10: Designing a Partnership

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Hello everyone. This is your fearless host, Emmett Scott. And I'm so glad to have you here on another episode of DSO Secrets. I was just meeting with a business owner in another part of the medical industry and we were talking about partnerships. This is a hot topic as a dso, as an associate, as a practice owner. How do you do partnerships? Right now? This business owner was really nervous to partner with his new up and coming doctor because he felt some fear around sharing in the ownership and control around what he had built. And I get that. I thought his questions were valid, but I also thought they were worth sharing with all of you and kind of some of the pieces, if you will, of our interactions so that you could have some insights around questions you might have around partnerships. Now I have to give the disclaimer that I'm not an attorney or CPA and this is not legal or tax advice. So that's there. I do just happen to be an experienced entrepreneur who's probably done this more than most people. But let's dig into some of the questions. I should say his focus was primarily around the fact that this doctor wanted to partner at 5050 equity. Now if you would have asked me many years ago, how do I feel about 5050 partnerships, I would say they're complete disasters. I've seen them a thousand times. No one can truly make any decisions. They're not in control. And so I don't like them. I've. I've learned a lot since that time. So I want to dig into kind of what a good 5050 partnership can be and what it means and what you do have to watch for. But you have a lot more levers and buttons to pull than I think most people realize. So the first question is, why does everybody want to be 5050 partners? And I've just come to the conclusion that primarily in small and medium sized businesses, it's an emotional piece. I mean, it's not like the Guy on the other side of the table sat down and did a bunch of math calculations and figured out that 49% didn't get him to his financial goals. And so he really had to be 50. And magically, the whole universe, everyone gets to their financial goals at 50% of an equity hold. That's not what's going on here. I think it's emotional in the fact that people want to feel that they are a partner. And of course, 5050 feels like equal partners, that we're both bringing everything we can to the table and that we're both striving to make this project or this business model a success. So I have to tell you, I now try to, whenever I can be 5050 partners with people on business models. And if I can, I'll even go lower than that on my side because I know of the emotional impact it has for them and how helpful it is later on as they're saying, are we truly aligned? Oh yeah, we're 5050 partners. So there's some real concerns and being, you know, quote 5050 partners. But I'll just tell you up front that whenever possible, I try to go where the horse is already running. And typically if someone's coming to you saying, I want to partner with you, they're going to say, I kind of imagined it being 5050 partners. Now if you're a publicly traded company, then of course people don't say, you know, the only way I'll buy some Apple stock is if we can be 5050 partners. But that's a totally different emotional transaction, I think, than small and medium sized business environments. So let's kind of talk about the first emotion that comes up is if I give them 50% of what I've already built. That just doesn't seem fair. I'm the one that put all the blood, sweat and tears into this and frankly the financial piece to get the business to this place. So now you're saying, go ahead and give them 50% of that. And my answer is absolutely not. I think there's two ways to carve out everything that's been built up before that individual comes in and says, I want to be 5050 partners with you. Number one, you can decide a valuation point where you would feel thrilled if someone wanted to pay you X amount of dollars to be that kind of equal partner with you. And so, you know, someone says, well, I really don't want to sell half of my business. There is a number that you could come up with that you said, well, yeah, if they gave Me X amount of dollars, then yes, I'd feel comfortable letting them participate and everything in the business up to this point. Now, typically in a small and medium sized business environment, they're not going to have a lot of capital or access to capital, so they're not going to be able to buy in. But I think having that conversation, if necessary, is helpful in saying, well, there's a real value to what's already been built. If you want to buy in, it would be this much. The second option, which I think most people are more comfortable with on both sides of the table, is to say we're going to start sharing in everything from this point forward. So you determine how much of the business has already been built up, what the natural growth rate of that is going to be, and you almost put it in its own bucket. You set it aside and say that is not going to be part of of the 5050 partnership. Now the good news for them is they don't have to come up with a bunch of money in order to partner with you. You're really starting from scratch together from this point forward. And all the income stream and all the assets of everything up to this point, you retain, if you've built that and you may have other partners with that, et cetera. So that's the number one thing that came up, was, wait, how am I just going to hand over 50% on everything that I built? And the answer is you don't. You carve that off separately. And there's a lot of legal and language components that can allow you to do that with assets. But I want to put that thought in your mind is, oh wait, if somebody was starting today with me and I retained everything previously from what I had done up to this point, then yeah, I'm comfortable with them helping me grow at a bigger acceleration rate, a bigger number, a bigger business than I would have done on my own at some other kind of growth rate. So I hope that makes sense. Take those assets, set them aside and allow you to then grow the rest of it on your own. Now, in a dental environment, an easy way to do that is to be partnering maybe at the practice level rather than partnering all the way up at the DSO level. And by partnering, or what we would call maybe a JV dso where it's the DSO just over that practice or some series of practices now they're participating in something that they can absolutely bring value to, but you're not trying to mess with a bunch of shareholders at the full DSO level. So that'd be an application to dental that I think works really well. And that kind of leads into to the second part of that is. But in a 5050 partnership, who's in control? And I think that that mindset, at least the reason I had it and the reason I said never do 5050 because you don't ever have, who's clearly the leader is because I didn't understand the intricacies and the capabilities of the second part of the partnership, which is the operating agreement, or maybe I should say the primary part of the, of the partnership. So let's say that you have an LLC entity, there's going to be some kind of operating agreement that says, how does this partnership really work? And it's going to say in there, who gets to decide whether we bring debt into the company or not? Who gets to decide whether the company gets bankrupt, decides that we need to bankrupt the company or not, or close down the company or not. Who gets to decide whether we sell the company or not? Who gets to decide whatever actually you want to put in there, that's in the legal, you know, limits of things. You can layer in to that operating agreement. So, yes, we can be 50, 50 partners, but there are clear things that somebody needs to be able to make a decision around that can't be based on committee, so to speak. And so those things, no matter if I'm a 1% owner or I'm the 99% owner, I can have that in the operating agreement. Now, I think because the operating agreement oftentimes gives a lot of rights to majority shareholder or super majority shareholder, then by default we try to mess with the equity piece. But there's another part to the equation here, which is just go change the operating agreement from kind of being in its default. And most attorneys can be very helpful on this if you'll give them the ideas of, hey, here's where my concerns are. I need to be able to control X, Y and Z in this. And I have found, because people want that 50, 50 percentage so badly that oftentimes, as soon as that's satisfied, they become more logical around the realities of things that you need to be able to control in, in the business environment. And some of those details that oftentimes they don't want to control, they really don't have line of sight on that. Oh yeah, that's right. Somebody's got to make that decision. So handing that over to you, that has a lot more experience, feels more comfortable to them, and there can be some back and forth on it. There might be things that they say, no, we want to jointly decide that. But most things that are really critical to you, that's where you put those in, is in the operating agreement. The last thing that comes up on a broad topic is what if this doesn't work out? Here we are becoming these equal partners and what if in six months, like, we just don't like each other? You know, or it's just maybe they decided that this wasn't going to have the fast and sexy growth rate that they were expecting it, and they kind of got into the grind of actually what it takes to run a business, and they won out. Now I'm 50, 50 partners with them, and I have to untangle this whole mess that we've created. So there's a couple ways to, to handle this. Number one, of course, is a vesting schedule. You know, they might say, hey, listen, after one year, that first 10% of this new business will, will, you'll, you'll have, and then the next year another 10%. So you can do some kind of vesting schedule. And again, oftentimes the, the partner is open to that. They, they really just want to eventually be equal partners. But, but knowing that you're taking efforts in the right direction, you can do something with more dramatic cliffs, you know, so you can say, hey, after three years, you know, you get 30% and then after five years it's 50%. So it doesn't have to be equal, equally broken out. You can even do a cliff as dramatic as five years from now you get 50% or two years from now you get 50%. So, so you can either have kind of a, an equalized vesting schedule or some kind of cliffed vesting schedule. The other thing to remember is you're only partnering with them on the growth that you guys create together. So however you carve that out, whether it's a, a practice, whether it's the revenue above a certain point, etc. So if you do have to untangle it, you're not untangling the entire business. You're untangling what's the best way to now compensate them for their 50% of the growth that happens. So if, you know, six weeks later, it all falls apart. There probably wasn't that much growth that you really have to untangle. And you can just, you made a lot of effort and probably spent some money on attorneys, but, but you don't have to untangle a bunch on the business. It probably doesn't have any value that you need to worry about. And that's probably true even six months later. But if you want kind of an extra layer to make it financially a little bit simpler, you can decide up front one, what the valuation of the business, how it's going to be calculated, because that can, you can end up spending a lot of time and energy if you have to untangle something, figuring out what is it really worth. So to the extent you can decide on a calculation ahead of time, that's super helpful. Number two is go ahead and put in the operating agreement that the there's going to be a buyout schedule. So if they leave, you're not going to. Whatever the calculation is, you're not going to pay them. The day they leave, you may have three or five years to pay them back on that. And that can be logical and helpful on the business cash flow because they don't want to necessarily kill the business that is paying them back or just say, sorry, that that doesn't even work for us. So building in upfront vesting schedules or cliff schedules and some kind of calculation for the valuation and then the buyout schedule, these can be kind of the pieces that allow that untangling to not be as painful or dramatic. So I just want to say there's a lot of details in this. I know, but I love the momentum that partnerships can give you. I mean, the reality as entrepreneurs and executives, we have so many things within our business that we can, that we can grow and so many great ideas. But we need motivated people who, you know, knock down walls, run through walls, and figure out how to actually get to that end result. And so partnerships can be a way to supercharge some of your biggest ideas and projects. Now, another thing that does come up is you might have multiple business or income streams. You know, so in dental, you may have general dentistry and pediatric dentistry and orthodontics all happening. Well, if I'm partnering with an orthodontist on a practice or on a series of practices, probably where they can bring value is around the orthodontia. So I can also carve off different lines of income streams. You know, if I've written a book and that's bringing in money, even though they say, I want to be equal partners with you, they also understand that you may have multiple income streams from different types of sources or specialties. And so aligning your partnership around where they're really going to bring value, I think is another critical part. So why not share in the upside in something that I can't get to anyway or that I can't bring the energy and the expertise that they're going to bring. I think velocity and momentum are meaningful and so it isn't just well, I already have that idea, so why should I share in that with you? It's if you've got the energy to be able to execute on that, or if you can take it bigger than where I'm going to have energy and I can't get to it for the next three years, then why wouldn't I want to share in some additional upside with them? So be creative to the extent my philosophy is give them what they want under the terms that you need and you'll create incredible growth in your dso in your company. So let me know if you have additional questions on this. Go to our Facebook page, our private group, DSO Secrets, and post any questions you have around these partnerships and if there's specific ones that you're working on. I'm happy to share ideas of ways that we've gotten creative and solved for both sides of the equation, ensuring that you protect what you've built, that you have control over the areas where you need to have control, and that you're able to untangle when it's time to untangle or control a transaction and a sale when it's time to do that as well. So appreciate you all listening. Look forward to conversing with you on the Facebook page. And until next time, keep smiling. Thank you for listening to DSO Secrets. Join our community on Facebook at DSO Secrets and get answers and resources to some of your most challenging questions. If you want to get a copy of the seven secrets of any DSO, go to our website at dsosecrets.com and we will get that emailed to you. Remember, don't go at this alone. Let us be your team while you build your team.