| If having a bad partner hasn't happened to you | | | | Agreement, either Partner A or Partner B must |
| yet, the chances are very good it will in the | | | | buy out or be bought out by the other partner. |
| future. The problem is you take on a business | | | | At the toss of a coin by an unbiased third party, |
| partner, often a former friend, with the intent of | | | | the winner of this coin toss must make an offer |
| his/her bringing something to the partnership that | | | | to the opposite partner to buy out his interest. If |
| you and he believe will be greater than the sum | | | | he fails to make an offer within two business |
| of its parts. If this sounds altruistic, it is, but that's | | | | days, the other partner can make an offer that |
| what everyone wants to believe - the partnership | | | | the former partner must accept. However, the |
| will succeed because of the partners' individual | | | | real power of this offer is this - the first part of |
| strengths. | | | | this procedure makes certain that the first |
| Sometimes the partnership goes bad because one | | | | partner has to make an offer or lose it to a |
| partner doesn't pull his weight or maybe one | | | | ridiculous offer to the second partner. |
| partner feels his contribution is much greater than | | | | So, let's assume the first partner makes a |
| the other's. This may sound like a marriage and | | | | ridiculous offer of $10,000 for assets worth |
| that's because it is similar in many ways including | | | | $1,000,000. He may have done this because of |
| the nasty parts of a divorce. Divorce impacts | | | | the "win the flip" rule or just because he wants to |
| families and so does the ending of partnerships. | | | | get rid of the other partner and thinks he can |
| Divorce has specific laws that can be enforced to | | | | take advantage of the situation. Let's call him |
| protect the partners' rights but partnerships are | | | | Partner A for this example. Now Partner B has |
| governed by contractual law. | | | | two options, first to accept the offer and sell out |
| So, if we make a contract before the partnership | | | | his entire interest for $10,000 or REFUSE this |
| starts, like a pre-nuptial agreement, it should be | | | | offer in writing and Partner A must accept |
| clear to the partners regarding what happens if | | | | $10,000 for his interest. Usually, the "winning" |
| they can't agree and want to break-up. | | | | partner gets 30 days to finance the purchase. If |
| Unfortunately, like most marriages, the parties | | | | he is unable to finance the purchase in the |
| involved are "in love" initially or they wouldn't have | | | | required time, the opposing partner gets the |
| gotten together, and don't think about what | | | | assets for his original bid that is now paid to the |
| happens if the partners can't agree in the future. | | | | "loosing" partner. |
| I could talk forever about who should be | | | | Here are the options in an abbreviated form for |
| delegated to do what, who should have what | | | | too low of an initial offer: |
| responsibilities, and very importantly, who puts in | | | | Partner A offers $10,000. Partner B accepts this |
| money and when. All of these are very important | | | | offer and is no longer a Partner. |
| to the partnership but the most critical element to | | | | Partner A offers $10,000. Partner B rejects this |
| ANY partnership is, "How do we get out if we | | | | offer and must pay Partner A $10,000 for his |
| don't want the other partner to stay?" | | | | assets of the partnership. Partner A is no longer a |
| As with a divorce, a partnership breakup is usually | | | | partner. |
| very expensive for one or both parties. For | | | | Partner B can't get funding within the appropriate |
| example, let's assume you are partnering with | | | | time period to buy Partner A so Partner A pays |
| someone to rehab a property and you agree to | | | | Partner B $10,000 and Partner B is no longer a |
| each put in equal money as needed. However, the | | | | partner. |
| project runs over-budget or takes longer than | | | | In another scenario for too high an initial offer: |
| expected and the other partner says, "No more | | | | Partner A offers $1,000,000. Partner B accepts |
| money". You are now faced with continuing to | | | | this offer and is no longer a Partner. |
| fund it yourself with the problem that the | | | | Partner B rejects this offer and counter-offers |
| partnership agreement didn't account for this issue | | | | $900,000. This is not part of the contractual |
| and the "other" partner is getting free equity. | | | | terms, so Partner B must accept Partner A's |
| What do you do now? Talking it out with your | | | | offer and he is no longer a Partner. |
| partner only brings, "I'm not putting another cent | | | | If Partner A can't get the funding to buy Partner |
| in the deal!" and he is still entitled to half the | | | | B, Partner B can reoffer Partner A another initial |
| profits when it is sold. Your risk in the project | | | | offer (usually much lower) that Partner A must |
| gets larger while his equity gets bigger at the | | | | accept or pay Partner B for his portion of the |
| same time. | | | | partnership. |
| Fighting about the problems is only going to cost | | | | If neither party can get financing to purchase the |
| both sides attorneys' fees and if one partner can't | | | | other's interest, the entire partnership must be |
| afford the expense of his own attorney, he can't | | | | sold to the best bidder at a public auction or other |
| fight the partner who controls the checkbook. | | | | agreeable method. Usually there are stipulations |
| This is a common problem with an intellectual or | | | | for no more than two offers that can't be funded |
| physical property where one person produces a | | | | before the offer is determined by an impartial |
| phenomenal product and the second partner has | | | | panel of accountants or attorneys for both |
| the capital to fund the deal - often called "venture | | | | parties. If neither party can agree to anything, the |
| capital". The partnership gets the rights to the | | | | National Arbitrator Association can be called upon |
| property and the stronger partner forces out the | | | | for a binding price to either partner and a third |
| one who created the real value (written material | | | | party hired to liquidate the partnership's assets |
| or product) in the partnership - stronger partner | | | | and divide the remaining funds to all the partners. |
| (money) forces out weaker partner (brain power). | | | | This method of making an offer that must be |
| It is just as common in rehabbing where one | | | | accepted by the opposite party, assures that |
| partner quits delivering labor or money and the | | | | either partner making an offer will have to make |
| other partner can't move forward. | | | | a fair and reasonable offer to the opposing |
| I've learned the lesson the hard way of having a | | | | partner or lose his ownership to his own low offer |
| bad partner and not being able to do anything | | | | that he thought would steal the assets from his |
| about it - or so I thought at the time. Now I have | | | | Partner! In corporate lingo this is called a |
| a simple solution that I have seen used by two | | | | "shoot-out clause" and any attorney worth his salt |
| billionaire investors that I have known - one of | | | | can easily add it to any contract or partnership |
| whom I went into partnership with and did very | | | | agreement. |
| well because of the following solution. Before I | | | | While it may sound complicated, it is actually |
| detail how it works, this solution can be used with | | | | simplistic when all is said and done. It also insures |
| any partnership and any number of partners and | | | | that the partners will get an equitable payment |
| for any business! | | | | for their portion if the partnership is no longer |
| For brevity, let's assume that there are only two | | | | viable and must be sold or liquidated. And trust |
| partners - partner "A" and partner "B". Something | | | | me, the more partnerships you do, the more you |
| goes horribly wrong and they can't get along and | | | | will need a clause covering the break-up or sale of |
| the partnership's product(s) are at risk and the | | | | the partner's interests. Good luck with your |
| very life of the partnership. Something has to be | | | | partnership. |
| done, and under the terms of the Partnership | | | | |