Partner Payouts

Business Brain Episode 531 for Casual Friday, March 8 National Proofreading Day 2024 Greetings, folks, and welcome to Business Brain, the show where we take several ideas, we analyze, we dissect, we extract, we impart from them such that we can use them to tune our business brains each and every time we get together in order for each of us to keep living those charmed lives. Sponsors for this episode include gosquaredaway.com contact squared away empowers highly educated military spouses to become your remote executive assistants. We'll talk more in depth about that in a bit. For now, here in Durham, New Hampshire on Casual Friday, I'm Dave Hamilton.

I love Friday, man. It's Shannon Jean from Lafayette, California. How's it going, man?

It goes. Do you take a. I do this. It's not, this isn't a judgment thing, it's a curiosity thing. Are the weekends different for you now that you're an empty nester than the weekdays? Like, do you still mostly compartmentalize your work to the week and give yourself a different change of pace on the weekends?

Mostly, yes, but not all the time. But it really depends on like this week out. When, when this show airs on Friday, I'll be up at our new river house that we're getting ready to, you know, have guests and everything up there. So I will be working on that business and just work right through the weekend. Right, sure. You know, that kind of thing. But if I'm home.

Yeah.

Then I'll say like, oh, it's, it's Saturday. You know what, I'm gonna work in the garage. I'm gonna clean the garage out. I typically am not gonna do that, do that during the week. So. Yeah, I keep kind of a schedule like that.

Same, same. Yeah, yeah, yeah, yeah. I mean, there's some weeks where it, it changes. Like right before we went, we left for Mexico on a Tuesday. And so I basically worked through the weekend before that getting some things ready so that I could be like, give myself a greater chance of detaching while we were in Mexico, you know, that kind of thing. And it's fine.

It's managing your energy and how you, how you apply it.

I. Yeah. So talk to me more about this managing of the energy, would you?

That smooth segue.

Yeah.

So, yeah. But before we get into our main topic today, I wanted to just mention this concept that, and the reason I'm mentioning is because I've. It just happened. I just had the flip switch or the switch flip when, when I'm starting a new business or a new project. I'm putting all of my energy into it. I'm just focused. Like, okay, I'm gonna. I gotta do this. I'm gonna build. I'm gonna build. I'm gonna grind. I'm gonna grind. I've done this a number of times. Like I talked about on the show on Wednesday, you know, I'm starting at zero again with something new. So I've got to put the energy in. And I've been doing that for months and months and months. And there becomes a time, hopefully, when I look back at things that I've been successful at, that that energy switch, it goes in reverse. It flips.

Yeah.

And the project or the business that you're working on or maybe even the people you're working with, they start pushing the energy back to you instead of requiring it that you're the driver all the time, which is not sustainable if you're the one that has to just constantly put the energy in over and over and over and focus and provide the fuel for it. In my experience, if you never start getting that energy back, I think you got to change something. You'd have to change who you're working with. You have to change the project. Maybe you have to change your business. And I really saw it last week as I was grinding, grinding to build this followers, trying to get to a thousand followers. We talked last. Last week about it. Yeah, man, it was a grind. And I have some groups that I'm involved in that are. We're helping each other. And I was like, everybody's hitting this but me. What is the deal? And it's not that I was going to give up because I just don't do that. But yeah, yeah, yeah, I was pushing lots of energy into this, man. Like, nope, I'm going to do it. I'm going to do it. And commenting in, you know, doing lots of stuff to help grow my account. And then Thursday I posted a post.

Yeah.

That was talked about motivation for my family, yada, yada, yada. And it just took off and it got like 90,000 posts or 90,000 views and tons of comments. Very positive. And all kinds of questions and, you know, things like that. It was. Yeah, it was a phenomenal experience.

And the energy came back. It was them giving you the energy back. Yeah, yeah.

All of a sudden I was like. And of course, if you're not into what I'm doing, there's. There's hardly anybody you can talk to because you're like, oh, big deal.

Yeah, it doesn't. Yeah, nobody.

I have a group of people that is involved, that I'm involved with. We're growing together, which is. I highly recommend you do if you're trying to do something like this. Okay. And all of a sudden, I felt the energy shift. When I went back down to our house after working, I told my wife, I said, you know, I can feel it. It's like a tingling in my fingertips.

Yes.

It's like when I sat back down, I didn't want to put my phone down because I kept reading these comments.

I'm like, wow, the dopamine hit.

The dopamine hit. Yeah. But that energy transfer. And it's kept up all weekend long, and it's kept up today, and. And I feel it. I'm like, okay, it's giving it back now, which. Which prompts me to even take more action. Yeah, now. Now I can build a little more. Now I can invest even a little more, because I feel like it's. It's working and it's. It's just a little bit. So I. I would love to hear, you know, if anybody else else feels that way or, you know, if that's a crazy thought, but. Feedbackusbrain show. If you're energized like that and you need that reverse at some point, talk with us.

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If you have the funds to do those distributions, if you have.

Well, I want to come. Let's put a pin in that. It, but, but the idea. Go ahead.

Well, and also it, I think, you know, how do you, what the roles are? I mean, if somebody's coming in as an advisor, investor, whatever, that's one thing versus if you have an operating partner.

Yes.

Like, hey, I'm going to be there every day. So I, you know, they, they were going to get a salary based on their operating of the business.

That's. Yes, that's right. This is a business where everyone's, all of the partners are operating partners. There's no silent partners. But you're right with a, with or silent or non active partners. That's. That's different. And then you do need to kind of come up with things, you know, a way of, of, of, you know, distributing that around. Yeah, but these are all active partners actively working in the business together. And the percentages of ownership that they've come up with are percentages that all of them are comfortable with. And that's really all that matters in terms of, well, ownership percentages. If everybody's on board, then everybody's on board. But he asked me, he said, you know, how do you, how do you do this? I said, well, it depends on how much cash the business is bringing in. But when I'm, when I've started a business, the way I've done it is a percentage of profits after what I always call the war chest. Right. You know, every business needs a cushion for whatever reason. I've always called it the war chest. You know, how much money, what's the minimum amount of money we want to have in the bank so that we don't have to worry about putting money from our pockets back in the business for operating expenses. Right. And that really is like the first milestone of success if the business can pay for itself and, and the way they're doing this business, it kind of automatically pays for itself, which is, which is great, you know. Yep. So their expenses are other than some really minimal things. Their expenses are very much tied to their income. So it's. Think of it as commission, but it's not, you know, but that kind of. So great. No problem. Once you've set whatever that minimum is, great. Then, you know, pick a time period. Monthly is what I've always chosen because it's not so frequent that it's a burden, but it's not infrequent. So every month on, on a specific day, that same day of the month, I've always done it where we go in and we take what we have in the bank, we subtract the previously agreed upon number of the minimum balance in the bank.

The war chest.

The war chest, Yep. And whatever's left over, we distribute according to percentage ownership of the business. Again, as long as everybody's an active partner. If you had a, you know, like. Sure, yeah, that's, that's generally how I've done it with one business I had, we had our minimum number of the war chest and then we had a goal number of the war chest. We knew that we needed X to run the business, but really we wanted about 4 times X as the really comfortable cushion based on some possible future needs of things that we wanted to do. So what we would do is we would take, you know, we set the minimum number. Great. When we came time the next month to do, you know, the first month, rather to do the distribution, we subtracted, you know, we did the math. There was the, the amount that we were going to split and instead of it being 100% split amongst the three partners, it was 95% split amongst the three partners. We added 5% to the war chest. And then after adding 5% to the war chest, we increased the minimum number of the war chest. Right. And we knew what the ceiling was so that we weren't just going to increase it added ad nauseam. But, you know, and then once that was it, then that was the minimum and we increased by 5% of whatever the leftover was the next month. The next month. And it didn't take us very long to get to that war chest number where we were like, oh, now we have everything we need. Now we can go to distributing 100%.

I will tell you from a different perspective.

Yes.

You've never had inventory. Fair. Inventory changes everything because it is the monster that can suck out all your cash.

Yep.

And if you're, you know, depending upon what your, what your margins are, you, you have to spend a certain amount. Now if you're a manufacturer, you have to create a certain amount of product.

Yep.

But if you're a reseller, you have to buy a certain amount of product to resale to make those numbers work.

Okay.

You know, if you, if you're going to make 50% margin, just to keep things very simple, you know, and you want to make $50,000. Well, we got to buy a hundred thousand dollars worth of product and sell it every month, right?

Yes.

Just gross really easy.

So wouldn't you buy $25,000 worth of product?

Yeah, yeah.

Okay. I was just doing the math.

If you're making, if you want to.

Make 50, if you want To Yes.

Yes.

Yeah. Okay.

Yeah. But whatever the numbers. Are you sure? I'm. Math in public always scares me. Yeah, I got you. Yeah, but you know, at the end, it's never as clean as you want it to be. It's not like, oh, well, we just drive that number down to zero and at the end of the month we can see it never is. That way your inventory creeps and yeah, maybe you sell 83% of it last month or maybe you only sold 64% of it. So then you're stuck with, okay, we've got this product that's taken up cash. Your inventory can creep up and up and up and up, and it impacts your, your available cash. So then what do you do? So in those cases, I have just decided, okay, what, what, what's your salary requirement? You know, at the end of the year, we're going to take out the same thing. What's your requirement? You know, how do we deal with this? And when I was young, I didn't have much of a requirement because I was, I was young. It didn't have, you know, expenses like you, you build up over time.

Yes.

And so, you know, you have your partners go, okay, guys, what do you want to take? Okay, we need a couple grand a month, whatever it is, to get started or in the beginning, we can't take anything. Okay. We got to start building up some cash. But then, you know, a year when.

You hit your war chest.

Yep, you got it a year into it. Okay, I want to take this. Like Dave, when you and I started deals on the web, the goal was to generate first get to generate enough money to hire someone. That was our number one goal so that we wouldn't have to do the day to day work. And we eventually did that. But at Mac Rescue, when I restarted that, my partner and I, well, we had young families. We needed to take a check, you know, I needed to have it. So we were employees of the corporation and we just got a salary. We both agreed on what our salary was going to be.

Yep.

And, and it wasn't unless you were broke, didn't hit at the end of the month, like, wow. And, and don't get me wrong, there were times where you could not keep that check. You couldn't, you couldn't get paid because you had to make payroll. So there's definitely different ways to do it. Yep. I, you know, the number one thing for me is to, it would be to keep it lean as possible.

Yes.

And live as frugally. Frugally. Is that a Word frugal. Be as frugally as you. As you can.

Yeah.

And then when times are good, you can take out more.

Yeah.

And you have a great quarter, a great month, a great year, because you're also going to want to reward your employees and maybe some smoking hot deal.

Comes along and you want to take.

Advantage of it and you need a million bucks and where are you going to get it? And maybe you can't borrow from the bank, so you need to have access to capital so you can go deep and hit hard on it. So it gets very.

No, it gets over. It's easier when you're starting for sure. Yeah. Once with, even with the scenario I described that generally has lasted maybe two years, maybe like, but you know, you know, somewhere between 6 and 24 months. And then at that point we, we even in the businesses that I described, where we had the multi tiered thing and all that, I think it was about the one year mark, maybe the 18 month mark. We were like, all right, great businesses. Now we can predict what this business is doing. We set our, we set a salary for ourselves, which if you have an llc, is a guaranteed payment because you're not supposed to pay yourself as an employee. But the IRS doesn't really care from, in my experience. Talk to your accountant. And, and, and then we, we just paid ourselves the salary. And then once a quarter we would evaluate our war chest and decide do we do a, do we have any, anything that, you know, we want to spend this on? Like that is what I'll call controlled growth or chosen growth, which is different from the, hey, a smoking hot deal appeared. We need to do this today. You know, like that's, that's different. You still have control over it, but it's, it's not planned growth. Right. That's just like it fell into our lap. Do we want to take advantage of this or not? And we would, you know, decide. All right. Yep. Let's leave X in the bank. Great. That leaves Y as leftover. So let's distribute that like we used to, you know, according to percentages and we're done. And it worked out fine. Yeah.

Yeah. And I would say that you either need to have a strong operating agreement that you've got this built into, or if, if you're not at the point yet, you're just starting out or in the planning stages. Use the working agreement.

Yes.

That we've talked on the show. You can email feedback, businessbrain show, and we'll get you an updated copy of that. I was just Working on it the other day. And you know, that working agreement is great because it's, it's also an exercise in working together with these partners. Yeah. Because believe me, there are. I've had potential partners that just. We could not get this agreement figured out. And I would say, hey, you know what? That's kind of a harbinger of the. The way things might be. So let's not do this deal.

Let's just pull the plug on it before anybody gets too deep. Yep.

Yeah. Yeah. And the way I like to do it is to give them a blank one. And you take a blank one. And based on the way you've discussed everything, hey, it's going to be great. I mean, you're in the beginning, everything. Sunshine and rainbows. But in the, the working agreements, like what happens when things go wrong, how to. And, and what is the distribution of profit?

Funds.

Yes, funds. All that stuff is in that working agreement that you can work through. It's not as formal as like an operating agreement.

No. But it can become the basis for your operating agreement.

It really does become the basis for that. But it's a great exercise and I would highly recommend it because I think you can solve a lot of these problems. I agree. The key is, if you haven't picked it up, it's flexibility. It's talking to someone because someone may say, you know what? I'm at this stage and I don't need that monthly revenue, so I'll bank it. But I know you're growing and you need this and whatever you've got a young family or you have this. Let's you do it.

Well, I want to. That's the pin that we put in. And I want to leave that pin in until the next episode because.

Great.

I think this is. There are some indicators, some litmus tests to run and some very dangerous scenarios that you might be able to avoid by really digging in with your partners to be and finding out whether they are actually your partners to be or not. So we will discuss that in the next episode. For now. Yeah. This is the way business brain rolls.

Yeah. And we'd love to hear how you guys do it. How do you handle distribution of. Of profits or salaries with your partners, all that stuff. Feedbackusbrain show or let us know if you want to copy the working agreement template. Dave and I have, you know, played around with that for years and love to share with you.

Absolutely. Feedback at BusinessBrain show. Just like he said. Make sure you check out go squared away.com contact and do me a favor. Would you please keep living that charmed life? We'll see you next week.