Working With Partners

Working With PartnersWilliam A. Price, Attorney at Law

www.growthlaw.com, Tel/Fax 1-800-630-4780

Agenda

1. Potential Partner Contributions 1. Potential Partner Contributions

2. Partner Buy-Sell 2. Partner Buy-Sell

3. Partnership Agreement 3. Partnership Agreement

4. Partnership Negotiations 4. Partnership Negotiations

Cycle Diagram

SolosCooperate

SharedExpenses Rainmaker(s)

And Associates

Business Changes orBusiness Disputes

A NewDeal, WithNew Players

Will This Work?

Your PartnershipName Here

New Partnership Value

• Have you determined what the projected revenue stream from the proposed new partnership is likely to be over the next one, two, three, four, or five years, based on your business plan?

Service Value Determinants

• □ the value added by your services compared to the current cost of performing equivalent business activities?

• □ the projected average sale or revenue stream from each successful relationship you initiate, by product or relationship type?

Firm Value Verification Factors

• □ the number of firms that could buy your product or products?

• □ the number and type of marketing activities you plan to direct to such firms?

• □ the percentage of success you think will be reasonable in each of the five years?

• □ the cost of such efforts?• □ the number and type of engagements

likely?• □ the cost of delivery of services?• □ the net revenue from service delivery?

New partner’s contribution

• Have you determined the contribution that each partner will make in the new relationship will contribute to revenue goals?

• Do you know the amount of capital such partner can and will contribute?

• Do you know what percentage of the total revenue stream the projected contribution to be made or already made by each partner or new investor or investor group amounts to for any given period of time?

Data Showing New Partner Value• Have you determined which key accounts a particular

partner can bring to the business? • Have you determined which key accounts a particular

partner can bring to the business?• Do you know the projected revenue stream of such

accounts?• Do you know the cost to the business of using any

software or personnel other than those of your existing business?

• Have you determined the estimated the dollar value of sales that may be related to the general market reputation of a partner or vendor?

• Have you obtained information on other capital, equipment, or other contributions that any projected partner has made to date or will make, with both objective and subjective data on such contributions (e.g., valuations, receipts, personal opinions, etc.) that would allow you to attach a dollar value to the contributions?

New Partner Contributions

• Have you determined what non-cash and dollar contributions, contract agreements, or other costs and lost profits have been contributed to date by each partner?

• Do you know what agreements, written and unwritten, have been made relative to future contributions?

Enterprise Value and Buy-Sell

• Have you thought about who else could be brought in to replace the current or future contributions of any partner?

• Have you determined what timing and amount would be appropriate for a buyout of the percentage interest of any partner, based on such things as the projected cash flow of the business?

Buy-Sell Life Events

• Have you considered what to do in case of the disability, death, retirement, resignation, conviction, or incompetence of any partner?

• Can you afford disability, business interruption insurance, or key man life for some of these events?

• What’s the agreement for items not covered by insurance?

Capital and Control• Have you determined what a reasonable

percentage and absolute value of each contribution should be?

• Have you determined what future calculations of value, and of success or failure, should be entered into before a buyout?

• Do you know what dates it would be reasonable to agree to in order to allow each other out of the deal in future?

• Have you considered what future contributions it would be reasonable to agree to, given that such contributions could potentially change the balance of control in the company?

Frenemies Are Forever

• Have you determined what sales to each other, competition with each other, and use of corporate information each of you will want to permit?

Decisions and Disputes• Have you thought about what mechanisms for

decision making you will want (e.g., majority vote, vote by percentages, one managing member doing all day-to-day business and accounting to others, unanimity, etc.)?

• Have you considered a dispute resolution method?

• Courts can take years to dissolve a company, even with our new and improved alternative dispute resolution sections, so private agreements usually try to short-circuit the process.

Disappointed ExpectationsDreamcatcher Software v. Pop Warner (DC Ct. 2004):

The Court dismissed elements of a complaint as speculative, but allowed trade secret, tort, and other claims to go forward based on allegations by a software company that the parent organization of the Pop Warner software leagues had initially cooperated with and signed a nondisclosure agreement concerning administration software, and had then disparaged the software and developed a competitive product with another software company, after disclosure of significant Dreamcatcher trade secrets.

Dissolution May Not Be Available

Lieberman v. Wyoming.Com LLC(2004 WY 1, 82 P.3d 274)

The Wyoming Supreme Court decided that since the Wyoming Act was silent on the question, a dissociated member did cease having the duties of a member, but could not force the LLC, absent agreement to the contrary, to buy out his membership interest on dissociation.

Agreement Checklist

• Have you chosen a name for the new organization?

• Have you determined the purpose of the organization?

Agreement Checklist 2

• Have you considered the legal form of the organization, along with the liability and tax consequences of that organization form?

• Have you determined what special terms and conditions are needed for the new business line proposed, including vendor or purchaser relations?

Agreement Checklist 3

• Have you considered nontransferability of member/partner/shareholder interests?

• Will a member/partner/shareholder have withdrawal rights, and have you determined the time at which such rights may be exercised?

• Have you considered what distributions should be made on withdrawal?

• Have you determined valuation methods for withdrawal distribution and other dissolution events?

Agreement Checklist 4

• Have you thought about dissolution events, including a method for resolution—or dissolution in the event of extensive disagreements?

• Have you determined the responsibilities for winding up the business if a dissolution event should occur?

Agreement Checklist 5

• Have you considered the contribution to be made and capital accounts?

• Have you set out a procedure for a contribution call for additional capital?

• Have you established a capital contributions form (e.g., capital, loan, in-kind services, contract from your company to new division, etc.)?

• Have you established indemnification and insurance coverage?

Agreement Checklist 6

• Have you established a system for maintaining and accessing organizational books and records?

• Have you considered tax matters responsibilities?

• Have you considered loans and other outside financing—and the conditions on such financing—both now and for the future, given your financing plans?

Agreement Checklist 7

• Have you established decision making and control for management and the authority to contract on behalf of the new organization (e.g., by unanimity, vote by shares, vote by percentage of capital contribution, authority for each of you in separate areas with unanimity for some defined fundamental areas, etc.)?

Day To Day Duties

• Have you set out the division of operating responsibilities?

• Have you determined who will handle budgeting, authorize expenditures, perform profit-and-loss accounting on transactions, ensure periodic mutual accountings for profit and loss, division of profits and losses, and take responsibility (if any) for capital deficiencies if the organization shows a loss?

Dispute Resolution

• Is The Buy-Sell Clear?

• Is the ADR usable and affordable?

• Have you considered debt guarantees?

• Do you have remedies if a partner or shareholder fails to contribute (sales or capital)?

Negotiation Exercise

Principals:Current rainmaker, wants to retire 2015:Able Attorney: $500,00 in billings,

commercial office for premisesFuture rainmakers, hate spending $$:Bonnie Baker, $250,000 in billings, $50,000

of same from new business, rest AA clients

Charlie Chaplin, $0 business yet, AA’s son

Negotiation Exercise 2

Principals:

Able Attorney, litigator, $500k billings, billings down 25% three years in a row

Bob Blaster, business lawyer, $100k billings, 5 banks now working with him, needs a secretarial/billing staff, billings up 25%/year from last year, to go up again

Negotiation Exercise 3

Able Attorney, $250k in billings, does all his own work

Susan Superclerk, $0 in billings, just left government work, never sold new business in her life, but knows the law, and owns $400k in equity from savings that could put into a home, or a practice.