Eight Simple Rules

AUGUST 13, 2002

Originally posted by Eric C on August 13, 2002 at 02:53:23:

Believe me, I could write a book on the subject of working with partners, especially "high-income" individuals.

Since I'm not sure I understand the role of partners in "your" business plan (why not just do the deal - whatever it is - on your own?), I can only offer some generic advice.

1. The best structure should be flexible enough to allow participation on a deal by deal basis. Once a partner has committed to a project, that's it -- no backing out; no early exits (without cost, that is).

2. Upfront money should be exactly that -- upfront and in cash. Now. I mean "write me the check today and I'll take it with me" kind of money. This should be used for a particular project (or deal) and not for "general" purposes under any circumstances. The money should be large enough to completely change the game in your (your group's) favor. Anything left to chance is not acceptable. Period.

3. Men plan, God laughs. Something, sometime, somewhere is going to blow up in your face. Please be ready for this when it happens. Understand that the chances of this happening to you increase geometrically with each additional partner (or project) you take on. It's not a matter of "if", just "when". Your reputation will be made when you can handle these difficulties with grace.

4. The most common problem you will face is this: (1) someone (or several someone's) will become angry or abusive; and (2) someone (or several someone's)will get sued, lose their job, or file bankruptcy. Feel free to reverse the order - your future partners will. I know, it won't happen to you, right? Care to put some money on that? Make provisions to repurchase partnership shares (or whatever) when necessary.

5. Please write out a complete (and coherent) business plan. In detail. If you can't make sense of this adventure on paper, then you will be unlikely to be able to do so for real. I can't stress this step enough. Almost everyone skips it. And almost everyone goes belly-up. Failure to properly plan (not lack of capital)is the number one reason for failure here. Don't forget that.

6. About your fee -- I usually take a percentage of the profits. And then only after the other "partners" - I really prefer investors -have received their payouts. Ok, that's not completely true, I REALLY prefer to do it all myself  - far less hassle. This is how I handle most RE projects. However, if we were talking more along the lines of money management, a flat fee coupled with an incentive fee ain't bad either. If you can perform, and you manage ten million or so (a paltry sum), you might charge as much as 6 percent of that as a management fee, and perhaps another 15 percent of the profits as an incentive. Again, the most important words in that sentence were: "if you can perform". Now, if you can deliver returns in the range of 30 percent or more - well, you do the math.

See? 200K-500K is pocket change.

7. Egos. People who make this kind of money usually have large egos. That's OK. It allows them to function in the real world at a high level. It's not at all appropriate in a investment partnership situation (score one more point for investors rather than partners). There can be only one manager (boss). Investors (partners) should be allowed to vote with their money (in or out - per project)and only with their money. Remember, they don't have a clue (yes, they have an opinion, so what?) as to how to run a RE biz, or investment biz either. Just keep in mind that like a ship's captain, you will be expected to go down with your vessel (partnership, project, or whatever). A personal interest in lifeboats would be well advised. Should we be talking about non-voting shares too? Probably. Anyway...

8. More? Of course, there's more. But you have to ask more questions and you'll have to give more specifics. Mutual default clauses, last look provisions, meet the competition agreements, net worth maintenance requirements. All of these are things that might prove useful to you, or not.

But hey, it shouldn't take a rocket scientist, right?

I really should make one more point. There is money everywhere. Capital, for good projects, is almost never a problem. But, with the stock market meltdown, there is going to be many, many bad projects funded that should never have seen the light of day. That's just the way it is.

If you really want to make some money, provide great returns for your partners (hate that term)or investors, and leave little to chance, why not search for those projects that will fail (or are now failing)?

If you really have access to cash, you can purchase the best of these deals for pennies on the dollar. Safely.

Provided of course, that you can also bring some expertise to bear on the situation.

The great thing about having cash is that you can afford to wait. And by doing so, you completely change the game.

Why settle for mediocrity?

Think about it.

Eight Simple Rules | Photo by sue hughes on Unsplash