There are many reasons to be uncomfortable starting a business partnership.
Thank you for reading this post, don't forget to subscribe!I heard Dave Ramsey say,
“The only ship that doesn’t float is a partnership.”
To that point, I know many entrepreneurs who would rather not partner with another person, Duration.
This is usually due to a desire for control and autonomy in their business.
Sometimes it stems from a bad experience where they could not meet their partner face-to-face and felt trapped in a kind of “bad marriage” (I have experienced this firsthand and know how sad it is).
But here’s the million dollar question:
Should we really end partnerships forever?
Teaming up with the right person achieves a lot!
What if Bill Gates and Paul Allen had decided to start Microsoft alone instead of together?
And what about Larry Page and Sergey Brin? If they hadn’t united, Google would have been just a misspelling of a big number!
So, think about it. By saying “no” to all partnership offers, you’re probably walking away from your next big break!
solution to the partnership dilemma
In the autumn of 2022, when I was halfway through building my first self-storage facility, I was approached by a local competitor in my market who proposed the idea of partnering with me on my facility.
Originally, I started with a plan to develop and operate this facility myself. I wanted 100% control and autonomy, and had no plans to take on a partner.
The first time he reached out to me, my initial reaction was, “Absolutely not,” and I went on my way, but after meeting him and hearing his case for why we should partner together, I have to admit that it means a lot.
This guy had two established and well respected storage facilities in the same city and knew what he was doing; He was a good communicator and already had a good management team and marketing channels in place.
He also seemed like a nice guy who matched my personality well. His track record was good and I can say that he will take my business forward without making my life difficult.
He offered to buy my company at 25%, and then he would act as asset manager and give me access to all his software and records so I could see what he was doing without doing asset management myself . ,
Since he had two other storage facilities nearby, it was only fitting for my property manager to get into my convenience game as well, so he wouldn’t intentionally run my business into the ground while driving traffic to his other locations. My.
Property management was something I had never wanted to do before. If he becomes my partner and runs the business this way, I’ll be free to spend my time on other things!
On paper, it seemed perfect. I couldn’t think of many reasons No to work with this man.
Still, I was old and wise enough to know The devil is in the details. Things are rarely as simple as they seem.
My biggest fear was that if we ever decided we didn’t want to work together, I would be stuck in a messy situation that would be hard to get out of.
What is ‘freedom clause’?
After raising this concern with our lawyers, together they came up with a clever way to solve the problem.
He wrote certain clauses in our operating agreement that would serve as a mechanism to ensure that neither of us would ever be “stuck” in our partnership. This is how it works…
If I ever wanted out at any point, I could offer buy up Shares of my partner in the company. The offer will be based on the current market value of the property, as verified by an updated, third-party appraisal at the time of the offer.
Now here’s the kicker… If my partner says “no” to my offer to buy him, he has to turn around and buy me within 90 days.
Either way, we’re not trapped! One of us can stay, and the other can get cash based on the current market value of the property.
How does this work?
For example, let’s say that three years in the future, I want to buy back 25% of my partner’s company. I must notify him in writing that I want to trigger the buyout clause; When this occurs, we will order an updated appraisal, and this 25% of the purchase price will be based on any value stated in this new appraisal.
Even though the original cost of the facility was $2 million, and at the time, this participant’s original investment was $500,000 (25% of $2 million), the purchase price would be based on the updated valuation. So, if the new appraisal says the property is now worth $3 million, I would have to buy it for $750,000 (25% of $3 million).
If, when receiving the offer, my partner does not want to sell, he must buy from me instead. And if it doesn’t do so within 90 days of its offer, we’ll have to revert to our original buyout offer.
It’s a bit like a game of poker, but everyone walks out a winner and none of us are in a bad situation.
My ‘Freedom Clause’ in Writing
For obvious privacy reasons, I’m not going to paste the exact language from our operating agreement here.
However, I asked Chat GPT to bring up some similar language to show you what it might look like.
Please understand that I am not a lawyer; This is not a legal advice. Partnerships often involve some complex legal considerations, and the actual legal language should be drafted by a qualified attorney based on the specific circumstances and laws of your jurisdiction after thoroughly reviewing your needs and situation.
With all that said, here’s an example of what it might look like:
7. Buyout Provisions
7.1. Voluntary offer to buy: Any Member (“Offering Member”) may at any time submit a voluntary offer (“Offer”) to another Member (“Offer”) to purchase the Offeror’s interest in the Company at the prevailing fair market value . Property. Fair market value will be determined by a mutually agreed upon, independent appraisal of the property by a licensed appraiser. The member making the offer has to agree to pay the cost of such valuation.
7.2. Acceptance or Rejection of the offer: Upon receipt of the Offer, the Offerer shall have thirty (30) days to accept or reject the Offer. If the Offerer accepts the Offer, the Transaction will be completed within ninety (90) days from the date of acceptance. If the offeror rejects the offer, the offeror shall be bound to purchase the offeror’s member’s interest in the company at the appraised value.
7.3. Transaction Completion: If the Offering Member fails to complete the transaction within the ninety (90) day period specified in Clause 7.2, the Offerer may exercise its right to purchase the Offering Member’s interest in the Company at the appraised value . Such transaction must be completed within ninety (90) days from the date the offeror exercises this right.
7.4. Financing: If any member exercises its right to purchase the interests of another member and requires financing to do so, they shall have the right to obtain such financing. If the Member is unable to secure financing within the ninety (90) day period, the other Member shall have the right to purchase the Initial Offering Member’s interest, as set forth in Section 7.3.
Again, this is just an example and should not be used as such. This is a complex matter and should be handled by a licensed attorney in your jurisdiction who can ensure that all terms are legal, fair and enforceable based on your specific situation.
beauty of buyout
The real beauty of this clause is that it sets out a clear timeline with a clear, one-way-or-the-other path that both parties have to follow.
Whoever initiates the purchase has to complete the transaction within 90 days. If they fail to do so, the other party gets a chance to buy them.
This is a fair, balanced way to ensure that each participant has an exit strategy and that the transaction will take place within a reasonable time frame.
Why is this so important, you ask? Because real estate is made up of partnerships and people, and like any relationship, people can change over time. The person I am today is not necessarily the same person I will be five years from now.
Business goals, personal circumstances, market dynamics – all of these factors can change, and sometimes, they can leave a partner wanting to back out of the deal.
The ‘freedom clause’, as I call it, provides an equitable and efficient way to deal with these situations. Feeling trapped without a partner.
In my opinion, having such a clause is a game-changer for any partnership. It is like a built-in safety net that ensures our interests are protected and at the same time allows flexibility and freedom to adapt to changing circumstances.
Remember, the key to a successful partnership is not just cohesion; It is also about foresight to make provision for possible changes. Therefore, if you are about to enter into a real estate partnership, I encourage you to consider this type of ‘independence clause’. It’s a small step in the beginning, but it can make a huge difference in the long run.
