When most people hear the word partners, they think of friends, buddies, pals. But ask any business person whose partnership has stood the test of time what comes to mind and they'll tell you something else. In the opinion of those who have ‘been there and done that', the term' partner' should not be considered synonymous with ‘buddy' when it comes to business ventures.
There are right reasons and wrong ones for going into a partnership. Then there is the major reason: fear. People are afraid to fail. They're afraid to have to face their friends if they don't succeed. But if they go into it with a partner, the prospect of failure isn't quite so frightening. As they say, ‘Misery loves company.' People may also fear their own perceived lack of ability to succeed. Bringing in a partner to fill the deficit helps alleviate this anxiety.
Partnerships that are forced because of the parties' fears aren't likely to hold together once those fears aregone. When the individuals involved in such a union get a taste of success, fear fades, taking with it the original grout that cemented the partnership. Dissolution often follows. It is important to analyze your reasons for forming a partnership.
If fear is a major motivation, take a step backward and rethink your position. One of the best' right' reasons for the establishment of a partnership is the coming together of different people, each of whom brings different assets to the union – assets that are necessary tithe success of the business – such as resource pooling (this can be money or ideas). Both partners should have something unique to add to the partnership.
If you take two doctors with a lot of money and no time to do any work, it's not going to work out. If you take two guys who are eager to work hard, but don't have any cash, it'll never work. You need a doctor with cash who doesn't wanton plunge toilets, and some young entrepreneur who's eager, excited, and willing to go out there and hustle.
That's what makes a great partnership!
However, there comes a time in most partnerships when the honeymoon is over and the dream partnership seems to be going sour. People come up to me after my seminars to ask my advice or tell meow their involvement in a badly managed partnership. I've also had a couple of bad partnership arrangements. As I look beckon these experiences, I think it all comes down to two simple words – trust and greed. One party was too greedy, and the other was too trusting.
Ninety-five percent of us are people who're willing to trust each other to carry out our mutual promises. The other five percent are probably very unhappy people. Yes, each of us sincerely wants to believe what people tell us, because the reverse is to treat everyone else as liars and thieves. That sort of distrustful attitude could turn someone into a hermit living in a cave.
Each of us is greedy in our own way. Yes, we are. That's the way our system of private enterprise is set up. From the time we start school, we all want the best grades, the prettiest girl, the cutest guy, the most expensive birthday presents. As we grow up, we compete for the best jobs, the biggest house, the flashiest car, the most exotic vacation. We often set high goals, and we are constantly rewarded for our achievements – the more spectacular the better. Here's one bad experience a friend of mine had. One day a broker came to him about a land lease on a commercial acre he owned – a built-to-suit for a dentist. He was to receive $35,000 a year for the next 50 years. He was looking at a lifetime of financial security. What a fantastic opportunity. The doctor needed tax shelter, and my friend wanted security for his family.
Short of enough ready cash, the dentist came in with no up-front money. My friend bent over backwards to work things out for him. Within six months this lessee defaulted. Within a year he was in bankruptcy. My friend's dream had turned into a nightmare! Blame it on his greed? Was he too trusting?
Should he have required better financial guarantees? He had trusted the broker and lessee to live up to their agreements, but he still ended up on the short end as a creditor in Federal Bankruptcy Court.
Many investment partnerships fail due to broken promises. If you are presently in a bad situation, or are concerned about the reliability of your current partner(s), let me offer a few ideas for addressing the situation:
1. Determine the issues. The most serious problems are those that stem from having a lack of understanding of the basicsituation or potential problems.Do you have written documents,or merely verbal understandings? You'll want to arrange a meeting with your partner. You may need to first discuss the matter with an attorney. Perhaps you should have onepresent at this meeting. Get a second opinion from another objective authority.Two heads are better than one. You may be too close to the trees to see the forest. Believe me, avoidance will not make the issue disappear!
2. Take control. Once having understood your situation, and you have established your options, now you must take charge. Within the boundaries of your agreements, whether written or verbal, start the clock ticking! If you have decided to prosecute, foreclose, sue or take other available legal remedies, make time your friend and an adversary for your enemy. Use letters to document your position. State your understandings (whatever they are) in writing. Be specific about the time, date, place and other pertinent data relating to the agreements you have.
Confirm all phone calls by immediately converting any oral discussion, agreements (or failures to agree) to written documents. By pursuing this line of action, you are preparing evidence which, if not immediately refuted, tends to become factual and more believable by lawyers, judges or jurors – if the need arises.
3. Establish objectives in a timely manner. You and your partner(s) must have certainjobs to do. You must re-establish your mutual responsibilities. You need to first assign such jobs and then set dates for accomplishing these mini-goals. To keep track of your progress, or lack of it, set up a goal of meeting frequently with each other – daily, weekly or monthly. If applicable, prepare a report format for actions and reactions expected by one or the other parties. Expect punctual communiqu's, with certain pre-determined penalties for tardiness. A stern posture can bend according to the circumstances.
A wishy-washy person has a hard time getting tough. Keep minutes of these meetings just like secretary of a corporation. When the minutes have been set down in writing; send a copy to each party to either okay or take specific exception. Failure to take exception to any part would tend to indicate acceptance.
4. Compromise. As in any negotiating position, expect to make compromises. It may be better to have your share of the partnership bought out at break even or a small loss for your lesson. Life is full of expensive lessons, so don't hesitate to take a cheap one and count yourself fortunate to be rid of the other party or parties. To achieve a win/win arrangement,I often use a give-up-and-get-back negotiation strategy. Personal,rather than business, differences are all too often to blame for the breaking up of otherwise excellent partnerships.
I know of two sisters who have attended several of my events. One of the sisters is divorced with a couple of teenage kids. The other is married. Together, these sisters have bought several rental units, mostly single-family bungalows and duplexes in a lower income area. They were doing well, and had a tremendous cash-flow because of the kind of properties they were buying.
Then all of a sudden, something went sour and they have been completely at odds. I don't know what happened, but it didn't have anything to do with their income property business or financial matters. It's personal. They don't speak or have anything to do with each other. They've since had an attorney divide up their partnership property. I'm still reasonably good friends with both sisters, so I've seen how devastating their personal problems have been to what was once a great partnership.
Another common reason for problems in partnerships is inequality. Whether there's a valid reason for the partners having unequal interests in their business or not, the partner with the lesser share often develops resentment, and sooner or later will drop the majority partner like a hot potato and strike out on his/her own. One real estate acquaintance recalls being involved in a partnership several years ago in which he owned less than half the business.
His quote to me was, ‘He got the financing, which was difficult to get at that time, and I did all the work. One day the thought hit me, ‘I'm driving all over the city doing all this work summer and winter, torturing myself, and getting the smaller piece of the pie, while my partner lines up some money occasionally, then sits in his nice office and takes most of the profits.'The only reason I stayed with it as long as I did was because I couldn't have gotten financing on my own. But the moment I learned banks weren't necessary to build a real estate business, it was goodbye partner.'
Forging and maintaining a good, viable partnership is a tricky business – sometimes trickier than the business itself. But when such a union works, it can accomplish wonders, yielding rich rewards for the participants. When all is said and done, it is trust, more than any other factor (as mentioned at the first of this article), that lies at the very basis of a good partnership. A business alliance (and your real estate investments are indeed a business) won't survive and prosper without it. From the initial written
agreement stage on, every partner should work to earn and maintain the trust of the other person, or persons, in the alliance.
An anecdote comes to mind that illustrates the kind of partnership that should be avoided …
‘When I learned to buy houses without using my own money or credit, I woke up one day and realized I didn't need to giveaway half of my hard-earned money.'
‘Hey, Sam,' said one businessman to his partner as they were about to enter the ocean for a swim on the afternoon they decided to take off, ‘we forgot to close the safe.' ‘So what does it matter?'replied the partner. ‘We're both here, ain't we?' Now let me add some final comments on how I feel about partnerships.
This will be ugly if you're presently in a partnership. Ask yourself this: What is your partner contributing that you can't provide yourself? If the answer is nothing, your partnership is short-lived. You might as well be making plans to separate now while you're still friends and like each other (I hope). If your partner is putting up the money and you're doing the work, you don't need a partner, you need more training. You're paying many times the price for your education by giving up half your profits.
The Cost Of Education Is Cheaper Than The Cost Of Ignorance
When I learned to buy houses without using my own money or credit, I woke up one day and realized I didn't need to give away half of my hard-earned money. You should have seen the shift in attitude when I told my partner I didn't need him anymore. It was a beautiful thing.
In that light, if you're the money partner and someone else is doing all the work, I suggest you learn to suck up quickly, because sooner or later, your partner will wise up. Make sure they don't get this newsletter! By the way, I've been both a mouse and an elephant. I definitely like being an elephant a lot better. In case you didn't get that analogy, the elephant is the guy with the money.