Equity, Conflict, and Opportunity: A Strategic Partnership Breakdown

0:00I think just, yeah, the issues, because there's the deal itself. that just, is it a good deal?

0:12Hey, everybody. Welcome to another episode of Business Lunch with your hosts, me, Roland Frazier, and my business partner, Ryan Dice. Ryan, what's happening? So good. So good. How about you? I'm doing good, doing good. Ryan's on a water fast, so he's barely hanging on. He's on his last day before he gets to have real food again. And so when it's done, I get to have like freaking yogurt. It's, it's not real food. I get to like, I admit, you know what I miss? I miss chewing.

0:42That's all. You should just have like water and a piece of gum and then you'll, you'll basically get pretty much the whole experience. Yeah. Yeah. That's, that's, that's not the whole experience, but yeah. Thank you. Thank you for the idea. Appreciate the suggestion. You're a good friend. so we had a deal that that came along for us and we had a pretty long conversation with with one of our team members and thought that it would be kind of fun to have this be the deal analysis episode where we basically talk about opportunities are coming our way pretty much all the time. I'm assuming that if you are in business and listening to this, that there will be or is or has been an opportunity for you to grow your business through some sort of acquisition, strategic partnership, or something like that.

1:35And so we thought that it would be kind of fun to do an episode where we share with you kind of how we approached a real live deal that was an opportunity for us and see if that could be of help to you. So that's really what we're going to do. I'll set the stage. We had a deal and some of the complicating issues that can create hard discussions, I'm going to talk about too. So setting the stage, we had a opportunity come to us through one of our contractor vendors. And they brought us into a deal that they thought we could add some value to as an equity partner. And ultimately, the vendor part of the deal didn't work out, but our part stayed.

2:32And that gave us this small interest in a deal, which honestly, neither Ryan or I had a whole lot to do with because it was brought to us by one of our other business partners and people that we work with in things. And so then the person who had the company decided that they wanted to sell the rest of it. So the opportunity to do a full acquisition as opposed to a consulting for equity deal presented itself as that sometimes happens. and it became an opportunity for us to discuss. Now, the complicating factors would be, one, the person that brought us the deal had another partner that was interested in doing different things that we don't do and maybe acquiring the company.

3:23The person that brought us the deal wanted to acquire the company with us. I brought Ryan in to talk about it because it came in through the vendor of a company that we own together. And then another company that we have an interest in is in a similar, arguably competing business to this one. It's not directly competitive, but it's in a similar industry providing different services and products. So it's kind of complicated and messy, which makes for the best, most fun things to talk about. Right. So, so that's like, that's the, the frame around it. Anything else you think would be helpful in that part?

4:09I think just, yeah, the issues, cause there's the deal itself that just what is, is it a good deal? Right. That I think we got to get to, but there's also aligning. What do you do if you have a business associate or a business partner who, or even an employee, you know, or an employer, a contractor who brought the deal, like, how are they going to be involved in that? Like, so they brought the deal and they're thinking like, Hey, cause I brought this deal along and I kind of had the conversation, I guess I'm in on the deal too. Right. Um, and then other, other people saying like, yeah, and I'm going to be involved as well.

4:44It's like, but if you're involved in this, then how are you, how does that impact your work here? You know, which we've seen happen before. And then there's the whole possible conflict with another portfolio company. So these are all things though, if you start doing a lot of deals, they're just going to come up. They're going to come up where, what do you do when you're interested in doing a deal that is potentially competitive with another company that you own, even a minority statement? How do you handle that? So I think we should tackle that first. So how do you deal with possible conflicts?

5:14That should probably be question number one. Question number two, how do you deal with related parties in the deal and their involvement in it? Whether like, cause they're going to add value to some degree or another, but maybe in some cases they think the value that they add is higher than maybe it is, you know, or maybe the value that they want to add is in direct conflict with other work that they're doing for you. And then there's the deal. So I think there's kind of three phases to, to approach this with. I don't know where you want to start, but assuming you agree with those three phases, go nuts.

5:45Hey, Ryan Dice here, co-host of Business Lunch. And before we get to the show, I have an exciting invitation for you. My business partner and Business Lunch co-host, Roland Frazier, and I are hosting a live in-person event. And if you're a bootstrap business owner who wants to build a 10 million and even$100 million business in the next three years, you need to be there. This event is called Get Scalable Live and over the last four years it has transformed from a small gathering of entrepreneurs into the largest bootstrapped entrepreneurship conference in North America. Now I know what you might be thinking, you're probably thinking, Ryan, really another business event?

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7:37Again, that's GetScaleableLive.com promo code LUNCH. It is truly amazing what can happen when you step out of the day-to-day and spend just a little bit of time surrounded by other powerful business owners. And since this opportunity only comes around once a year, you don't want to miss it. Again, the link is getscalabellive.com and don't forget to use promo code LUNCH at checkout to save up to 67 % off the full ticket price. That's all I got. I'll see you in Austin. All right, back to your regularly scheduled programming. We'll start with the first one you said, which was the potential conflict with other companies that you've got.

8:16To me, it has to be, the difficult question I think is when do you, when is it an opportunity? And that is something that in this case was, was a bit of a challenge because, um, the consulting for equity deal got done. I was basically, um, just kind of told about it. You know, it's like, it's like, Hey, we're doing this thing. That's an opportunity. Uh, is it something that you're interested in? And the answer is, you know, yes, I'm always interested in it. It sounds cool. And then it got done. And, um, and now we have this interest and, um, but I don't know anything about it. Like, I don't know, I don't know anything.

9:01I don't know, you know, like, do we make money from it? Anything. Cause it was just basically done by, you know, by another business partner and, and, and it was, you know, a very small interest. So I gotcha. It's a, it's an, it's an exotic tropical fish. um it i got it for you for your birthday um it you know it requires a very expensive and fancy food that you can't really buy locally you're gonna need to drive two and a half hours to get it but uh you're welcome yes exactly exactly kind of which is my favorite kind of gift to give by the way it's a gift for the family that's what you give to your very close friends But so the, the, I guess the issue there was one the, the other company basically, I don't know how they ended up talking to this person.

9:53And, and there's, you know, there's some lack of clarity around where, where did this, where did this deal truly originate? Did it originate from there? Cause the people in that company think maybe it did, but aren't sure. And it definitely didn't come to us through them. It came to us through a vendor and it didn't come to me. It came to somebody else. So it's very, it was very removed yet in conversation when I mentioned that, that we had that CFE deal, the consulting for equity deal, the other company, it created challenges because they're like, you know, well, Hey, what the heck, you know, this is a business we're in and we're interested in that.

10:33Now, I don't even know what the company does at that time. I have an idea of the market they serve, but I don't really know what they sell or what the offer is or anything. And so all I could tell the other company was, if it's a conflict of interest, I'll sign it over. I don't want to have a conflict of interest. So if that's an issue now, you can have, we'll just take whatever I've got and we'll put it here and we're good to go. So, but truth, truly guys, I don't know what it does. I've just very removed from it. So that's an issue. And I don't still know that I would take that. I will in that case, because I know they're hypersensitive to it.

11:17But like, if it was for you and me, I don't know that I would take it to you until I knew a lot more about it and whether it was an opportunity and what we could do, because there's so many things like that that come up that to me, it's just like, until you have an idea of what it is, what is the value in presenting? So if you have a partner, I think, that is sensitive to potential conflicts of interest, you should have a higher level of what you're going to tell them, you know, hey, this thing came, I don't know anything about it yet, but it might be a thing. Or do you develop an opportunity more to where you actually understand what it is and then bring it to them.

11:57I think that's just depends on the people you're dealing with. What are your thoughts on that? Yeah, I think kind of the first hint where you think like, oh, this could potentially be a conflict. I think when you first think about that and that's a judgment call, right? I mean, so at some point you're trusting basic human judgments and there it is like that, that's called being in relationships. So I think at the at the second that you think like, hmm, this, there could be a conflict here. I'm going to go and talk to this person and just give them a heads up. Hey, just so you know, this deal came across.

12:29I don't have all the details yet. I don't think it's directly related, but I just want to let you know, I'm looking into it. If I find that it's directly related, I may loop you in and we can have a conversation about it. But I just wanted to give you a heads up now so that if this comes up later on, if you hear through the grapevine, you know, you don't think I'm trying to, there's no shenanigans involved. So I think the slight hint, when you think it's there, then you talk about it. But again, to your point, you didn't know about it. And even in looking into it a little bit, and still to me, like I know the deal that we're talking about, and I know the potential competitive party.

13:08I don't see having looked into it how there's really any significant competition. They fundamentally serve different markets, even if there's a slight crossover in its industry vertical kind of thing, it's just very, that Venn diagram is still, you back up, it still looks like two circles. There's very little overlap, you know, in there. But I do think at that point, you have the conversation. Now, what do you do if you believe that there isn't a conflict, but if the person you're in business with does. How do you handle that? I mean, to me, I think it depends on the, on the, on how credible you think that is and how valuable the relationship is to you.

13:52Um, so I'm going to throw it back to you. I think those are the considerations, uh, anything else that would factor into the capital? I think you're right. I mean, I think at some point if a relationship, I think we're relational people. I think there's a lot lot of people who are transactional in business. So the, I think the transactional answer is I'm going to make it, I'm going to have a conversation with the person. We're going to have a discussion. I'm going to make a judgment call. And if at the end of the day, if I disagree with them, I'm going to move forward and I'm going to tell them, Hey, I disagree with you.

14:25I'm going to move forward in this deal. Cause I think it's important. I don't think it's in conflict. And if you disagree, well, I guess you can freaking sue me. That's the transactional response to it. Right. I mean, that's kind of it. It's like, I'm going to do it because I don't agree with you and i but there are some people in our lives who they get to be irrational yeah right i mean certainly that that happens with spouses i mean i know i'm not that we're suggesting in any way that our spouses either of them are not at all irrational i'm the irrational one right but there's i know there's been plenty of times you and i where i've been irrational and stuff and you've bent to that i mean the very first deal that we did together was a terrible deal.

15:03It was a completely like take emotions out of the side that it was a super crappy deal. Like in every way, shape and form, I really wanted to do it was completely irrational. Again, not emotionally irrational, just wanted to do one. And you were like, all right, we'll do it because you want to. And I think that there are some people in your life who you, you will let, you will lean into irrational things and you will say yes to stuff. You know, you shouldn't say yes to and no to things that you shouldn't, that you would like to say yes to for the sake of that relationship, because it's valuable.

15:34Now that's to a certain point. If the person's like, I want to do this illegal thing. You're like, it's irrational, but I love you. So yay. I'm obviously not saying that. I am just saying that I think the criteria that you had is thing. Number one is how valuable is this relationship to me? And if it's valuable and it matters to them, then it's got to matter to me, even if I think they're being irrational. And I would generally err on the side of passing. So like, to me, it's like, if somebody that I, and really, I don't, I can't, I can't think of any transactional relationships that I have, because I really don't like them with business partners.

16:13So, so I'll say, I believe that if it's anybody that I was a business partner with, if they felt that way, and felt at all strongly about it or even I felt that there was a tiny dilution in the relationship, I would pass. I would just say, you know what? Life is full of opportunities, so I'm not going to do it. Especially since most deals don't work out. I mean, the worst thing in the world you could do is pursue and be like, to both ruin a relationship for the sake of a crappy deal. So I agree. Or I think you try to loop them in on it. Like what if you're involved in this? Maybe it makes sense Which is what I did.

16:52I said, look, I'll just sign it over. So no issue. I mean, no, no hesitation, no argument because it's not worth it, you know, to damage the relationship. So that's, that's the first thing. Um, I'm trying to remember the second thing of your three finger. I think the second thing is just what if there is somebody who brings you the deal or they're in some way involved in the deal? How do you, how do you deal with multiple stakeholders within a deal where the division of labor is a bit unclear. And some people think that maybe they should have a bigger part of the deal than they should. And this happens a lot of times with partners coming together with where you've got one business.

17:31So we've got multiple businesses together, but then there's an opportunity for a new deal. You're the one who brought the deal. Maybe you're going to be doing the bulk. I'm going to be doing some. How do you kind of deal with the equity splits and arrangements from a practical purpose and then from a relational, how do you communicate that? Yeah. That's a tough, tough, tough question. I think that the first thing would be, is it core to what you do? If it is, then it comes in at whatever the pro rata ownerships are. What do you mean by that? Break that down a little bit. So if you're, you know, we own a company that has a business operating system.

18:12If an opportunity comes along that is an enhancement or, you know, significant complement to that, then to me, that's an opportunity of that entity. And however it comes from, whoever it comes from, if it gets, for number one, it gets presented to that company as an opportunity. And then number two, if that company takes advantage of it, it's just owned in the same proportions. And, you know, if there's a, you know, a significant additional requirement of effort or participation or investment. Yeah. From, from outside, you know, from the individuals, then that you can have a conversation about how that might work.

18:58But generally that would be, you know, Hey, we're going to buy this. This is, I found this seems like something cool. Do we want to buy it? Yes, we do. Great. Let's buy it. however that works out, you know, whatever the documents that you've already got or the relationship that you've already got, it's going to be pretty much pro rata, right? If it comes from somebody else. Just real quick on that, Roland, because I think this, so hypothetically speaking, let's say we wanted to, there was an opportunity to buy a company and it was a million dollar deal, like to buy the company was a million bucks.

19:31The company itself really is only comfortable putting up a half a million. And the other partners who were involved are like, I like the deal, but I don't know that I love, love the deal. If one of those partners is like, hey, I'll put up the other half a million, then it might make sense for that company to be owned 50 % on its cap table by the partner who put up the half a million and 50 % by the company, which means that partner who put up the extra kind of gets a double dip because they're also a partner in that. So they might wind up owning more than 50%. And that's totally appropriate. I think it's important.

20:03People think that equity is a function of effort and it's really not. It's a function of risk. Yeah. Right. And so, and risk can take the form of like risk capital. So money that other people aren't putting up. And so if that's disproportionate, it can also take the form of, it can take the form of effort with opportunity cost. So yeah, I'll do this deal, but me doing this deal means that there's a lot of other things that I can't do. I got to say no to, it could potentially be valuable. So I feel like I should have more. And so I just, anytime you're doing these negotiations, I think you always want to start, you know, with partners and friends, especially if they're less sophisticated with, can we all agree that equity is not a function of like effort or, Hey, I found it.

20:45It really is a function of, of risk. What's going in. Yeah. Yeah. And most of the, like from a legal standpoint, most companies that have documents will basically say that, that you have offer it to the company first. If the company says no, then you can, you know, then the individuals that want to pursue it in the company can pursue it. And if none of them want to do it, then the individual that brought it can pursue it. And if that doesn't want to do it, then it doesn't happen. Right. So that's, that's a relatively clean way of doing it. If it's somebody that's bringing the deal, that's not going to have any continuing involvement.

21:21There's a relatively standard, you know, two to 5 % finder's fee or a bounty that you would pay them for bringing the deal. And typically we wouldn't, if there wasn't going to be any ongoing involvement, we wouldn't really want that person to be involved in the company because they're just dead equity on the cap table. And, you know, it's better to give them some amount of money and, you know, and to say thank you and then let them go do other things. So I think that's a a fairly standard thing on that side of it. And then if the person, as in this case, if the person works with the company as a partner in, if there are different deals that you're doing and it's messy because they're an employee of maybe the company the deal came from and their partner and other things too, then you have a little bit different thing to look at.

22:19But if it It came through the company, whatever company it came through, it's an opportunity of that company first. And so I think you have to have a conversation about that. Yeah, so let me give you an example, a hypothetical example to maybe bring this home for the listeners. So one of our business partners, Richard Linder, and by the way, he has nothing to do. And so this particular deal, he's safe to use because he has nothing to do with this deal. But let's say Richard, he does his own networking. He's involved in, you know, we, as we encourage like all of our operators, all the CEOs that we have to be involved in, in CEO peer groups and things like that.

22:57He comes across an interesting deal, right? That he's going to go and do. And so this deal could potentially be a decent tie-in into one of the companies that he's running in our portfolio group. And so he wants to bring this deal to us, you know, and he's saying, I think it's a really great opportunity. I'm willing to put some money in. So I would like to have a majority, you know, I think it's appropriate for me to have a bit more stake in it because I want to put the money in and the company doesn't. So the company would own some. I'm going to personally own some more. And, you know, I also, you know, I'm going to I'm going to be, you know, actively kind of running this thing.

23:33Right. In that case, we probably wonder, yeah, OK, but what about. the fact that you run these other businesses that we all own per erratic. Because my fear then is if you go and do this deal with this other company that you put some skin in the game, you know, love you, Richard. And I think you're very talented. And I think you are highly productive, but I also know you still got 24 hours in a day and you'd like to sleep some of those. So if you add in this new thing, what is the opportunity cost? You know, we basically wind up acquiring an entity that you have a majority stake in that we know that if, you know, push comes to shove, you're probably going to focus more on that because you've got more of your money in it.

24:18So how do you handle that? Because we want our team members, we want our operating partners and things like that to bring in deals. We want that to happen, but we don't want it to happen at the expense of what we have right now. So that, how do we handle that? I mean, I think you can't do it. If it's going to take away from what you've already got, you it's it's like saying and we talked a little bit about this with the ghost jobs i think it was called or something like that uh in another episode of of employees that are working for you but also have two other full-time jobs um you can't possibly if you're being paid for a full-time job and you're going to go or you have equity you know as an operator for full-time and then you have this other interest it just doesn't work it you would have to change the relationship and not be a full-time employee anymore if that was acceptable.

25:10And you can have a conversation about that, but I don't think it's possible to continue to take your full salary and have less time to focus on it, even if you believe, as I used to, that you subscribe to the myth of unlimited capacity. I was like, I can do everything anytime. You just can't. And you will make decisions that will damage both businesses. And so, you know, it can't be status quo and we're just adding this giant new thing that you have a significant capital investment in and you're going to have to give a time investment to because you can't do it. I think it's got to be a conversation.

25:50What are your thoughts on it? Yeah, same. I mean, I don't believe that somebody can have two full-time jobs. I just don't. And so the argument is, is this going to be a full-time job or not? And what a lot of people go, oh, no, I can kind of do it in addition to what I'm doing. Yeah, but can you? Right. And I think that's where there really does need to be that honest conversation because ultimately, if it's two full-time jobs, then you got to pick. And so now the conversation, if you're really excited about this, then that's okay. You can go over here and do this. And if this company can afford to pay you the same salary, fine.