, but the

And, and we look at each other and go, nah, sounds like too much work. That would

be much harder than actually kind of making it work. Well, talk about that a little

bit. You grant, I want to go into it. You mentioned, you mentioned putting some

things in place to help you both drive for that partnership and to fight for it.

So I feel like Dave, what you just said there speaks to that a little bit too.

Talk about that a little bit more. What can partners put in place to help them

fight for that partnership? Yeah, you know, every, every partnership agreement

typically has something with regards to buying out the other partners or a partner.

Typically, there's a limitation on who can buy. So for example, in a partnership,

you know, I can't just go sell my interest to Joe Blow. I've got to first offer

it to the other partners. You know, those kinds of clauses, you'll see it in a

partnership agreement, in a partnership or an LLC operating agreement. If it's an LLC

or bylaws to the corporation, if it's a corporation, sometimes it's in a shareholder

agreement in a corporation. But at the end of the day, there are ways that you can

make it a whole lot easier. What's difficult is, is that those agreements are not

updated. So for example, as the roles in the business change and they do change,

as the roles change then sometimes those agreements need to be updated because they

kind of I'm not applicable. Sometimes it's just as simple as the valuation.

Oh, we're gonna value this company at certain times earnings or certain number times,

or maybe book value is when I spoke to somebody about this morning. And those are

just, they become antiquated. And so making sure that those agreements are updated

along with the importance of the partner just change.

If you have a manufacturing entity that starts a retail side,

and all of a sudden the retail side becomes so prolific that the manufacturing is

not that important because they're retailing a whole bunch of products that they're

not making, Well, the guy that was in charge of manufacturing to begin the company

is super, super important and maybe really the key to the success.

And at the end of the day, sometimes the company grows so much that the head of

retail now is the guy or the girl. And so you've got to take all that into

consideration when you're setting the value of that person's shares and so making

sure they're updated is super important. Yeah. Do you have a story to go with that?

Do you have an example of a time a business owner came to you, they were talking

to you about the problems they were having and a lot of those pointed back to that

agreement that just wasn't updated? Yeah. I have, you know, we had a manufacturing

company that I was thinking about when I was just talking about that example that

was all about making furniture and it ended up having 130 retail stores across the

country and so initially the guy that was making the furniture was the guy and

eventually There were three or four of the partners that were very,

very valuable to the business because they're the ones that proliferated that retail

chain across the country and their shares became very valuable and their role was

very valuable. And so there's, you know, the of the organization the more valuable

the guy is that that holds the purse strings or that is the sort of the CFO right

and so that guy becomes super valuable all of a sudden he he knows what's going on

he's he's enabling the growth all those kinds of things and so people's roles become

more important the shares become You know more important to hold on to and so You

know all those things change and the value of that company changed significantly over

the life cycle of that of that business and And I think You know making sure that

the partnership was Held together through those days and roles maybe were switched

around and changed was hard work. - Yeah, I think another example I was just

thinking about was in the last couple of years where we sold a company and there

had been some transactions, there had been a couple partners in a couple of decades

ago that had sold their piece or they had divided kind of territories and

everything, but it wasn't documented very well. And the documentation that was done

couldn't even be, couldn't put their hands on it for a while. And then it wasn't

very clear to where the buyers almost got spooked out of the deal because it was

like, I think, I think maybe we, we're going to have competitors before we know it,

you know, and which wasn't the case, but it was really hard. I mean, just

documenting that is really, really important if people are looking at exiting at some

point, make sure that what's happened with your partners and make sure that's

documented so that there's not illegal issues in the future. So, Grant, you've

mentioned a couple times, shares, buying out your partner, that kind of thing. So,

every time you're bringing a partner in, do you always give them equities or always

equities part of that? Yeah, and this is what I said in the first place, right?

Partners are not always equity owners. They sometimes is a title. But I think what

you're asking is do you have to give equity away when you take on a partner?

And the answer is no. In fact, Dave and I have always said you need to guard

equity. And so that's where sometimes in corporations or even LLCs,

there's something called phantom shares, which gives the economic benefit of equity

but without the actual equity because it just it brings all kinds of issues and

it's expensive to hand an employee stock or an interest in the company.

For example, if let's just say ICCG is worth $100 and I give 10 % of the business

to one of our employees, then I'm giving value and therefore it's a taxable event.

And so we have to pay taxes on that 10 bucks. And that's just sometimes deemed a

waste of money and of time and it's awkward because I might be doing it to keep

that employee but at the end of the day I might not satisfy that employee and now

he wants to get bought out. And now I've got to now buy that 10 % back. And so a

lot of times it's phantom shares nowadays where the employee gets the economic

benefit of ownership as long as he's working there.

You know, Michael, before we end here, I don't know how long we're going to go,

but I did want to say this, you that along the way, we've been really fortunate

and to have some really good partners that we've brought in on certain deals. We

haven't only just done intermediary work, we've owned a portfolio of companies along

the way ourselves and each of those, we would typically bring in somebody. And at

one time, I think, or the most partners we have, Grant was six of us, I think.

- Yeah. - We kind of lose track. And Each of them were brought in for different

reasons. Typically, we bring a company in, and they came with the company. We chose

to have them come with the company, and we bought the company. And then oftentimes,

they would then-- maybe the next deal-- they were part of that as well. To where

this group of people, as long as we were in a certain industry that we were

operating in, they had a little piece of the action moving forward. And they all

had different things that they brought to the table, which was really great. And

into this day, we could get together for dinner from all parts of the country and

never miss a beat, because it went that well. There were hiccups along the way,

of course, there always will be, but it was a fun time. I would say it's probably

some of the most fun we've had with the companies. And Grant, there's one, you had

some examples of the one person you're talking about that's, that's been really a

good utility for us, you know, through the years. Yeah. When you're buying a

company, um, you know, and you know, you need that guy, you know,

this happened in, in a couple of industries that we went in, Dave and I didn't

know squad about the industry. Um, but we really liked the economic model.

Um, and, uh, and, And so we got into it and we gave equity in that company to,

in this particular case, this one individual. And the type of equity that we gave

him initially in that business was a limited partnership interest because we didn't

know him. And I didn't want the business handicapped by somebody I didn't know,

making decisions. Today, he ends up being one of our closest friends who we trust

probably more than we trust most other people in our lives. And we would give him

and we have in other businesses, you know, the same type of interest as we have.

But when you're going into that particular is you got to have your eyes wide open

to the possibility of it not working out and that same industry we actually bought

another business gave equity as one of the as part of the compensation and that

agreement had a buyout clause in it and and we had to buy the buy them out

because it just became impossible to deal with. And in one company,

we walked in when we bought the company, and we gave a certain amount of equity to

everybody who was an employee from the top down. But it wasn't voting shares.

It was a C Corp, and we gave them non -voting shares, so B shares. And it worked

out tremendously for the employees as well as us. But we needed them around in

order because we didn't know anything of that one as a technology company. And and

as everybody knows, Dave and I do not need to be that we don't need the password

to a server. And so, and so the point was, when you buying a business,

structuring that that capital stack, which is the technical term to who owns what is

super important. >> Yeah, that will drive a lot. >> That's awesome.

Well, we've talked a lot about starting a partnership and how partnership changes

over time. But when you do decide to sell and move towards selling or even buying

mergers or acquisitions,

how does having a partner affect that process, the acquisition process.

Well, you know, hopefully you're on the same page. You, we, how often does that

happen? Well, I mean, I think most of the time, I think most of the time by the

time we're getting contacted, someone's decided this is what we're going to do.

You know, it, you almost have more issues with maybe upper level management who

aren't partners, but see themselves as partners or may have been promised that, hey,

you're going to be a partner someday. Oftentimes, they're more likely to scuttle a

deal.

Yeah, we've just seen that happen. But I think that hopefully,

I mean, we've sat down with partners sometimes and just kind of helped them walk

through what would this look like? And oftentimes the husband and wife team that's

built this amazing business and one really wants to sell the other one doesn't and

you know we're not there to break up a marriage. So you know we'd rather them get

on the same page at the same time and then and then want to sell sell the

business down the road. Kind of help them through that process a little bit but

there's a lot to digest and sometimes it's just not understanding. You know, there's

this, there's this thing out there that all PE groups are evil and we've had, you

know, we've had people say, we're never sell to a PE group, but they don't

understand all the different types of, of buyers that are out there. And that

there's really, really great buyers that even would call themselves, you know, private

equity groups. And we've, we've, we've met them, we've dealt with them. Wonderful

people have great intentions and do great jobs. And so, You know,

that's that's what I would say Grant. What would you yeah, just you know get a

third party in the room that's what we do right and and let's talk through what

actually can be expected because a lot of people have fears on Change and so,

you know once they deal with the knowns and With possible outcomes, then you can

make a good decision. But just thinking, oh my gosh, I want to sell, my partner

doesn't want to sell, or vice versa. And just saying, oh, we're never going to come

to agreement. That's short -sighted. You need to get an intermediary like us in the

room whose principal desire is to get everybody on the same page.

And And certainly we'd love to help you sell. And earlier we talked about outdated

agreements, that kind of thing. Can partners bringing outdated agreements to the table

when they're ready to sell, even if they're on the same page, can that complicate

the process? Any agreement is subject to change, with agreement.

So for example, I might agree that

you know that the company is worth a hundred dollars and we're gonna split the

split the the proceeds. What if we agree to something different than that becomes

the new agreement. It's only worst case scenario you have to operate and your

existing agreement but if you can agree to something different then you agree to

something different so everything is subject to a vision, you know,

as long as you're working together and you understand the reasons for that. Awesome.

Well, hey, that's all our time today. Dave, Grant, thanks so much for jumping on

here with me. And that wraps up another episode of Integrated Insights with ICCG.

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