50/50 Partnerships: A Case Study Part 1 | Business Partnership Mastery Series

50/50 Partnerships: A Case Study Part 1 | Business Partnership Mastery Series


Hi, this is Brett Cenkus, the right-brain
business attorney, and this is another video in our series about mastering
business partnerships. So today we’re gonna do something a little bit
different. We’re gonna look at an actual business partnership dispute, a strained
business partnership. This is from a real situation that I was presented with – a
possible client. We’re gonna do it in a case study format so what the business schools
call a case study. So we’re gonna take a look at what’s going on we’re gonna analyze what the parties have done right, what they’ve done wrong. And think through
kind of what they should do from here. So maybe about a year ago gentleman called
me, his name was John, he was in a 50/50 partnership with a gentleman named Gary.
They were longtime friends, best friends from youth. They had no business
partnership documentation whatsoever aside from the certificate of formation
that was filed with the state and then the yearly annual reports they’re sort
of both on – the things you file with the Texas Comptroller if you’re in Texas. But they
didn’t have an operating agreement, a company agreement, stockholder agreement, founder agreement – you know, whatever you want to call that kinda heavy lifting
document between the partners. More background just to set things up:
they so John did sales, Gary did the operations. It was just the two of them
they’d been going at it for over ten years. They drew relatively equal salaries although they both paid themselves the
same amount through payroll, but John was taking a little bit more money out of
the company and you know with Gary’s understanding not anything sort of
expressed, nothing in writing – just kind of an acknowledgment that John needed a little bit more money out. They had not talked I mean they talked sort of in passing and about you know regular business sort of stuff “did you do X”? Did you do Y? What’s
going on?” But they hadn’t had a meaningful conversation about the
business. Hadn’t had a meaningful conversation about their partnership in
close to a year. So that’s the background that’s the setup of what we have going
on. Here let’s talk about what the parties have done right. Many, many lawyers will tell you never be in a 50/50 business partnership. I give
much more nuanced advice and insight around this issue. I think they can work
tremendously well, and I think that 51/49 or you know 90/10 or unequal
partnerships have their own risks. They’re just not the same
that attorneys are worried about of stalemate – that’s really why a lot of
attorneys will tell you to never be in a 50/50. You’re just gonna get deadlocked. Well
you may, but that doesn’t mean they can’t work well. So the parties here know each
other very, very well. They’ve known each other for over 20 years. That’s great if
you’re gonna be in a 50/50 partnership that’s critical. Don’t go into a 50/50
partnership with someone you met at a tech meetup last week/ That’s not a good
idea because you just don’t know if you’re in a position to be able to work
things out. 50/50 partnerships require a lot of
communication and require a lot of give and take on both sides and they require
you be just connected and there’s gotta be a lot of trust and you just really
have to know that whenever there’s a disagreement – because they’ll come up all
the time, right. Should we advertise in that place should we advertise in this
place? Should we say…you know these things come up all the time, so you’ve
got to know you could work those things through. You’ve got to know your partner
work those things through with you. “Yeah I’ll take this when you take that one or
I see your point it’s no big deal.” If you get into business in a 50/50
partnership and every single thing – and I’ve seen these people – every single
thing they disagree with unless it’s their decision, like it just that’s
impossible, right. So you’ve gotta have a lot of
history. It doesn’t necessarily have to be business history, although that would be
good rather than just friendship, but you need a lot of history to even attempt a
50/50 partnership to have any expectation of success. I think it’s a good thing
that he’s in business with a friend. Now, other people might take a different position, right. Don’t mix business and pleasure. I hear that a lot. To me that’s for someone who want to wear two faces in the world, they want to be two
different people. Like what is the problem, right? To me, yes you’re
you’re you’re potentially taking a risk going into business with a friend, but I
think you ought to be able to be relationship oriented, you ought to be
able to preserve the relationship wherever the business goes, and these
things can work really really well in tandem. I think they can work great. You
know, I want to be a business and do business personally with people I like –
people I want to socialize with. That makes being in business I mean it just
makes it much more exciting. It’s more interesting. I don’t believe in not being
in business with family. I believe when you do these things you’re taking on a
heightened level of responsibility around the relationship. It’s incumbent
on you to be sure that you you value and respect the
relationship – that you don’t fall back on well it’s business, sorry you know and
screw the other person over. Like, no there’s a whole different level of
operating in this arena, a level that should be applied to any partnership, but
it’s sort of intensified if you’re in business with family or long time friends but I think it’s a good thing. So that’s what they did well. On the not-so-good
side, there’s zero documentation, and you can argue with someone you’ve been over
20 years you don’t need a partnership agreement you’re never going to sue each
other. We’ll see as we go on in this case study
that that’s not always the case and it’s hard to know always, even if you’ve known the person for 20 years or so, you just really don’t know what could happen here. So I think having a document, having something to enforce one day is helpful. But if you’ve listened to my video about the real reason to have a partnership
agreement, it has nothing to do having something to enforce because that’s
already in lose-lose things have devolved in a terrible territory. You
have a partnership agreement even if you’re in business with a longtime friend,
someone you’ve had a successful exit with, your dad, you have that to set out
expectations and clearly represent what you’re each thinking about things. Because even with someone who you’ll always work it out you’d never sue each
other – again don’t think that lightly because it happens all the time, families
end up broken up over things – but even if that were really true you’re still going
to forget things, misremember. You know, there’s still all that stuff, so having a
record of like “hey here’s what we talked about” that’s just helpful for the
relationship. And then 2) sorry 3) I guess, but these are these are – that was the
number one most important reason – is to be sure that you have a really good
clear understanding of what the other party’s expectations and tensions are,
like how things ought to work to avoid misremembering and disagreements over that sort of stuff 2 is to talk everything through. So the
discipline of putting a partnership agreement on paper, in that process you
do that through a corporate lawyer like myself, we’ll walk through all sorts of
questions and scenarios and situations. So you’re sure you’ve talked it all
through. And then you want to get it on paper if you gotten to that point. Then
the third reason is to is to have something to enforce. So they didn’t have any documentation. They were really siloed in the
division of labor. So John’s doing sales and Gary’s doing operations – you’ve
probably heard me talk about a merger of equals where you’ve got two CEOs and
people are running things together and it’s just like – that’s not a great
situation where people are kind of stepping on each other’s toes. And if
there are employees they don’t know who to report to and and who’s sort of
really in charge on certain issues. So that’s not great, but in a partnership
with only two people no other employees you handle all that you know in your
corner and I’ll handle all that in my corner like in silos like sort of in
vacuum separately – that really has a risk of being problematic. Number one, you
don’t know what the other is doing. I think over time there’s a natural
inclination – we’re human and we sort of spin the narrative to support our, you
know, sort of set of like what helps us sometimes. So it’s really easy to think
to yourself “what’s he doing?” like “I don’t think he’s doing anything over there. You
know he I think I do so much more. Mine, the operations is so much more important
like anyone could call someone and ‘say you want to buy something?’ You know, but like
delivering this?” Right, so and on the other hand you’re hearing someone say
like “anyone can fulfill that order, right, like how do you how do you get someone
to pay?” Right, so again you’re gonna be hopefully with a partner who’s got
complementary skill set. Someone can be responsible for one thing, but I think
you might have a better understanding what the others doing and working
together in some fashion rather than just passing in the night you do X and I
do Y does have a real tremendous
potential for a problem in that. Okay, three: they were taken unequal salaries. So they’re paying themselves the same amount through payroll. They are both
full-time in the business they’ve both been working in it for 10 years and
John’s drawing a little bit more out of the bank account. And my understanding is
he’s drawing it with with you know he’s mentioned it to Gary, but hasn’t really
made it formal, hasn’t been explicit, hasn’t said I don’t believe “are you okay
with this, Gary?” John has a reason for that. You know,
John’s got a bigger family and more obligations. That makes sense, but you
still have to be very, very respectful of your partner who, yeah but they didn’t take
out all those obligations, those are your choices, right. You
the house you live in because you wanted to you have three kids because you wanted to. Those are things you decided to do. Yes, objectively you’ve got more
obligation and maybe you’ve got a partner if things are great who says I
understand that, I’m good with it, you know. But you’ve got to be very
respectful and ask explicitly, not sort of in passing “hey you know I’m gonna
take a little more this month” Or “yeah you know I’m doing that, right?” No, like
“is this okay with you, right?” Gary’s doing the same amount of work, but John may not think so, but like ostensibly they are. They’re doing, they’re both full-time
in the business. It would be natural for Gary to be thinking “what do you mean
like we should make the exact same amount of money.” So if there’s going to
be a disc- some sort of disparity in income it’s okay, but be sure your
partner is really on board with it. And that became an issue in this case as
we’ll explain. It’s commonly an issue and I’ve been on both sides of the table on
this issue, by the way. Both sides have points. Look I’ve got more obligations,
it’s not going to my pocket, I’m not having fun. Every weekend, you don’t have kids, you’re flying around having a great time. Yeah but, you know, those were your
choices those were his choices and in the end, you know, it’s kind of Gary’s
position on this issue is gonna be the stronger one. But you could work it out,
but it’s one where if you’re in John’s shoes and want to take more money you’ve got to be very clear and get really clear permission for it. Maybe even give
something in return, not just like “hey thought he was okay with it.” You’re gonna
walk into a problem. The fourth issue and this is probably the biggest issue is they
haven’t had a conversation, meaningful conversation about the business or the
partnership in a year, and that’s absolutely nuts. Like, you’ve gotta to make
anything work, any partnership work, any even employee-employer relationship
blossom – all this stuff – like requires communication, but particularly a 50/50
business partnership. Are you kidding me? Like you’ve got to be regularly figure
out some – making time to have conversations about the business. He
actually should be making time to have conversations about their lives and the
relationship aside from the business. You’ve heard me talk about syncing up –
getting a beer outside of the office, whatever it is. Like this is really
important stuff that you nurture these relationships or they’re never going to
work. It’s just really important to understand that a 50/50 partnership can
be amazing, but it takes a lot of time. So at this point John contacts me and is very upset. He’s kind of like this has been going on forever. Gary’s
that working very hard. Like I’m just tired of this, I want to get out of the
partnership. I’ve got to fix things. What do I do? How do I how do I sort through
this? So he he’s got a problem. He’s knee-deep in it
he hasn’t headed it off at the outs- at the outset you know a year ago. We’re pretty far along. So you really have three choices – almost always you have three
choices, but John had three choices. One is just walk away from this thing, okay. That’s one. Two is sit down and have the difficult conversation.
I think it’s Tim Ferriss who says we’re measured – the success of a person’s life
will be measured by the number of difficult conversations that they’re
willing to have. And this one isn’t an email by the way. This is a sit-down in a
face-to-face let’s talk about what’s going on here. And that one is done in
the spirit of trying to fix things by the way. The third is to decide it’s
already gone south, but I’m not willing to walk away and to bring someone like
me or a mediator or someone into the picture and to make things more formal
and more sort of step things up and head down the dispute track. So in a scenario
where there isn’t a brewing dispute, the other partner hasn’t lawyered up, bringing
me in or suggesting you go to a mediator is to me sort of the third option. It’s
the least favorable because the partner – if you haven’t had any conversations about
this stuff – yeah your partner might be thinking things aren’t great they’re
probably thinking this isn’t great, I got to get rid of, you know. yeah they’re
probably thinking about getting rid of you – but but to bring an attorney or
something into that picture is to signal “I’m not even willing to work this out.
I’m not willing to pay respect to the relationship. I don’t think you’ll work
it out with me. I’m gonna take it to that step.” And it isn’t always – sometimes this
is something that my client wants to do because, not because they really feel
like they’re not willing to pay the relationship respect, but they don’t
think it’ll work or they’re scared of their partner at this point sometimes. Like they really think like “I don’t think I’m gonna get anywhere unless I have
some help.” Okay I get all that stuff and so sometimes there’s a reason and
that’s the third and least attractive option in my book generally is really
the only one that we’re gonna pursue. So you can do that. Mediation, where you go
to a third party to kind of figure things out, that is something it’s like
sort of a couple’s – I’m married, you know if my wife and I and things are great,
but if they weren’t you know maybe at some point you say let’s go see a
counselor. The idea isn’t that we’re leaving this whole thing it doesn’t have to be
the idea that like we’re gonna fight, but maybe just we have to work it out. So
this third a third option can be in that vein, but I still feel like you run a
huge risk that your partner thinks “why don’t you sit down talk to me about this?”
Right, like you’re walking right into that natural response and that’s not
gonna frame the path towards a resolution very well. So I think that
that’s the third and least attractive option. It may be one that you need in
the future, but one and two – either walk away or sit down and have a real heart-to-heart. Walking away – John wasn’t willing to do that. So and it can be a little bit
complicated when you have nothing down on paper like how you do that.
You’ve got, depending on the entity form – they were in a Texas limited liability
company, so Texas LLC. By default, in a member managd Texas LLC, the members are gonna have duties fiduciary type duties usually to each other, which mean you
can’t just haul off and go start another business on the on the side while you
prepare to just take off on your partner like that’s problematic. You’re
in a partnership and you owe that person more transparency not to compete
with the partnership. So you know if you had all the money in the world, you
could just say “hey I’m out of here I want to go figure out something else to
do in life” and take a year off. Hey that’s that’s good. But he needs to work
to feed his family. I mean I think both these partners did, so he would want to
take time to plan his next step but that’s a little bit problematic – not
always impossible but carries some risk. So, he didn’t want to leave the
business, taking some of the clients was important to him, but you know as I
advise you you’re not you can’t be having those conversations now. I mean it
really there’s a lot of risk to doing that to try and line up these kinds to
take from the business so. So that left us with sitting down to have a
heart-to-heart. So that’s the option that we chose, that’s the option that John
implemented. So that’s the background that’s what the parties did well and
what they didn’t do well and that’s John’s decision going forward. So we’ll
cut it right there and I will see you in part two.

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About the Author: Oren Garnes

3 Comments

  1. What are some of your real-world stories? Whether it's partnership related or not, I'd love to hear about the experiences you've had in business!

  2. Great video, Im very interested in cooperate law and have an assessment day in London for it coming up soon. The case studies are really fascinating

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