Partnership Advice: The Good, the Bad, and the Ugly, with Matthew Paulson

You're listening to Freedom Fast lane, presented by capitalism.com this is the show about building businesses and investing in profits so that you can live life on your terms.

As many of us know, choosing a business partner is one of the most important decisions you can make in your business venture. Choosing the wrong partner can completely destroy your chances of having a profitable, successful business, but choosing the right business partner can open you up to possibilities that you would never have on your own.

In this episode, entrepreneur, investor and author Matthew Paulson will be teaching us the qualities he looks for in the business partner and how you can spot them yourself. This episode is packed full of useful information, so enjoy. Matthew Paulson on Freedom Fast Lane Podcast.

Hey fastlaners. Matthew Paulson here. Ryan asks me to take over this episode of the Freedom Fast Lane Podcast to talk about business partnerships. Now I know it's not the most exciting topic in the world, but it is one of the areas of business where entrepreneurs just make a ton of mistakes. Now everyone that is an entrepreneur that I know has been in a business partnership that either ended badly or was just a total waste of time for everyone involved. If you haven't been in a bad partnership personally, I bet you do know someone who has. So that is what we are going to talk talk about today. If you don't know me, I run a financial media company called Marketbeat.com we publish a daily investment newsletter to more than 445,000 subscribers and we do just under 3 million a year in annual revenue. I was also a speaker at Freedom Fastlane Live last December and I hosted another episode, Freedom Fastlane in January, about how entrepreneurs should invest their money. So definitely check that episode out as well. I also host a weekly video podcast called Startup Q and A where I answer business questions from entrepreneurs. So if you want to check that out, that is startup Q&A co. In my main business, MarketBeat, I don't actually have any partners. I own 100% of that business. But I do have partners in my three other companies though. GogoPhoto Contest, US Golf TV and Falls Angel Fund all have multiple partners. GogoPhoto Contest and US Golf TV I have two other partners in those businesses. Falls Angel Fund is actually a partnership of 31 accredited investors where we all get together and we make angel deal angel investment deals together. And I happened to manage that fund. They made me the chairman for whatever reason. So obviously it's very important to have very good structures in place when you're in a business with 30 other people that have the same Voting rights that you do. Having.

A good operating agreement and good relationships with your partners is very important when you have that many partners. But I guess for the purposes of this episode, I want to take a step back and discuss what we're really talking about when we talk about business partnerships. I'm not talking about joint ventures or service agreements where you're just working together with somebody on some small project. I am talking about a true business partnership, an agreement where you and somebody else own significant piece of equity in a company that you're all working on together to make successful. It's you and other owners working together, same business. Maybe you have, say, the same equity or similar equity, or somebody owns 20%, somebody owns 80%, but you all own a piece of a company. And that is really what we're talking about today. Obviously, there are other types of business relationships that you have, but that is a conversation for another day. I really want to dive into this episode and get going by sharing the story of my friend. I'm going to change his name. We'll call him Don for the purposes of this episode, but he runs a local construction company where he and his team remodel bathrooms and kitchens. That's really all they do. They do a good job at it. And Don, he's a great sales guy. He's booked out for months at a time. He could easily be doing seven figures in billing each year if he could just figure out how to find the right operational team to execute on his sales. So he asked me maybe a couple weeks ago, now that I'd have coffee with him, to help him over some different partnership opportunities that he had for his business. So I went ahead and I met with Don. The biggest problem that he was running into at the time was really just operations. Great at sales, having a hard time managing projects, just staying organized, keeping track of all the moving pieces. He just wasn't good at that. He was a sales guy.

Really. He needed a CEO or a project manager or a lead project manager or something like that for his business.

He told me that he had two potential business partnership opportunities that might be a solution to this problem. The first was Business Growth Acceleration Company that approached him to be a partner in his company. That team consisted of a marketer, an attorney, and somebody with some construction experience. So naturally, you might think that's a good fit. They wanted to take a stake in his company and a royalty on sales for helping out with paperwork, doing contracts, and having contacts in the construction industry doing some project management work. Don said this idea was interesting to him, but he just had it with you. They just had a really hard time communicating what they would actually do for him. And then the other partnership opportunity was a local painting company that wanted to get into the construction business. They had a nice sales machine, and, you know, they hire a bunch of college kids each summer to work on their painting crews. And Don thought, you know, those skills could help get his business organized and manage all of the projects he's selling. Because if you can hire three or four hundred college kids and get them all to show up at a house and paint, you know, you can probably manage some construction guys and manage those projects as well. I asked Don a few piercing questions about these partnerships, and by the end of the conversation, he realized that probably neither of these are the right thing to pursue for him. But I think there are some really good lessons that we can take based on the questions that I asked him. The first thing I asked him was, do, you know, like, and trust either of these groups of people enough to marry them or at least let them move into your house for the next decade?

You really have to know people your business partners with just about as well as the person you're going to marry. And if you don't know them that well enough, you should probably get to know them better before you become business partners with them. A business partnership really is like a marriage. When you're business partners with someone, you spend just a ton of time working with them, Working on a business, going to meetings.

Going to conferences, you're going to see a lot of that person, and you just really have to be around them for a long period of time without getting sick of them. And that is not a hurdle that every potential business partner can get across. When you're in business with somebody, you're going to see their good parts, you're going to see their bad parts, and frankly, you'll just see everything in between. So any personality flaws that they have, they are going to come out in how they deal with you and how they manage their aspect of the business. So you really kind of need to know everything about somebody's character and their work ethic and what skills they bring to the table before you go into business with them. When you're working together, you're sharing money, you're moving toward a common goal. You just don't trust your money to everybody. So you really do have to trust your business partners and trust that they have the same vision that you do and are moving your company towards that common vision. I asked Don this question he said, I just don't know either of these parties that well enough.

You know, they're interesting, but, you know, I don't know them as well as I know my wife or close to as well as my wife. So, you know, for me, I kind of told them, you know, if I were in your situation, that would be enough for me to not move forward with either of these potential opportunities, these partnerships, until you really got to know these people. Because, you know, it's, you know, a business partnership is pretty much the same time commitment as a marriage and see a ton of these people, you're going to work with them forever. So you really do have to know, like and trust some of the people that you're going to work with, really that well. I mean, it's a really high bar to cross. But.

If you're only doing business with people that you really know and trust, you're going to avoid a lot of the common pitfalls that happen when you're in a bad business partnership. You can prevent a lot of those things by only partnering with people that you really do know, like and trust. The second question that I asked Don about these potential partnership opportunities was what kind of value do either of these partnerships bring to the table that you just can't get by hiring an employee? If you're going to have somebody as an equity partner in your business, you really need. They need to really be bringing something to the table that's just not something you can easily hire. So maybe it's a marketing strategy. Maybe they're great project manager or they just have skills that you don't see every day in an employee.

So before I asked Don this question, I kind of already knew the answer. He didn't really need a partnership. He needed a project manager that he paid 50 grand a year to to manage his jobs. Now, certainly, 50 grand is. Or whatever it was. I don't know what people in the construction industry make. It's not a small chunk of change, but you know, it is going to be a heck of a lot cheaper than whatever it is giving somebody equity in your business.

When you pay somebody salary, you're giving them a set amount of dollars per year. But when you hand somebody equity in your business, you're effectively promising them a share of the profit for really as long as your business is in existence, not as long as they work for you, but as long as you are in business, maybe you give somebody 10% of your equity this year and then they quit on you two years from now. If you're in business, 25 years from now, you're still paying them 10% of the profit each year. And gosh darn, I bet you wish you had spent that 50 grand instead of giving them equity, because they are going to get their share of the profit for literally forever, as long as your business continues to exist. Unless you buy them out, which would be also more expensive than that $50,000 or whatever the salary is. I guess the point is paying for stuff with equity, paying for services and expertise with equity. It's really expensive over the long term. You just have to gauge whether or not it's worth having a partner that can really bring something that an employee can't bring, or if the skills are more of a commodity and you should just hire an employee to provide those skills and that work and that expertise.

I guess as a successful entrepreneur, there are going to be a ton of people that want to partner with you and JV with you, because people just love to attach themselves to success. So there's not going to be a shortage of people that want to be business partners with you.

There are plenty of people that are going to want to attach themselves to you as a partner just because you're successful. Sometimes this works out well, but it does end up being a waste of time just as often. So I guess the point is you should never just get into a business partnership because somebody approaches you. You wouldn't marry the first person that proposes you right off the street. So you really need to think about business partnerships in the same way. And just because you're getting approached doesn't mean it's something you should pursue. You should really only consider doing a business partnership when you couldn't see yourself starting a business without that person you want to partner with, or because they offer a very specific expertise and talent that you just cannot get by hiring an employee. Go. GoPhoto contest is a great example of a business where I legitimately needed partners. And so GoGoPhoto contest is a piece of fundraising software for animal welfare groups. The way it works is that animal shelters can use our SaaS platform to host photo contests to raise money. So people will submit pictures of their cats, dogs, or whatever animal, and then they try to get their friends to vote for them in a contest. And then it costs like a dollar a vote. And then at the end of the contest, whoever is able to amass the most votes for their entry gets some kind of prize at the animal shelter raises. So, you know, every animal shelter can raise 5 to 10 grand doing these things, you know, we take maybe 8 or 9% of that cut, and we've built kind of a nice little business there. I love the business, but I literally don't know anything about the animal welfare industry. My experience with animals is we had cats when I was growing up. I don't have a pet now. I don't know anybody at a humane society.

I don't know. I don't really understand how animal welfare people think. I don't know how to talk to those people. I don't know what their problems are. I just don't think like they do. But my partners in the business, Jason and Stevie Shea, though, they totally get the space. They've got five dogs in our house. Jason sits on the board of local humane society. They had been doing this business model locally with the local humane society. They just live and breathe that industry, and they had expertise in the business that I just didn't have. Certainly, I bring a lot to the table with marketing and finance and the stuff that I'm really good at, and some of the software development stuff I did initially. But I could have not started that business without them, and I wouldn't have even tried because they just understand the animal welfare industry so much better than I do, and they like working with people in that industry, and they just bring stuff to the table that is necessary for that business to succeed. I literally could have never done it myself. So in that company, Jason, Stevie, and I, we each own a third of the business. It is just a great little company. And our unique combination of skills together has made something that neither of us could have, frankly, made separately.

So, I guess, you know, moving on. The third question that I asked Don was, so of these opportunities that have presented themselves to you, would you consider either of them to be an opportunity where you're saying, hell, yes, I would do this. Something I couldn't possibly not do. Something that you're super excited about, you really want to do, you just can't wait to move forward. Is that how you feel about either of these partnerships?

And the answer to that was probably no for him.

But given the volume of requests that a successful entrepreneur is going to get for partnerships, you really can only say yes to a handful of the best opportunities. For me, any business partnership that I'm looking at really has to be a heck, yes, hell, yes opportunity. If I'm looking at a partnership, I really have to have no reservations about it. I would be really bummed out if I didn't do it. I just literally could not see myself not doing it that is kind of the bar that you have to hit for a business partnership with me. The idea of hell yes or no or heck yes or no, that came from Derek Sivers. He was a CD baby guy. And I just think that's a great filter to put on any kind of opportunity. We live in a world where there's so much opportunity and things you could do, you could go back to school, you could go take a different job, you could meet your friends for drinks tonight, or you could volunteer doing something, anything in life. You just have more. You probably have more opportunities than you do time. So really you only can do the things that you are absolutely fired up about and that you just can't not do. I actually get about two or three requests every week to be partners with somebody or invest in their company or speak at their event, and it's impossible to say yes to them. You know, I'd love to invest in 1,000 companies. I have 168 hours in a week like everybody else. I've got two children under five. I need to sleep at night. I really only have so much time to work on businesses, so I have to say no to almost everything so that I have time for my kids, time for my businesses, and just the opportunities that I care the most about. You know, I've even had to turn Ryan down a couple of times because, you know, I love Ryan, he's a great guy, but they just weren't quite, you know, hell yes opportunities.

So really, that is kind of the bar that you have to hit with a business partnership. You really have to be so excited about it, and your partner does too. You both have to be really excited about it, willing to work really hard together for a long period of time and just have it be that that's the one thing that you really want to do and you really want to do it with the other person. It just really does have to be that kind of heck yes, let's do this no reservations opportunity.

Finally, I say to my buddy, don't. He didn't seem too excited about any of these opportunities. I think before we sat down for coffee, you kind of already knew that neither of these opportunities were a good fit for you, so why are you even considering them? Was my question to him. And his answer that he thought maybe some magic would happen where his company would be more successful if he just had some partners that were working on it with him. In other words, he thought a partnership might be a magic bullet to fix business problems. Of course, it doesn't take a Genius to realize that there are no magic bullets or shortcuts in business to fix all of your company's problems. Being an entrepreneur is a multi year slog. It's a lot of work. And adding somebody else to the table is probably going to, as a partner is probably actually going to create more problems than it fixes in the short term.

So don't think of a partnership as a way to fix all of your business problems. It will actually probably introduce more problems in the short term because you have a whole other person to deal with that has their own opinions and ideas and skills that wants to work on the business. So never think that just signing up for a partnership is going to be a magic bullet in your business. Now, before we kind of wrap up, I want to talk a little bit about partnership agreements. You really do need to have a partnership agreement in every business that you have partners in. I'm not talking about like a 50 page document written by attorneys that covers every possibility of everything that could ever go wrong in a business. Frankly, if you need a 50 page legal document to be partners in a business with somebody, you probably don't know them well enough and trust them enough to be partners with them. What I am talking about really is just a two or three page document that you will sign that outlines some of the basics about the business just to make sure that everyone is on the same page.

So in my partnerships documents, I include maybe about 10 things that I really think should be in these things. So first, you know, in your partnership agreement it should list out the responsibilities of everybody that owns part of the business and what they're responsible for. You know, who is going to be in charge of sales, who's in charge of operations, who's doing the bookkeeping, who is in charge of legal stuff.

What are the roles? How are they equal? How much time is somebody supposed to spend in a business every week? You should also include what happens if somebody wants to get out or if somebody dies? What happens if somebody gets hit by a bus?

Does the person's spouse get to vote in a business?

Those are questions that do come up. Should write down who owns what percentage of the business. You should write how and when profits will be distributed. Somebody might want to take profits monthly and somebody might also want to just leave the money in the business to grow it. So you got to figure that out ahead of time. You should write down whether or not anybody is taking a salary, what that will be and how that will change over time. If anybody's putting money into the company. You should write that down. You should talk about what rights people have in a business.

You should talk about where the buck stops. So if there's a disagreement, how is that dispute going to be settled or who gets to overrule the other person. And finally, you should write whether or not there is going to be a non compete to prevent somebody from quitting and then going starting a competing business.

So those are kind of the 10 things that I like to put in a partnership agreement. And kind of the reason that I like to have all this stuff on paper is because it clearly outlines just what everyone's rights and responsibilities are ahead of time. And then there just can't be any real disagreement about ownership issues because it is all on paper, it's all signed by everybody, and it's just there plain for everyone to see. When you have kind of a verbal agreement, sometimes people's memories are fuzzy and you might remember a conversation differently than the way they remembered it. So just having it on paper is kind of a nice way to make sure there's no confusion about what you had all agreed to. It really should only take you to put a couple of hours to put one of these things together. If you've kind of already verbally agreed to the major components of your partnership, there are plenty of templates online for this kind of thing that can get you started. But just having these things on paper, it really will ensure that everyone is exactly on the same page and knows what their rights are and what their responsibilities are. So let's recap a little bit. First, you should really only partner with people that you know like and trust enough to marry or let them live in your house for 10 years. You're going to see people that you're in business with a lot. You're going to work with them a lot, you're going to see a lot of them, you're sharing money with them, you're moving toward a common mission with them. So there should be a really high bar in your level of knowledge of the person, whether you like them and whether you trust them. Before you go into business with somebody, finally make sure that you only do partnership deals with somebody who brings something to the table that you just can't get by hiring employee hiring an employee, somebody that you're partners with really has to be doing as much work as you are in a business and bring something to the table in terms of skills or expertise or money that you just don't have.

You're not going to give equity to your customer service person. You can hire that job out. So make sure that they really are bringing your partners, really are bringing something to the table. Finally, you know, make sure any partnership opportunity that you're considering is kind of a heck yes opportunity. And it's just something that, you know, you couldn't see yourself doing or couldn't see yourself not doing. It's just something that you really feel like you have to do with something you're super excited about, something you want to do. And then finally, make sure to have a good partnership agreement in place with all the partners of your business so that there is no confusion down the line about who owns what or how profit is going to get sent out or how to settle a dispute. It's always good to have that in writing up front. These kind of four issues are really the root causes of most partnership problems. Things tend to go wrong when you're in a partnership, when you don't know the person well enough or the person isn't as excited as you are about the partnership, or if there's just not a good partnership agreement in place. If you can do these four kind of things right, only going to business with people you know like and trust, have something where somebody's really bringing something to the table. It's a hell yes opportunity and a good partnership agreement. If you do those four things kind of right, you really will avoid the vast majority of problems that come up in business partnerships. So I think that's pretty much it for this episode. So if you enjoyed it and you like some of the ways that I think about business, go on itunes. I have a show called Startup Q and A. On that show I answer people's business questions that people submit over email and Facebook, so definitely check that out. You can also find the latest episodes at Startup Q and A. Co if you want to email me or get in touch, I'm really not that hard to find on the Internet. You can email me@mattattpaulson.com if you feel so inclined. And with that, I will turn it back over to Ryan.

Hey everybody.

Hope you enjoyed the show. As you can probably tell, this is not Ryan. My name is Tyler Atwell and I was the host of today's episode. If you found value in the information shared or want to start a business and invest the profits, go to www.freedomfastlane.com and subscribe for our email list and we'll send you every episode as soon as it's published. If you have any friends who you think would find this information valuable, share it with them. As well. Thanks again, everybody. We'll catch you next time on Freedom Fast Lane Podcast.