Hello and welcome to today’s webinar on finding success with more than one agency owner. So basically a discussion of partnerships in the agency world. I’m your host, Chip Griffin, the founder of SAGA, the Small Agency Growth Alliance, and I’m looking forward to a good conversation today about a very important topic for any of you out there who are not just going it alone or you’re thinking about taking on a partner in your agency, whether that’s one where you’re just getting started or adding a partner to your existing agency.
We will cover all of that today. But before we do, let’s get into a couple of housekeeping matters while folks are trickling in and starting to sign in for today’s webinar here at the top of the hour, first of all, the full webinar replay will be available to SAGA Pro members, so you can access all of the replays from all past webinars on the website.
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So with that, let’s go ahead and dive into, the topic at hand partnerships. So we’re gonna start with that question of whether you should have a business partner or whether you should go it alone.
This is for those of you who perhaps haven’t gotten started yet, and you’re just thinking about starting an agency, or maybe you’re running it solo and you’re in conversations with someone who might make a good partner, whether that’s someone you’re already working with or just someone that you know and feel like they might bring something to the table.
We’ll talk about how you should think about that decision process. We’ll talk about the difference between partners and investors. Both own stakes in the business, but they function very differently. And I know agencies sometimes go down the investor route. So I do want to touch on that today since it is related to some of the topics in a traditional partnership as well.
We’ll talk about why partnerships succeed and why they fail, and how you can make sure that your partnership is more likely to work rather than not. And we’ll finally talk about the impact of having a partnership and what that means when it’s time to exit, whether you’re exiting on your own or the entire agency is being acquired or merging with another firm.
Let’s go ahead and start with that fundamental basic question of should you have a business partner or should you be a solo owner? And it’s not an easy question, and there are pros and cons to both. So let’s start with the idea that you, you’re thinking about an agency, but you haven’t pulled the trigger on it yet.
and you’re thinking about going into business with someone. So starting an agency with one or more partners along your side. And as you’re thinking about whether or not you should do that, you need to think about a few things. You need to think about what that looks like. And a lot of times we’ll have conversations with somebody about potentially going into business with them and we naturally focus on all the excitement that surrounds it and all of the good things that come from it.
And we should certainly be thoughtful of those. But we also need to think about what are some of the challenges. And in order to, to really address that clearly, you need to have a very clear vision for what that partnership looks like. It, and that’s more than just what percentage ownership do you have?
It’s what are your roles, how do you function? We’ll talk more about some of that later, but you really need to have that clarity about how you’re going to function in order to decide whether or not it’s the right thing. You also need to map out a path, and I’m a big believer in taking pen and paper or a spreadsheet or a mind map or anything where you can try to plot out how that partnership looks. And I’m not talking just in terms of what your roles are. Right? That’s important. That’s part of your vision. It’s it’s part of how you’re selling the agency to other people, because it’s the combined expertise that the two or three or four of you bring to the table.
But it’s looking at the fundamentals, the basics of how do we generate revenue that’s going to sustain all of us, right? Because if you’ve got one owner, then coming out of the gate, you need to have enough revenue to support that single owner to compensate just you. Once you start having partners, now you’re talking about having to achieve a certain scale right out of the gate, and you have to have more revenue to feed more mouths, and so getting to that point is more challenging.
Now most agencies, whether they’re single owner or partnerships, tend to start with an existing client that’s fueling them. And so perhaps you’ve come from a previous agency where you were working together with your partner, and so now you’re able to jumpstart your new business by taking on some work.
Make sure that that work is enough to feed both of you. Right. There’s nothing worse than going into business and realizing that, that it’s so difficult to make ends meet because you have to generate two or three times the revenue that you would have if you were in it solo. So you need to make sure that the, the benefits of bringing everybody together comes along with increased revenue in order to make that happen, particularly at the start. But what about the situation where you have an agency that you own on your own and you’re thinking about adding a partner? Typically, this comes from a longtime employee that you’re thinking about giving equity to.
But sometimes it could be that you’ve been partnering up with someone else who owns their own agency and you’re thinking about coming together and, and operating as partners. You need to think about, in all of these cases, how do you divide roles and responsibilities? How do you split up any revenue that’s coming to the table directly?
If it’s an employee, you need to think about how much are you going to have that person pay to buy in, right? Because ownership, a partnership is part ownership of the business, and so you don’t just typically hand over a percentage of your business to an employee. There tends to be some sort of a period over which they are buying into the business, and there’s a lot of different structures to it.
So you would want to make sure that you have the proper paperwork in place, but the proper business decision so that they understand that they are taking a risk in owning the business, and there needs to be something that they’re, they have to have skin in the game, if you will, in addition to the work that they’re putting into the business.
So there are lots of considerations that you need to think about as far as do you cross this bridge into bringing on a new partner? Because it, it has the same challenges that you have if you’re starting out with a new partner, right? You need to have more revenue because now the profits are going to be split amongst more people, even if you were the one who perhaps holds the majority interest in the business, particularly if it’s an employee that you’re bringing into the partnership.
And finally, I would say you need to keep in mind that there are different structures that you can use, and I’ve talked about this in some of my compensation discussions that I’ve had in previous webinars and other articles and videos, but with employees, you don’t necessarily need to make them a proper legal partner in the business who truly owns a percentage of it.
You can have what’s called phantom stock or other kinds of compensation arrangements that treat them in many ways as if they’re a partner without actually having to go through all of the paperwork and having all of the tax implications and all of that that come along with being a proper legal partner in the business.
So lots of different things to consider here. can’t cover it all today, but happy to talk that through with any of you who are interested in exploring that further. Instead, today I’m gonna focus mostly on how you make sure that you are well set up once you’ve now crossed this bridge into deciding that a partnership is the right way to go.
And as I promised in the intro, I, I will take a moment to mention the difference between partners and investors because there are a lot of agencies that are – not a lot – there, there’s a not insignificant number of agencies that have investors in them and, and investors come in all shapes and forms. So let’s talk about the different ways that someone can be a partner in the business, whether they are a true partner or whether they more are, are more of an investor. So they’re a full-time partners.
That’s what we tend to think about first when we think about partnerships in the agency world. So that means that you and your partner are partners. Your primary source of income is that agency. And so that’s sort of the traditional classical model for having partnerships, not just in agencies but other things, whether that’s law firms, accounting firms, et cetera.
And so you’re all employed full-time by the business. You’re all working and and paddling in the same direction to get the result, which is your livelihood. And so that’s the, the traditional model, and that’s what most people think of when they think of partnerships. But there are other cases where you might have a partner who has an investment in other businesses.
This is something that I’ve done a number of times over the course of my career where I was a partner in an agency, but a partner in a software firm and maybe some other businesses as well. And so in those cases, I was not technically a full-time partner in any of those businesses, because I had all of these other interests. That creates some additional challenges.
If you or your partners are going to have ownership stakes where you’re actually helping to operate other businesses, you need to think that through and understand how that impacts the core partnership, because I will tell you that that is far more challenging than it sounds. It often sounds great to have all of these ownership interests.
But there are a lot of extra demands on your time, and so the, the focus can be very different. And one of the things we’ll talk about when we talk about why partnerships fail, it can be because people don’t have the same focus on the business as all of their partners. So this is particularly true if you’ve got one partner who’s full-time or most, mostly full-time in the business and others who are perhaps operating in other businesses simultaneously.
That can be a real challenge to do things and have success. But then you start getting into what I would call silent partners. So silent partners are, are really investors. They are people who perhaps they’ve helped get you started. So I’ve seen agencies where you have someone who’s been a rainmaker for the business in the early days and maybe helped, maybe even worked in the business early on, but now has, has shifted into a silent partner mode, which means that they are partial equity owner of the business, they own some of the stock. They’re probably taking some of the profits, but they’re not contributing to the day-to-day operation of the business. So they’re not adding to the bottom line anymore. They’re simply taking from it. And so silent partners are one of the most dangerous things in my view, that agencies can have along with debt or true, just straight up investors, people who have never worked in the business, but maybe make an investment in the business.
They say, we’ll give you a hundred thousand dollars in exchange for 10, 20% of the agency, and you can use that as your startup capital. In my view, high levels of debt and any kind of equity owned by people who are not operating within the business are high risk. It means that you have all of this pressure to be producing income for someone who is not helping to increase the amount of income in the business.
This is not typically appropriate for most agencies and is a, a good way to get into trouble. So I would highly discourage having any kind of a silent partner, a straight up investor, or someone who owns debt in the business, or having a, a big loan that you owe to a bank or other type of entity.
Try to do everything you can within the existing capital that the partners bring to the table. People who are actually contributing to the day-to-day operation of the business. That will be much more successful for 99.9% of agency partnerships.
So let’s talk about why partnerships succeed. Obviously the, the, the most often stated thing is that we’re bringing together really smart people who have some complementary skills. So in some of my past partnerships, I had ones where I was more of the operations person and I had more of a growth oriented business development oriented partner. And that can be particularly helpful for a lot of agencies.
And so, When you bring together complementary skills, it means that you can offer more to your clients. It means that you can share the workload within your business. That’s really helpful. It’s really helpful to have the access to the expanded network. So typically when you bring a partner into the business, they know a set of people, you know a set of people.
There’s probably some overlap, but there’s a lot of people that you each know independently of each other, which means that particularly as you’re starting to grow, as you’re going out there to the market and trying to generate that early revenue, you are in a position where you’re able to tap into more people, and so it often can accelerate that revenue growth.
Now, as mentioned earlier, you need to have faster revenue growth if you’ve got multiple partners because you need to sustain two people from the get-go rather than one. But nevertheless, it is beneficial and it has long-term benefits to have those additional networks. Frankly, I think one of the, the most understated but most important reasons to have a partner is because you have a mutual support network.
You have someone that you can go to when there’s frustration within the business. When you’re wondering about something, when you just need a second opinion, you have someone to talk to. And a lot of small agency owners end up feeling a bit alone. And frankly, it’s one of the reasons why a lot of agency owners end up working with me or someone like me.
It’s because it gives them a voice that they can talk to who can offer a second opinion, who can give them some feedback, who can be just a shoulder to lean on when, when times are tough and. You can obviously tap into friends, family, colleagues, and all that sort of thing, but it’s not quite the same.
When you have a business partner, you really have an opportunity to be in the trenches with someone who’s feeling a lot of the same things in all likelihood that you are. And so that mutual support can be very beneficial to get you over the inevitable challenges that occur in the ownership of any business.
Another advantage of having a business partner is that you do have checks and balances on each other. So you can, if, if you’ve got a bad idea, you’ve got a business partner who may say, Hey, time out. That doesn’t seem like a good idea. Maybe we should pump the brakes on this one. Slow down. Think about it some more.
And that’s something when you own your own business and you’re a hundred percent owner, your employees as much as you encourage them to be honest with you, and to tell you when you, you may be going off the rails. They’re a lot less likely to tell you that than someone who actually owns a piece of the business and is your peer as a partner.
And so having that kind of a person in your business can be really helpful in helping to make sure that you’re staying focused in the right way. It also helps make sure that you’re accountable to them. And so in, in a typical a hundred percent ownership situation, you say, Hey, I can make any decision I want and, and at the end of the day, if it goes wrong, it’s all on me.
No big deal. If you’ve got someone that’s that you’re accountable to and you have to say, okay, I’ve promised I’m gonna do this, I’ve said, this is the plan, you now have to move forward with that plan. And so it can help keep you moving forward and moving in a set direction. Whereas sometimes when you’re on your own and left to your own devices, you can end up wandering a random path at times, and so partners can help overcome that challenge that many solo owners have. And then finally, you, it’s a labor multiplier, right? If you’ve got, if you’re, particularly when you’re starting out, if you’ve got two or three people in the business, that means that you can do more right out of the gate. And so it can often accelerate growth in the early stages of the agency, even in later stages.
Once you’ve got team members in place and all of that, it’s still a labor multiplier at the senior level because now when there’s a client crisis or something like that, there should be multiple partners who can step in and help and service that particular challenge. And so it doesn’t all fall on one person.
And this can be really beneficial when it comes to things like taking time off, because as long as you’re coordinating your schedules well, you have a very senior person within the agency who can address any major issue that may come up in your absence. Whereas if you are a solo owner, you might have to make yourself available to be interrupted on vacations or even at family events and those kinds of things.
If there are, are true client crises that pop up that your team can’t handle, and they ruly are that time sensitive. So there can be huge benefits from a labor multiplier standpoint to having multiple partners.
But if partnerships were all sunshine and roses, everybody would have them. There are reasons that partnerships don’t work out, and so there are downsides to partnerships as well.
And some of the reasons that partnerships tend to fail is because you have a situation where the partners are not aligned, and this misalignment can come in a variety of different ways and for a variety of different reasons. So let’s talk about some of the most common ones that I’ve seen. So obviously you can have a, a clear mismatch in the differing needs of the partners.
So if you’ve got one partner who is in the business because they enjoy it, but perhaps they’re independently wealthy, perhaps they’re they own part of this business, but they own part of another, they don’t necessarily have the same pressure as a partner in the business who this is sole source of income and this is how we put food on the table for the family.
And so if you’ve got mismatched needs from the business in the two, in two or more partners, you can have a challenge because from a decision making standpoint, the risk profile is going to be very different for those two mindsets, right? If I’m just viewing this as a fun thing, as gravy, but not my core livelihood, I look at all of the decisions that I make and all of the work that I may or may not put into it very differently than the person who this is essential to being able to pay my bills. And so when you have those mismatched needs, it can create a tension, an unhealthy tension within the partnership that can lead to hurt feelings and other issues that crop up over time. And it in particular, for any partner who is not committed to the business as their primary source of income, it can often lead to situations where those who are committed to the business for their livelihood are putting in more time and energy into the business than those who are not as focused on it and not as dependent upon the business. And so that can also create issues and decrease that labor multiplier effect that we talked about is one of the benefits and one of the reasons why partnerships tend to succeed.
So you can also end up with situations where you have different goals. And this is particularly true when you’ve got partners who are maybe at different stages of life, right? If you’ve got one partner who has young kids and you have another partner who is approaching retirement, you can have very different goals, both short and long-term.
Which again impacts decision making. If I am, if I have young kids, I, I’m valuing my flexibility perhaps more than the person who’s charging towards retirement and wants to maximize the amount of money that I can generate. And so that can create this tension between the partners. But it can happen even if you are all in the, the same general position in life, there can still be different goals and objectives that you may have. Maybe you have one partner whose goal is to exit the business by selling it and trying to take in money that way. Or you might have another one who wants to maximize how much they put into retirement in order to be able to provide for themselves that way.
Maybe you have one who’s a growth oriented person and one who’s a profit oriented person. That can lead to tension. So you really want to try to, as much as possible, understand what the goals and needs of your partners are when you’re first getting started, but then continue to check in on this and make sure that as there are life changes, that you can address these natural tensions that come out and, and figure out how to address them.
None of these mean that, that you have to be identical in your needs and goals to your partners. But if it’s different, then you really need to figure out how you’re going to balance those potentially conflicting needs and goals and try to figure out how to map out a structure for the partnership as well as a day-to-day operating approach that will attempt to meet both of those.
Otherwise, your partnership will likely fail. Of course, other partnerships can fail because of personality differences. Sometimes people are great to get along with when you’re talking about what you might be able to do with the business and all of the excitement that comes around the start of a partnership.
But then when you start to get into the day-to-day functioning of the business, you know, maybe it’s, it’s oil and water and there’s, there’s some tension there that’s not healthy. That it happens with employees. And effectively when you’re two partners, you’re each employees of the business. And there, there can be conflicts that arise that you didn’t anticipate.
And, you know, maybe someone’s great to know over coffee and, and talking to an hour a week, but when you’re with them 40 hours a week, it’s an entirely different ballgame. So those are the kinds of things that can come into play in partnerships and you need to try to figure out how to address them.
And we’ll talk about some of the ways that you can overcome those challenges, or at least be aware of them sooner rather than later. But a lot of partnerships fail for these last two reasons that I have on my list, and that’s poor communication and poor planning, and the two are related. So poor communication is probably the number one reason why almost every agency relationship can fail, whether that’s client, employee, partner, et cetera.
And for a space where we’re focused on external communications and helping our clients communicate better. We in the agency community tend to be very bad at communicating with all of those audiences that I’ve mentioned. And for the purposes of today’s conversation, you need to be focused on communications with your partner and, and you need to communicate effectively before you jump in and become business partners. You need to communicate effectively while you are business partners, and we’ll talk about how to create the proper cadence for some of that communication and some of the key principles that surround it a little bit later in this presentation.
But communication is really central to why partnerships will succeed or fail. And the corollary is you have to have good planning. You have to be able to sit down and in order to address some of these risks that I’ve outlined here as far as why partnerships fail, but also to take advantage of some of the reasons why partnerships succeed that I talked about in the last slide.
You need to have good planning so that you accentuate the positive, you diminish the impact or potential impact of the negative, and you pull it all together by communicating effectively and having that clear vision, that clear plan that you’re going to implement together as partners to have success in the agency.
So what are those things that I’m talking about that you need in order to make it work? And as I said, communication obviously is central to all of this. The first and most important thing in any business partnership or really any partnership anywhere, is to make sure that there are no surprises. Nobody likes surprises.
You may like a surprise birthday party, but beyond that, nobody wants to be surprised, frankly, good or bad. And it’s one of the pieces of guidance that I’ve always given my own employees. Don’t surprise me. I want to know if, if there’s something possibly bad that might happen or there’s some risk out there, let me know as soon as you are aware of it.
And so in a partnership, in a business partnership, you really need to make sure that you are communicating early and often about anything good or bad that might happen. Whether you’ve, you think you might be signing a new client, make sure you’re looping in the, the partner on that so that you know that maybe there’s gonna be a resource issue coming up or you know, frankly, just making them aware that there’s good news potentially on the horizon. But as important, or more important would be those things where there are potential problems. Make sure you get that on the radar of your partner as soon as possible, even if it, it feels embarrassing to do so.
Maybe you screwed up with a client. Make sure you’re telling your, your business partner that make sure that they know what’s hanging out there so that they can help solve the problem for you, or at least be there to listen as you talk about what that challenge is. So, first of all, avoid surprises. And one of the ways that you can avoid some surprises is by having well-defined roles and responsibilities.
Too often when I’m working with agency partnerships, I see that you have both partners or more than two partners who are responsible for a certain thing, whether that’s business development or finances or client service or HR or whatever. And I think it’s really important that you have a primary partner responsible for every function within the business.
That doesn’t mean that if you’ve got one partner who’s primarily responsible, who has the primary responsibility, I should say, for business development, that the other partners don’t or shouldn’t have a role in business development, they absolutely should. But you need to have one person who is the first among equals, the coordinator, the driver of activity, the person who’s making sure that the plans are developed and executed.
And if you don’t have that, if you have a shared responsibility, it means that nobody is truly responsible for it. Worse is when you have a situation where you’re duplicating roles and you’re wasting energy and time on things. So if you have two partners who are both responsible for finances or something like that.
There’s really no reason for that. If you have two partners who are responsible as the lead client contact for a particular client, that’s silly because that just means that you’re increasing your cost to service that client. And so you need to have those well-defined roles and responsibilities.
Again, doesn’t mean that you can’t contribute in all of these things across the partnership, but you need to have one person who has that primary responsibility and is, can make sure that the, the plans are developed, they’re well executed, and that if there are shortcomings that they can identify them and try to address them as part of the partnership.
So make sure that you have those clearly spelled out for everybody so that there’s no confusion and no duplication. You also want to make sure that you’re in regular communication with your partner. . More often than not, what I hear is, well, we talk every day. Maybe if it’s, if you have an office, you’ve got offices right next to each other, or maybe you’re in one room and see your desks and so you say, Hey, we talk all the time.
That’s true and that’s great that’s a good first step in communications, but it’s really important to have a weekly check-in for the partners so that you have an opportunity to go through the status of the business, the things that you’re responsible for, updating on those things and keeping your partner very clearly in the loop on all of those kinds of things.
So I think it’s vitally important that you have a weekly check-in, just like I encourage weekly one-on-ones with your direct reports. I also encourage, weekly conversations amongst all of the partners in the agency so that everybody is aligned and everybody has an opportunity to flag potential surprises or potential issues or their own concerns as quickly and as timely as possible.
And if you don’t have the weekly meeting, these are kinds of the kinds of things that often don’t pop up in more casual conversations. So take the time, have a 20 or 30 minute check-in on a weekly basis. It is more than worth the time that you will spend doing it. But beyond those weekly check-ins, you need to do more deep dives on the business.
And so whether that’s monthly or quarterly, , you need to have more strategic, more planning oriented conversations around the business, where you’re reviewing financials, you’re reviewing your business development plans, you’re reviewing staffing and other resources, you’re, you’re viewing all of these different things at a much higher level and really planning out for the future. This is where you make sure that you’re aligned on vision.
This is where you make sure that that all of the bases are getting covered, and these are things that are easy to lose in the weeds of running the business on a day-to-day. This is where you’re serving more in the board member role for the agency versus being an employee. Because this is the overall operations of the business that you should be looking at on a monthly and or quarterly basis in depth with your partners.
But then once a year, I would also encourage you to do. even something deeper than that. And, and preferably offsite, whether you wanna call it a retreat or an annual planning session or whatever, but, you know, get away, get into a more casual environment. If you, if one of the, the partners has a place that they like to vacation, maybe you go there, maybe you just, you know, go to a, I don’t know, a hotel or a restaurant for the day, or I don’t know, something like that.
Pick some other environment other than what you normally do for your typical meetings. Get outside of that and have some conversations about where the business is headed. Make sure that you’re also using this as an opportunity to share where you are personally and how your own personal goals are changing.
One of the things I talk about with solo owners a lot is my AIM-GET framework and that the A in the AIM-GET is for ambition. You both need to make sure that in a partnership that you are clear on what your own ambitions are for the business, what you’re trying to achieve from it, how much you wanna make, what kind of work you wanna do, and what kind of flexibility you want to have in the time that you spend working so you can achieve the work-life balance that you’re interested in.
Those three things are things that you would normally do on your own, but in a partnership, you need to make sure that you’re aligned, or if you’re not aligned, how you’re gonna resolve that. Again, going back to why partnerships fail. It can be because that ambition is not aligned. So make sure that you’re using this annual process as an opportunity to look at what’s changed, what life changes have taken place.
Have you had a kid, has a kid gone off to college? Have you had a change of your significant other that that impacts? All of those things can be really important to look at and to understand so that you are, in the same place or at least on the same page with where you want to take the business.
You need to make sure that as a corollary to the no surprises that you’re sharing any concerns that you have early. So if you’re not comfortable with where things are headed, if you feel like you know you’re pulling more weight than your partner, share that sooner rather than later. Don’t let things fester.
One of the reasons why partnerships fail is because partners keep things to themselves because they’re uncomfortable bringing them up. They just don’t want to bring them up. They hope it will change magically. Share those concerns. And this doesn’t mean that you should turn every weekly partnership meeting into an airing of the grievances.
But it does mean if something’s starting to eat at you, share it and try to resolve it sooner rather than later. And of course, if you are either on the receiving end of that or if you identified an issue just generally make sure that you’re making adjustments and changes as necessary. Whether that’s to the day-to-day operations of the business, or whether that’s to the broader grander vision that you have.
As you need to make changes. Make sure that you’ve got buy-in from all the partners on whatever the new direction for the business is. So I do wanna take a minute now to talk about some of the boring stuff when it comes to partnerships. And that’s the paperwork. And look, we all know that, you know, the paperwork is not the fun side of partnerships.
But if you’re going to have a partnership in your business, you need to make sure that you’ve talked to your lawyers and accountants and you’ve gotten all of the T’s crossed and the i’s dotted. Because if you don’t, you will run into issues. And I always encourage folks to look at all of this stuff at the start of the partnership.
Don’t wait until some problem pops up because if you try to paper over it at that point, it’s gonna be much more challenging. So there are two key documents that almost every partnership needs, and there may be more. And again, your professional advisors can give you better guidance. But the two key things that you should be looking at would be a partnership or operating agreement and a buy-sell agreement.
So let’s take a look at the partnership or operating agreement first. That’s something that you need to focus on because it is, it goes to how the business actually runs on a day-to-day basis. And so obviously some of the things that, that pop into that are the obvious ones, like equity split, who owns what, how much of the business do you own and does your partner own?
How did, how is decision making done? In other words, most partnership agreements will address what happens if, you know, where you wanna fire one of the partners, or what happens if you want to sell the business? Who gets to vote? How do those decisions get made? If you’ve got an agency where you’ve got a 50 50 split, which is pretty common, you need to figure out how do you deal with ties?
Anytime you’ve got equity split in such way that a tie is even theoretically possible, you need to make sure that your operating agreement addresses how to deal with that. Is it by a flip of the coin, is it by having an external tie breaking vote? Is it by giving one of the partners a tie breaking vote?
How are you going to deal with it because you wanna make sure you don’t end up in a deadlock within the partnership? Because I’ve seen agency partnerships fail spectacularly because they’re 50 50 partners and they just get to a point where they can’t agree on anything, and there’s no way to even dissolve the business properly at that point.
So make sure that you have some sort of a tiebreaker in there in order to keep things running smoothly. But it would also, your partnership and operating agreement will also address things like, you know, are there, are there partners, particularly as you get larger, are there partners in there that have more rights, responsibilities than others?
You also need to make sure that you understand from your lawyers are there minority shareholder rights statutes in your state or other jurisdiction that would either overrule your partnership agreement or that need to be addressed in your partnership agreement. Because even if you don’t have a partnership agreement, there’s usually a default set of rules and regulations that you will fall under. And so you, you’re better off having a document that you’ve agreed to and set out as opposed to just falling back on state laws and regulations that you may or may not find suit you when a challenge arises. And that’s also important to remember. All of these documents you’re creating in the good times, but they’re designed to be looked at when there’s a problem.
Partnership agreements are like client contracts, employment contracts, et cetera. Nobody bothers to pull them out when everything’s running well. The only time you look at any of these legal documents is when there’s a problem. So you need to look at all of them in terms of how does this help me deal with a problem that might arise down the road?
And this is where a buy sell agreement is particularly important because a buy sell agreement helps you to understand how can you transfer your equity stake in the business. And so, there are the obvious ones, like voluntary transactions, I want to sell some of my shares, or we want to sell the business. So your buy sell agreement would deal with those kinds of things.
For example, if I decide I wanna sell half of my interest in the agency to someone else, can I do that? What are the, what’s the process around that? Can you veto that as my business partner? Do I have to offer it to you first? What happens with the shares that I’ve sold? Does that person become a silent partner or can they become an active partner?
All of those things are things you want to think about in advance so that you’re not having to deal with it in the moment when perhaps there’s, someone’s got pressure to sell because they’ve got some debt they have to pay, or they want to make an investment in some other business or what have you. So make sure that you’re thinking about those voluntary transactions.
But the most difficult piece here tends to be around the involuntary transactions. When you have to give up your shares or when you want to force your partner to give up their shares. And so there are five key things here that you typically want to make sure that you’re thinking about. But when you’re working with your lawyer and your accountant, I would encourage you to try to think through all of the potential bad or uncomfortable things that might happen to you and your partners that might cause you to, to rethink whether you want to be in business together. So top of the list, obviously, is if one of the partners dies. You need to figure out what happens to their ownership in the business. It doesn’t just magically evaporate.
It’s still there. It transfers by default to their estate, but then what happens to it? And so you need to think through, do you, I mean, typically you would want to, any departing partner you would want to buy out, whether they’re leaving voluntarily, involuntarily, et cetera. And so you need to think about how does that take place.
And you need to think about the finances around that too. So your buy sell agreement might specify that a buyout happens over a period of time. So if a partner passes away, maybe it’s a three or five year buyout so that you’re not putting a huge amount of pressure on the business, you’d want to be thinking about things like, do you have life insurance to cover that buyout?
But then there are other things other than death that are also situations that you might need to address. Some of them are more challeng. Disability. If you have a partner who has a stroke or is otherwise unable to contribute to the business, what happens to their equity? Obviously you want to do right by them and their families, but at the same time, they’re no, no longer contributing to the business.
So typically you’ll want to find a way if they’re on, if they become permanently disabled, a way to buy them out. You also need to look at what happens if they get divorced. Do you want a spouse who’s perhaps not thrilled with their former partner to be now a partial owner because, By default in some places they may have, they may get half of the ownership stake in the business.
Do you really want them sitting in on partner meetings and, and all the challenges that that may bring to the table? You need to think those things through in advance and how you address that. But then you also need to think about what happens if, if none of these more bad things happen. But what happens if a partner wants to leave voluntarily?
Or what happens if a partner, if you just say, this partner is no longer pulling their weight or they’ve done something wrong and we need to, to fire them. Right? Because a partner is both an owner and an employee, and if they lose their employment role, either because they’ve gone and taken a job with a client or something like that, or because you’ve decided that they’ve misbehaved or underperformed and, and they need to go, how do you deal with their equity then? Because again, you don’t want those folks still having an ownership interest in the business. So you need to have some sort of a plan for what to do with their equity or to at least give the business the option to deal with that portion of their equity upon their exit.
So you need to think about those things. And with all of these things where you’re dealing with a potential that the business might be required to buy their interest or might have the option to buy their interest, how do you value that? And so your buy-sell agreement should have a process for valuing the agency and saying the agency is worth this much. And that can be as simple as all of the partners sign an annual letter that says, this is what we believe the agency will be worth, to having a third party evaluator come up with that valuation either on a regular basis or when an event takes place.
It can also, there are all sorts of other systems that, that I’ve seen in valuations where one party has to name a value and if the other party disagrees, then, then they’ve got a tiebreak procedure for all of that. There’s a lot of different ways you can go about valuation, but your buy sell agreement absolutely needs to deal with this so that you have some system in place that it’s not just left to a bunch of uncertainty when one of these unfortunate events takes place.
So make sure that you’ve really worked out this paperwork and you have it in place because the time to do it is when everything is going well, not when there are problems. So finally I want to talk just for a minute about what happens when it comes time to exit the business. And this is, this is what happens when a partner leaves an agency for any reason.
We’ve talked about some of this in the buy sell, but we also need to think about all of the other reasons that partners may leave or that the business itself may exit. So in the case where you’re selling your agency or merging with another agency, you need to make sure that you’re thinking about what is your plan for how we even decide to do this?
And so I mentioned that in terms of the operating agreement, but who decides whether or not the agency can be sold? Is that all of the partners? Is that one of the partners? Is it a vote of the partnership? All of these things, you can really customize this however you want. And I would encourage you not to overthink it, not to overcomplicate it, but have this discussion in advance because you need to think about these things because a lot of partnerships can run into rocky waters when you’ve got an offer on the table to buy the business, and you’ve got some partners who want to sell and some partners who don’t.
So making sure that you have that decision making process outlined in advance and making sure that you’ve had good conversations overall about what you want to do with the agency over time is really valuable and really important because it helps make sure that when there is the potential exit on the table, you’re all on the same page.
And it’s particularly important because if you’re merging with another business or if you’re being sold to another business, The partners are directly impacted, and so they may have requirements for employment agreements with whoever you’re merging with or being acquired by. Think these things through, talk these things through, make sure that they’re not all taking place just in the moment of that acquisition conversation, but you’ve had a chance to talk about these things at your annual retreats or other things along the way.
But you also need to think about how you help to exit one partner from the business, because it’s not uncommon for one partner to decide that they want to move on. And so while you’ve got the buy sell agreement in place for what happens, essentially, if you can’t reach some other conclusion, you need to be thinking about what happens when a partner leaves the business. Maybe that’s because they retire. Right if, if a partner retires, you typically want to try to buy back their equity into the rest of the business, or you want to allow another partner to buy that equity from them so that they can, first of all, have that money for their own retirement. But also because you don’t want someone, as I’ve mentioned before, who is taking a portion of the profits but not contributing to the profits.
That’s a very dangerous thing for most agencies. So think about those things in advance and be having conversations about it, particularly if you’ve got a partner who you know might be approaching that point where they want to move on either to take another job or to retire, or for whatever reason they may need to leave the business.
But a partnership also has the added complication of thinking about how to do succession correctly. Because in a typical one owner business, when you think about succession planning, it, it’s a one-to-one. I’ve got, you know, I’m the owner, how am I going to deal with moving on? And that could be by taking on partners and then gradually downsizing your piece of the equity.
It could be trying to sell the business directly. It could be by trying to pass it on to a family member or an employee. There are a lot of different ways that you can approach it as a solo owner, but in a partnership, it starts to become more complicated because, In partnerships, depending on the individual roles of each partner, there may be different pressures, different requirements on them as far as what they want to be doing if one of their other partners leaves.
And so succession planning becomes that little bit extra complicated and you want to be, again, talking about those things, thinking about those things well before they happen. So just an added layer of complexity when you’re dealing with a partnership that you don’t have in a solo owner scenario.
So hopefully I’ve given you a lot of things to think about here, whether you’re considering a partnership, whether you’ve already got one and you’re trying to figure out how to get the most out of it.
Maybe you’re in a challenging situation with your business partner, and so you’re watching this to try to figure out how to solve it. All of these things are achievable, attainable, and again, hopefully I’ve point you, pointed you in the right direction. I have a lot more resources on the website to talk about buy sell agreements, operating agreements, that kind of thing.
So by all means, tap in to the SAGA community for input. You can go to our Slack community, ask questions there. You can use the search engine on the SAGA website in order to search for some of these resources. Or of course, you can drop me an email at chip@smallagencygrowth.com and I would be happy to try to answer your question as best I can or point you in the right direction if I don’t have the answer myself. So in just a moment, we’ll be moving on to the q and a session for live attendees. For those of you who are watching on replay, this will conclude the replay recording of this particular webinar. I look forward to seeing you all back on another webinar again very soon. And in the meantime, as I say, if you’ve got any questions at all on partnerships or anything else, feel free to drop me an email and I’d be happy to try to answer it.
So I’m gonna grab a sip of water and we’ll jump into q and a here in just a moment.
