#80: Why Your Small Business Partnership Needs A Prenup Agreement with Tanya Bower

Show Notes

Regardless of the type of business you’re forming or whether your business partner is a friend, sibling, family member or colleague, you don’t know how long the relationship will continue and how it will end. 
​
To understand the ins and outs of how business prenuptial agreements work co-hosts Lori Vajda and Nola Boea sat down with legal expert Tanya Bower. Listen in as she explains how a business pre-nup protects both of your interests, what specifically should be included in the agreement, and what to do if you formed a partnership without one.

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In This Episode You’ll Learn 

• How you can protect your business in case the relationship just doesn’t pay off.
• What do you need to know to avoid putting your business at risk.
• Different business entities are subject to different kinds of business agreements.
• Tips and topics to put include in a business prenuptial agreement. 

Key points Lori and Nola are sharing in this episode:
(5:24:75) How business pre-nups help you avoid court, avoid litigation, and reduce court costs and potentially putting your business out of business.
(07:03:51) How a business prenuptial agreement, is different than a business partnership agreement, an LLC, and an operating agreement.
(08:59.86) What to do if you've already launched your business and have been working together without a pre-nup, what do you do you then?
(15:59.56) These are the basics issues you want to make sure you have in the agreement. 
(29:02:27) Should you have an attorney draft a prenuptial business agreement, or can you use an online templates or can you write it in yourself?

Resources 

You can subscribe to Lori and Nola's show, (we love you and want to make it easy) on Apple Podcasts, Spotify, Audible, Google Podcasts, Stitcher, or wherever you listen to podcasts.

Connect with Tanya Bower: Website: www.trippScott.com 

This episode was supported by: Be-YOU-nique

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​Transcript

​00:00:00] Tanya: As I say to clients, you think a divorce is bad? Try a business divorce because somebody else is controlling how you're eating. Like the money's not coming in.
[00:00:09] Lori: Starting a business with someone is a lot like entering a marriage together. You both know and like each other, and you're both committed to the relationship. However, you enter a marriage with the expectation of staying together until quote unquote. Death do us part. That's usually not the case in a business partnership. And what about a business prenuptial agreement? Do you need one or is a business partnership agreement enough? Stay tuned friends, because in this episode, we're talking with attorney Tanya Bower about what you need to know before you make a business commitment with a good friend or a highly regarded colleague.
[00:00:47] Announcer: You're listening to the Sticky Brand Lab podcast where time-strapped professionals like you learn how to create a business you love in as little as three hours a week.
[00:00:58] Nola: There's a reason they call the start of a marriage, the honeymoon period. It's because in the beginning, you and the other person seem like a great fit. You share similar interests, values, and goals, and both of you are committed to the success of the relationship. Here's the funny thing. That same description applies to a business partnership. And just like with a marriage, no one involved in the business expects it to end in divorce. But the reality is that many business relationships will not make it to forever. Yet people will pool their money into a business without thinking about how the partnership will end. And maybe it won't end, but life happens in unpredictable ways. Goals and time commitments change. Someone will get sick. Someone might get divorced. Sometimes it's a change in differing expectations. The point is you need to plan before the worst-case scenario happens. Which is why we wanted to talk to attorney Tanya Bower.
But before we begin, a little disclaimer. In today's episode, we'll be exploring the topic of what we're calling business prenuptial agreements with attorney Tanya Bower. The ideas and opinions shared are for informational purposes only, and do not constitute professional legal advice. Please consult with an independent legal expert for information specific to your city, state, and circumstances. And now on with the show.
[00:02:19] Lori: We are so glad to have Tanya back on the show to help us and our listeners understand the good, the bad and the unpleasant parts of a business partnership. Tanya is a director with the law firm, Tripp Scott in Fort Lauderdale, Florida. A practicing attorney since 1996. Tanya's practice focuses on corporate and tax matters. She counsels business owners on our wide range of areas, including establishing and dissolving corporations, drafting contracts, partnerships. Establishing amending and terminating pension plans and representing owners and acquisitions and mergers, as well as analyzing the tax aspects of these transactions. Welcome back Tanya.
[00:03:00] Tanya: Hello. How are you both?
[00:03:01] Nola: Real good.
[00:03:02] Lori: We're good and
[00:03:04] Nola: Glad to have you back.
[00:03:05] Lori: Yes, we are.
[00:03:06] Tanya: Thank you.
[00:03:07] Lori: The last time you were here was shortly after we launched our podcast and we were looking at that. That was episode 16. What you need to know about incorporating your business. Now we're approaching episode 80, so it's really awesome that you're here and that previous episodes. Nola, it was one of our most popular episodes, really.
[00:03:31] Nola: It was a big hit. Absolutely. Yep.
[00:03:34] Tanya: Well, thank you.
[00:03:35] Lori: Now, just to clarify, usually prenuptial agreements have or at least it seems has quite a stigma attached to them. And part of that is because they focus on the end. At the beginning of a relationship when people are really excited to either enter into marriage or in the case of business, enter into a business relationship and they tend to not make the news until the divorce happens or somebody contests a prenuptial agreement. So our first question right out the gate is what is a business prenuptial and why would two people going into business want or need one?
[00:04:17] Tanya: Sure. A business professional probably is in the technical sense called that is I think what a lot of attorneys and people industry jokingly call them prenuptial agreements because they are, they're actually envisioning what happens if this partnership ends. Or something goes a foul. And then what, like a marriage, it can ruin your life or it can be fine. Right? So he has all looks at it. So depending on the type of entity you have, they have different names. There's a general concept, no matter what entity it is called, a buy sell, which just deals with, if you want to leave what you want to sell, or if someone wants to buy. But in most instances, they're governed by documents that based off of the type of company. So a corporation typically has like a shareholder. A limited liability company has what we call an operating agreement. And a partnership has a partnership agreement. They can be super broad and not have a lot of bulk in them, or they can be really envisioning what if like you do with a prenup and they can be rather lengthy, but either way, I think it's important that you have one because I've seen it. I had a client come in to me, two female partnership. They were in the beauty industry and the one partner came in on a Monday, crying her eyes out. She had found what she thought was some misuse of some regulative product and wanting to know what to do and didn't want to work with the partner anymore. Trust was gone and what happens? Well, the law would tell us what happened. If you don't have an agreement you're just stuck with the law. So the first thing I told her to. You go to the bank. Closed the bank account, open a new bank account and the company name. And you're the only authorized signatory. So we're not stealing, there's no theft, but now you've kept your partner, who you no longer trust, who has you take mismanaged funds and has mismanaged product, from doing any more harm. So when you have agreements in place, we're not stuck with just going to court. To solve the problem. There are actions within the document that will allow you to hopefully avoid court and avoid the litigation and the cost and the expense, and basically potentially putting your business out of business.
[00:06:23] Nola: Is there anything that a business will call a business prenup? Is there anything that one cannot do? Are there any like caveats?
[00:06:30] Tanya: There's certainly things that are probably statutorily imposed. Like in Florida with a limited liability company, you can take the voting rights away from another member, except for, for things that you they're required by statute to vote on. So I wouldn't say there's really any, no nos, but there might be statutorily imposed limitation, but generally most statute. Pretty much every state day, unless you have an agreement that they otherwise face the following. Here's your default. Okay. And you may not like the default.
[00:07:03] Nola: So we know, especially from the last time we spoke that there are three main types of partnerships, general partnership, joint venture, and a limited liability partnership. And the question is. Is a business prenuptial agreement, the same as, or part of a business partnership agreement or what you had said maybe in an LLC, an operating agreement, or is it like, as, in addition to?
[00:07:31] Tanya: Generally, if you're going to go that route it's within the partnership agreement.
[00:07:35] Nola: Okay.
[00:07:36] Tanya: Yeah. As long as they say, you don't have to have a partnership agreement. A lot of times a partnership agreement, an operating agreement, a shareholder agreement, they talk about governance. How many directors you're going to have, how many offices you can have, what voting rights you're going to have, especially with partnerships and limited liability company. How profits are distributed, how taxes are paid. All of that may or may not be in the agreement, but what I do, because the more prenuptial part of it is what happens. If you have two partners and one gets sick and can't work, are they disabled? Do they get bought out? Do they get to continue to ride along, but they're not providing any services? What happens if they die? What happens if they say I can't stand you and I don't want to work with you anymore. Right? In the old sense and old partnership agreements that they didn't really address those issues. But I think as litigation happened as life occurred, we've gone and we've seen that happen and that can wipe out businesses. So the prenuptial part can, or it doesn't have to be in the document. That's smart business owner and a smart lawyer will advise their client or the business owner will think it's through and have that agreement because they can do a lot of things. They can talk about expectation, but it can talk about the what-ifs. And the expectation if the what-ifs occur.
[00:08:53] Nola: What if you've already been working together and you've already kind of launched the business? Is it too late?
[00:08:59] Tanya: Absolutely not. You know, in the marital world, they call that a postnuptial agreement. I've represented many clients who have been in business for a year or two, and they realize, oh my God, this is really successful. We're feeding our families. We're feeding all of these employees' families. And if something goes south, we need to ensure the continuation of the business and the livelihood for the employee. One of my first clients at my firm that I worked with 20 odd years ago. Were three brothers and everything was kind of hunky dory, but they could see that it's brothers, they don't always get along and different views on different things. And they had actually had one brother leaves a business. And so that preempted them to come in and say, okay, we need to work this out while we're happy. And we're getting along of what happens in these situations.
[00:09:50] Lori: When you're forming a relationship business is what we're talking about. But even in a marriage situation, you're at the beginning, you're in love you like each other. You want it to work. Should you each have your own attorney review your business prenup or is it okay to do that together with one professional?
[00:10:13] Tanya: So that's a great question. And I can tell you it's probably divided. I would say there are different analyses for different situations. It is not uncommon for me to really represent the company and draft them really kind of on the company's behalf and not take any side was a shareholder. But at the same time, I think at some point somebody has got more thoughts on the other. And I think if you take the time and send the money to have one attorney represent one shareholder and another attorney represent another. Now, if you have like four or five. Even if you don't need five attorneys involved because that may never get done, but at least it's going to be hard to be somebody who had more shares of last you know maybe that way. I think you end up having better discussions when each side maybe has somebody involved, I have a good friend who was going to business with a former boss of hers. And we talked about it and I said, you know, ultimately, I want to represent you and the negotiations for your partnership agreement. I can represent the company after that, but I want to make sure you're protected because they were coming in as 50-50. And that leaves a whole nother world of questions that you also have to think about. I gave a list of questions that needed to be addressed, and they basically did a retreat and they had like a business advisor come in and sit with them and they just bantered back and forth. And they came up with the decisions. I was like, I came to some ideas of things are options because they're 50-50 of what they should consider. But they were like, okay, we'd like this idea, but this is how we want to modify it. And they literally had come back and had come into agreement. So while I technically represented my friend in that, I think they took the time and the energy to sit through and go through the hard path of answering those questions amongst themselves, that I honestly don't know if I got a single comment back from the former boss’s attorney.
[00:12:06] Lori: That's a good thing, right?
[00:12:07] Tanya: Yeah. Yean. I think it causes more. I don't want to say fairness, but I think it causes those hard discussions potentially to happen.
[00:12:16] Lori: That makes total sense because you don't really think about it. I mean, even as you're going through all of these things, the one question that I had is you can't, or maybe you can possibly think of every scenario. For which you're offering up a protection. So it seems to me and correct me if I've got this wrong, the goal is to figure out how you're going to make decisions to the best of your ability with the goal of not going to court.
[00:12:46] Tanya: Correct. Yeah. I think we can cover the big life event generally. And I think one that commonly gets overlooked as disability. And what happens when someone's disabled? Yeah. And I wouldn't be honest to say, would I get eye rolls? I was like, well, what if somebody is disabled? Because I didn't know. And I'm like, okay. But so now you're running the company. You have no help. Are you going to be okay with that? There's still getting paid. That one gets a little bit of an eye at sometime, but, can cover the ones that you see commonly litigated because we see them commonly litigated.
[00:13:15] Lori: Okay. That's helpful. One of the things, when we were doing our research, we found what's called a Uniform Partnership Act. Is that enough? Or do you still need to have a business prenuptial agreement?
[00:13:31] Tanya: So the Uniform Partnership Act is not enforceable and it's by itself in its name. It is more or less laws written by a national committee that say, this is what should happen in a partnership. This is how these should be governed in a partnership. And then those Uniform Acts have brought back to a state and the state can adopt it en masse or the borrower will come in and say, well, we don't like that. That's like a Delaware thing. We don't like how Delaware looks at it or that's the New York thing. And we don't like how New York looks at it and we're going to tweak it this way. Or our common law has evolved to this and so we're going to modify it. So it's thinking about it as like, almost like a boiler plate rule that they then kind of carved to a state and that becomes the Partnership Act for that state.
[00:14:11] Nola: Okay.
[00:14:12] Tanya: What that is, is that your default. The state has now decided if X happens in your partnership, this is the default. You may not like that default. Because the default like in partnership incorporations, the default is dissolve it. Bye-bye you're done. You take half, you take half and bye.
[00:14:29] Nola: Wow.
[00:14:30] Tanya: That's the ultimate remedy.
[00:14:31] Lori: Wow.
[00:14:33] Tanya: And it also says partnerships not as much, but like in a corporation, you guys let's say you had 60 grand in the corporation and Lori, you didn't have a shareholder's agreement and you said, oh, I just want I've had enough. And I'm going to go sell this to Nora's least favorite person on the planet. The statute won't stop you from doing it. Nora, couldn't stop you from doing it. Your agreement could stop you from doing it.
[00:14:55] Lori: Oh wow. So Nola lives in one state. I live in a different state. I know other business partners that are similar. There are two different states. Do you, as part of your agreement, say the default is to Florida state or to wherever do you pick?
[00:15:15] Nola: Wherever it's incorporated?
[00:15:17] Tanya: It's generally where it's incorporated. So you just pick what the better region to incorporate. Although some states will say, well, you have a physical office. So let's just say, Nora's in a position where she can work remotely. It doesn't have to have a physical office. Lori, you have to have a physical office because let's just say you're selling product as well. And so that then deems the state, you live in, you either have to register it in that state or you become a foreign entity in that state. But regardless, whichever state you set up the company is a default for the rules that apply to your company.
[00:15:49] Lori: Okay, that makes sense. Can you tell us specifically what kinds of things, at least in a bold kind of brush stroke, what are the basics that you want to make sure you have in the agreement?
[00:16:03] Tanya: Sure. So I think we set a little bit governance, directors, who's voting for them, voting rights, but I think the bigger one, the prenuptial side of it is can you sell? Can you just decide you've had enough and just sell it on the open market? Can you give it to your family? What's your rights to transfer it? You know, this is a closely held, so it's not publicly traded. It's not on a public stock market. So the market is a little different. Does your partner have some right to say yay or nay? Or they can say fine, you have an offer for somebody to come in and buy half of the company for a hundred thousand dollars, I have a right of first refusal. So I have to pay that hundred under the same terms that buyer was offering. So it does that kind of thing. What it comes down to transfer rights. What are your transfer rights? And transfer rights occur in life events or they occur when you just said, you know, somebody likes this business and they want to buy me out. All right. So let's go. So let's say Lori, you had somebody come and say you own 51, Nola owns 49, Spotify wants to buy your podcast and you say, great. And they say but I want to buy a hundred percent. Well, Nola can sit back and say, I'm not selling, or are they going to pay me more than they're paying you because they need me now. So you can put it in the agreement that Lori, you have the right to force Nola to sell. And vice versa. Spotify comes in and says I only need 51 to control it. I don't really care what Nola wants. I control it, now, if I buy your 51, and Nola can sit over here saying, no, no, no, I get to sell too. And Spotify says, I only need 51. Well, then that can be controlled by the agreement. And we'll say, well, proportionate, Lori, you get to sell 51% of your share. And Nola gets to sell 49% of her shares and then all the company gets is 51% and you're still there, Lori and Nola's still there. So, most statutes still cover that. That's a prenup side of that kind of business agreement. It's a lot about controlling transfers.
So, one of the things that I go through and I don't care, male or female, I'm just going to be generic. Somebody comes in and says, I don't ever want to be in business with my partner's spouse.
[00:18:05] Nola: Oh,
[00:18:06] Tanya: Dont want to do it. They have no clue about the business. All I care about is if there's a divorce, the spouse can't own the business. Very few statutes address that. The agreement can address it. Is it a buyout? Do you have a mandatory right? Do you have an optional right? Or does it switch to the spouse can continue along and just benefit from profits, but have no voting rights? So those are all questions that should be asked.
[00:18:31] Lori: And these are the things that you can absolutely put into your agreement?
[00:18:36] Tanya: Yes. Yes.
[00:18:38] Lori: Wow. Okay. So there was the buy, sell, the buyout, distribution,
[00:18:44] Tanya: Depending on the type of entity, some of that will be governed. Like, with an S corporation tax laws require everyone to be treated equally on distribution. The only thing that can be different is voting rights. So if you don't distribute properly, pro-rata based off of ownership, you lose your S Corp status, but here's the question, right? You don't have an agreement. We have no agreement in place because you don't need one in a corporation. You can just default to the statute. And the company earned a million dollars. And Nola knows you don't have the cash on hand to pay the taxes. And she wants to force you out or she wants to decree how much you owe. And so she says, Hmm, company doesn't have the money to make a distribution. So you're going to have to pay the taxes out of your savings. Cause an S Corp is a pass-through or a limited liability is a company that is a pass-through. So some of that can go in there. We could. Okay, well, you don't have an agreement and you want to squeeze somebody out who only owns 10%. Oh, I guess they gotta pay taxes on their own. There won't be any distribution to cover taxes this year, will there. So that's one of the things that, that business prenup, right? That's kind of the time the statute doesn't require a distribution. In fact that the statute says, in certain instances, you can't make a distribution.
[00:19:49] Nola: Really?
[00:19:50] Tanya: Yeah. If you're going to make the company insolvent you can't make a distribution.
[00:19:53] Nola: Okay.
[00:19:54] Lori: Now, all of the sudden it moved from a nice to have, to, why wouldn't people have this kind of agreement in here because you're pointing out all of the areas that aren't covered by a partnership agreement.
[00:20:09] Tanya: Well, by the Act right? The Act. So, if you guys are 50 50 and you can't agree, by the statute, and by most acts, what does that mean? By most agreements? We can't agree. We dissolved it, bye bye. Well, who gets the company name? Who gets the rights to the copyrights? So even if you don't have any agreement anymore, you guys are still partners. To each get 50-50. You get 50-50 of the rights. What does that mean? Who gets which right?
[00:20:33] Nola: Wow.
[00:20:34] Lori: My mind is just blown.
[00:20:37] Nola: These aren't things people think about when they're in their business honeymoon. Right?
[00:20:41] Lori: Right.
[00:20:43] Tanya: So I have a story and I have a story of two physicians in Miami and two doctors, very, very successful. Came to my firm. They'd probably been in business maybe 10 years and we talked about some things they needed and I drafted a shareholders agreement. And they said they called and I was young. I was new. The for maybe they're a year at that point. Why did you draft this? We don't need one, we have one. So I apologized, I misunderstood from our conversation. Don't worry about it. I won't charge you for it. That's my mistake. I apologize. 10 years go by. One's a little older than the other. And he's also like getting a divorce. He's having the classic midlife crisis. Doesn't want to work as much. Doesn't want to have to use any overhead to pay for the new physician they've hired to train, to help with the overflow. And they call me and they say, we're done. We can't be partners anymore. I said great, send me that shareholder's agreement you have. And I get, yeah, we never signed one. I thought we had one and we didn't.
[00:21:45] Lori: I'm afraid to ask what happened. Yeah.
[00:21:48] Tanya: So think about it. They're in medical practice with tax ID numbers. That is how they get paid every dollar. Everything's done by tax ID number. And they both look at me and they say, well, I get the name and I get the tax ID number. And I said, no. Only 50-50. And so literally one of my colleagues who's a litigator came in and kind of mediated it, and so the end result was nobody got the name. Nobody got the tax ID number. We split receivable by who earned them after overhead was paid. And they all had to start over fresh for insurance purposes and licensing purposes and payment purposes.
[00:22:26] Nola: Ouch.
[00:22:27] Tanya: And the doctor who I continue to represent today said I probably should have had that shareholder's agreement you drafted.
[00:22:36] Nola: I wasn't so dumb after all was I?
[00:22:39] Tanya: And so then his new partner, which was the doctor they had hired after a year or two, he became his partner. We were drafting the operating agreement because he had one that was just him. And we were modifying it now because it was bringing a partner in. And he said, oh, by the way, I get to keep the name and I get to keep the tax ID number. He needs to agree to that. If he doesn't agree to it, he can't become a partner. I never want to do that again.
[00:23:02] Nola: See?
[00:23:02] Lori: Yeah.
[00:23:03] Nola: That's a prenup.
[00:23:05] Tanya: Right?
[00:23:06] Nola: Wow.
[00:23:07] Tanya: So there's a lot of things you can think about and put in there that you really, it's through experience. And that's why I think going through one of those programs where you just kind of check a box, you don't even know what you're checking. Right? You know what those answers are. It's like, I've seen wills where I'm like, I don't know what that means. Did you mean to kill off half your family in that will? You checked the wrong box. You didn't understand. Lawyers go to law school for a reason. I mean, legalese is legalese, but you need someone who is experienced that who's gone through it. Who's helped a client negotiate through the what-ifs. And like, all I can say is that I think that success story I have with my friend who went into business, literally I got a call three months later saying, we're doing so much better than we thought. We negotiated that we weren't going to get paid for six months. Do I need to change the operating agreement to get paid? I'm like, no, because we didn't put that in the operating agreement, we put that in the consent action. So we'll just do a new one. You have a new meeting and a new vote and you get paid.
[00:24:08] Nola: Wow.
[00:24:09] Tanya: But when you think about death or disability, where someone else may be protecting your rights, it should be in an agreement and not just at a meeting.
[00:24:16] Nola: Wow.
[00:24:17] Lori: Is it better if you have an agreement to set, like we will reevaluate this in whatever time period, or is it better to say what we will do in that time period is amend. So rather than start from scratch, we're amending it. Or we have the right to amend it at a certain point.
[00:24:38] Tanya: I very rarely draft mine where it's a unanimous vote to amend. Especially if I have a client who's got like a small one or 2% owner, that's guy has all the control in the world. Right. So depending on the situation, it's either majority or super majority, I think you should always have the ability to amend. I've had instances where we thought there was a way to at distributions are going to occur. And the client through just routine practice after being in business for a year or two said, okay, we need to modify it to read this and this and this. And so we did an amendment to do it. So if you want to leave Lori or you've passed away and Nola doesn't want to be in business with your spouse, Nola has the right to buy your spouse out. Well, how do we determine the value? Can we get an appraisal?
[00:25:21] Nola: Yes.
[00:25:22] Tanya: Do we have a formula? I yield to formulas. They're easily determinable versus this, which is where most of my clients want to go. And I get mad at them and I'm like, you're never going to do it. And we're going to end up paying a ton of money to have a valuation person come in an expert and appraise your business. We're going to decide what the value of our businesses once a year. And we're going to put it on the schedule. That's what they want to do. I can tell you how many businesses never do it. They didn't even do it when you first drafted it. They're like, oh yeah, we'll put, we'll fill it in. And I get the agreement back. I'm like, it's not filled in. Oh yeah, we need another month or two to figure it out. I'm like, you're never going to fill it in. You're just never going to do it. And you're never going to look at it every year, I mean, I've had a couple of clients who are pretty rigid type a and like it's a check mark. It's gotta be a check mark that they check off, but most of them never do it. So you're just setting your client up to spend money when that happens. So for me, when you have a triggering event for a buyout, I like to have a formula. So we may end up changing the agreement to change the formula. Because as you've progressed, you've seen it's not really an EBITDA. Maybe it's based off a revenue or the model changed, or there's certain owner perks that you guys are taking that need to come back in, determine value. Or one person is working a lot harder than the other, some of these kind of taking a step back and maybe there's an adjustment.  Of maybe that happens for a year. Maybe two years. It doesn't happen. It rarely happens.
[00:26:46] Nola: In some cases, there is two people working together, but one will invest more time while the other one invests more money. When somebody exits, how do you determine what's divided? If it's all financial and only one person invested actual money while the other person invested most of their time. So would that be a formulaic answer?
[00:27:06] Tanya: Yeah. So the, when I said my friend who went into business with her former boss, one of their discussions was, former boss is had her own business. So she was really a cash purse and my friend was the feet on the ground. She was the service provider. So if she left, within the first two years, she got hardly anything. She got whatever she put back in because on their timeline and their horizon, they thought it would take two years for the company to get up and running and have employees who can probably maintain it if my friend left. So there were two different formulas. There was one that happened if she left in the first two years. And then there was a formula. What happened after that back? Oh, that's really. But even then, you can have in there, like even, almost like a preferred return, it's not the right word, but I mean, we think about it in that target is where maybe those service provider is not got the cash in the deal. Right. But they're going to get paid something for the service. So it, depending on the entity, if it's a corporation it's salary, that's fine in a partnership. It's not the same. You have other tax consequences. Very that as well. And then many times we're representing the investors. So we're like capital contributions get paid back before profits get distributed to my guy, gets all the cash back before you distribute profits. But then what does that say to the poor service provider? How are they making? So, yeah, that's important. Cause I've had another discussion because state law says abstinent agreement is five percentage ownership. If you make one. You're not required.
[00:28:38] Lori: Well, this is why this was such an important episode because you don't know what you don't know, and you don't know how it can hurt you because you don't know what you don't know.
[00:28:48] Tanya: And to check the box on that Legal Zoom, isn't going to get you there.
[00:28:51] Lori: So for people who are just starting out or for those with not a lot of funding, so they're just a two person we're just launching this from your professional experience. Do you need an attorney to draft up this part or this prenuptial business agreement, or are there online templates you could use or can you like write it in yourself and, and have like an amendment to your agreement that you default to?
[00:29:20] Tanya: So my honest thought is this. I don't like any of the types of box forms, because like I said, I got a will that basically cut out half a family. I mean, like you checked the wrong box. This is what I suggest to clients when they call me. And they'd say we have a budget, we're a startup. We don't want to spend a lot of money. Like, okay, I can quote you maybe a flat fee to do it, but here's a question you guys need to sit down and answer because I get it. I get it's expensive to start a business. And there's an opportunity cost, right? Cause you'd rather stick that money in to the business to get it up and running. But at the same time, if it's apple and it's worth a hundred million dollars in two years, it's that discussion going to be a lot uglier and could cause more problems than when you guys are really starting out and you know what you want and you have the same goals and that's the same time. It's almost a gut check. Forcing somebody to have those conversations makes them realize, do I really want to be in business with my best friend? They really want to be in business with my sibling because we don't see eye to eye on anything. Right. I mean, not for nothing. Family businesses are tough because you don't lose that generic family. And modeling the older brothers, the older brother and the younger brothers, the younger brother, the dynamics remain, they remain. Right. So I always say to clients, if you're going to be with your brother, you definitely need it. Like, this is just not an option. Like, because the whole family dynamic is going to be ruined. When this gets that this blows up, you guys are not having family dinners anymore. So you're comfortable with that. And you want to ruin your parents' lives and go at it.
[00:30:55] Nola: Well, there's that.
[00:30:58] Tanya: I've seen it where they believe that they'll talk to each other for months on end and having these discussions, they're hard. You need to take the time to have them. They're important. And then you're going to take the time. Actually, put it in writing so that you're both are bound, but it also causes you to have to discuss the expectation. Yeah. You know, maybe Lori's expertise is the pretty wording and Nola's expertise is the technical behind. You each are bringing something important, but you gotta know what the expectations are. What happens is Lori says, I don't want to do any of the branding side of it and the Martin, the fluffy side. Right. I don't want to do it anymore. I never want him to do it. You have to have those conversations about expectation. Because, you know, oh, we have a great idea. We're going to make a ton of money. Okay. Well, what's happened in six months when you're not making a ton of money.
[00:31:42] Lori: Well, that was one of the things I think that we were discussing was in general Nola and I, as we were preparing, for lack of a better way to say it, black and white this seemed like if you went to court or you sat down with an arbitrator or an attorney, they're just getting to the end result, whereas you or us, we bring the emotion. So it felt like some of this emotion is taken out of the process, which is very hard for people because that's your bread and butter. It's your livelihood. It's your investment. And it's heartfelt. Yeah.
[00:32:19] Nola: Your creativity. Yes, that's your baby.
[00:32:24] Tanya: It is your baby, right? And it's your creativity. And even more important, it's probably paying for your family livelihood. What happens in that situation where I literally advise the client, quote, the bank account and control the fund. And I've seen it happen where one partner goes in and says, okay, I need to control it. And sometimes they just put it in their name and they don't put their company name. That's a big no-no, but they do it. As I say to clients, do you think a divorce is bad? Try a business divorce. Somebody else is controlling how you're eating, like the money's not coming in, or you're spending all the money on legal fees, so you can't afford to pay yourself. So it's important then to like one of the things and such to be, if you're 50, 50, I can't tell you that there is a worst situation to me was not having an agreement because what the statute will tell you is 50 50 call the deadlock, dissolve the company. That's your answer? When I first started practicing everyone called it a thought gun provision, oh, I really liked that name. Blind option has become the more favorable term. It seems a little friendlier. So 50, 50 owners that can't get, and they're not getting along and they will have the same vision for the company, whatever it is. Well, what a blind option is, and this one partner says to the. I'm willing to buy your 50% out for a hundred dollars. What also means is that you're willing to take a hundred dollars for that. So you're putting fairness on the table, right? You're acting, having to come to with fairness because if you're willing to pay, it means you're willing to accept it. So then the question is, okay, so that's the result at a deadlock, or could we have a baby step to get us there? And so a lot of times what I negotiated into agreement, kind of like having a mediation where an expert in their field where someone they trust coming in. Listen to both sides and mediate their answer business. Doesn't go away. No one's buying each other out and hopefully there's no bad feelings. Well, that's not guaranteed, but at least, sorry, I should hopefully think about it. I mean like that the ultimate result is somebody doesn't get to be a part of the business anymore. Where do and one of you leaves now you got to know a part and somebody, you now have to develop trust for it. You got to pay them a lot more money to do it. It's still not a win.
[00:34:30] Lori: That's true. So with that in mind and switching direction, just a little bit, based on your years of experience, working with entrepreneurs, what are some of the commonalities you see with successful partnerships?
[00:34:45] Tanya: I think it's really the willingness to have discussion and to talk through. I have two clients that I've represented their businesses and I've represented one of them individually, but what impresses me about them and they have been super successful. They've bought and sold numerous businesses. They each have a strength and they each have a weakness and they kind of offset each other, but they take the time to have the discussion if they don't agree, but they see the different way they take the time they take the emotion out and they have a discussion. About what's the right answer.
[00:35:22] Lori: Yeah.
[00:35:23] Nola: Communication.
[00:35:24] Tanya: Communication. I mean, it's even with the situation, the three brothers, when I first started representing them, I mean, they started having problems and faithfully, we had the shareholders' agreement in place, so the business was really not affected, but it was a lack of communication. Which then became all. You don't respect me. Oh, well, you're not wanting to lift then either. Like you're not listening to what your actually patient is. You're decided what your expectation is, but that's not what the other two brothers’ expectation is for you.
[00:35:50] Nola: So communication. Includes the listening
[00:35:53] Tanya: So I think it's key. Communication.
[00:35:55] Lori: Yeah.
[00:35:56] Nola: Wow.
[00:35:57] Tanya: So I think that's key. And I think there is somewhat of that ability to have somebody's strengths be and other's weaknesses and vice versa so that you become a good pair, because if you can do what I could do just as well as I can do what you really need. And that's where you starting to see that ego start to come into play. I could do it. I know so much better than him. Right. And that starts to, that becomes a big one. And I think having kind of that pathway of what happens with money, when do distributions occur, do they. Especially in that startup phase. When do you start to get paid money? When do you start? Do you get a salary? Do you get distributions? Do you get profits when or do you return the profits to the business? Having some of that, maybe, you know, sometimes we put some of that and those prenuptial agreements that trying to kind of talk about. I may be a spendthrift and Lori's a big saver. And so she wants to put everybody back in the bank and everybody back into the business and I'm like, no, I wanted to spend a million dollars on marketing, get more clients, get more clients. Right. But you've got to have some of that. Like we talk a lot, especially if you have been in the investor, who's in putting in the cash, but isn't really the day to day, but how does he control how the money. So we do budget. The budgets have to be approved and you can only that, and you can only deviate from the budget by five or 10% before you have to come back and get it approved by the vote of the owners.
[00:37:15] Lori: Oh, there's another thing to add to your prenuptial agreement that we didn't talk to.
[00:37:21] Tanya: And then we put it in there. I mean, so those are the kinds of things , you don't necessarily think about that when you're starting a business, but I've seen it been there and negotiated with clients. So we're fighting about marketing. We're fighting about how much money is going to be spent on marketing, because somebody always sees the value of marketing. Somebody always thinks it's a waste of money.
[00:37:40] Lori: Going back to that previous question on whether it makes sense to use a template that you can find online or what you referred to as checking the wrong box versus hiring an attorney. I think your comment about what successful partnerships have is. No what's in the agreement. They've communicated. It they've been part of the decision-making they've agreed to it and it makes it the default. When things get tough that we can go back and rely on it. And only an experienced professional like yourself is going to know those things that they've seen in their practice template. Isn't going to give you that.
[00:38:21] Tanya: No. one hundred percent, and I think there's another type of agreements that you've got to budget it in and, and, you know, ask the attorney, what are you going to charge me for him? I always tell clients like, this is your range. We can be on the lower end of that range. If you do your homework, here's the question. I'll give you the question. I'll give you some options to consider, to answer those questions that you have to have this constant. And we can, maybe you guys can work your model and you just need me to work through one or two of them with you. Maybe figure it all out on your own. Just give me the answer so I can hold your hand through the whole process, or I can give you the questions asked and you can give me back. Maybe there's one or two we need to work through that will decrease the cost.
[00:38:57] Lori: You may not know the answer to this, but generally speaking, if a partnerships were to budget for. Realistically, I know you can have a high and a low on both ends, but what should somebody at least have an idea? What does something like this cost?
[00:39:15] Tanya: I think if a client's willing to do some of the homework, couple of thousand dollars. If you're literally holding their hand and negotiating through everything with them, it's probably five or more five thousand or more. But if you guys can take the time and do the homework and do the hard talking without the lawyer being involved and say, look, this is where we are. Can you give me a reasonable resolution to that? Then I can give you an answer. So I think it sounds stupid, but like if you're literally having the lawyer to sit there and negotiate every position with you, why are you going into business together?
[00:39:44] Nola: Yeah, good point.
[00:39:45] Tanya: 'Cause you don't see things the same way,
[00:39:47] Nola: good point
[00:39:47] Tanya: So if you can't have these discussions now, how are you gonna have the tough ones about the business later?
[00:39:52] Lori: That's what I was just going to say. If you want to know if you and your partner are good fit, negotiate this.
[00:40:01] Tanya: And I've had people who walked away and said, oh no, I'm not going to do business with that person.
[00:40:04] Lori: Oh, wow. Well, yeah,
[00:40:10] Nola: Best to learn now.

Tanya, thank you for being our guest I know we just got the literal, the tip of the iceberg of all the expertise you have to offer on this. But even that tip has been extremely valuable. I think it gives a really good perspective on what the iceberg might be and turn heat. So if someone wants to learn more about you and your legal practice, where should listeners go or how can they connect with you?
[00:40:40] Tanya: Sure. That probably to go to my firm's website, TrippScott.com and there, I think there's a link to you. Send me an email or you can, there's a link to my, or there has my phone number listed my. Either one of those is probably the best way to get in touch with me.
[00:40:53] Nola: Cool. And friends. Thank you so much for listening to this episode. We hope it makes all the difference in you getting started on your business so you can create your best and most exciting life. If you found the information here today, helpful, let us know by posting here where you're listening or on our Facebook page.
[00:41:10] Lori: Not sure how to turn your idea into a profitable side business? Contact us at stickybrandlab.com/contact. We'd be happy to help you.
[00:41:20] Nola: Be sure to come back next Tuesday and every Tuesday for another informative, inspiring and motivating episode. And remember action creates results. So tap into your desire to create a business and brand you love by taking 1% action every day. Small steps, big effects.

[OUT-TAKE]
[00:41:38] Lori: I have to interrupt here for just a second. This is separate. It sounds like you're saying Nora and it's Nola with an L.
[00:41:48] Tanya: Yeah,
[00:41:50] Nola: that happens all the time.
[00:41:55] Lori: I just wanted to make sure that here.
[00:41:57] Tanya: Okay. Sorry about that. No, no, no, no, no, no.