Should I Take On An Equity Partner – Ask Clay Anything

Audio Transcription

Two men, 13 multimillion dollar businesses, eight kids, one business coach radio show. It’s the thrive time business coach radio show. Get ready to enter the thrive time show.

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Come. As we are preparing for our business launch, we’ve had a subcontractor that has expressed interest in combining forces. You would be a great component for scaling and training a part of the business that is a huge growth potential to our business. Total amount of revenue would likely be between five and 15 percent of the total business. To start, should we negotiate an business coaching equity stake that reflects this?

Wait a minute, this has the total amount of. Repeat that back to the total amount of what total amount of end business coaching revenue will likely be between five and 15 percent of the total business to start with. Now what? Okay. What do you understand that question at this point? No, I don’t see. Well, you reset the great. Again, I’m going to start from the top. Okay. Here we go. Here we go. As we are preparing for our business launch, we have had a subcontractor that has expressed interest in combining forces. Summarize, there’s one other company who wants to team up a sub contract contract. Okay. Okay. And this guy, he would be a great component for scaling and training a part of the business that is a huge growth potential to business. There you go. Okay. He says the total amount of in revenue will likely be between five and 15 percent of the total business.

Okay. To start. So I guess that means that this person could bring to the table extra now means that’s what we’re going to have to. We’re going to have to guess, should we negotiate an equity stake that reflects this five to 15 percent. Okay. That’s it. That’s the first question. Yup. Um, I am going to try to make sure I’m going to try to. I got it. I got it. You got to get my head wrapped. Okay, well this one, or this might take you have a business that’s growing two by 200 percent from my understanding from last year. You’ve more than doubled last year’s revenue and you’re only like eight months through this year. Right? So you’ve got, you’re on the, you’re have a potential to maybe tripled last year sales. So I would say there is no way at all under any circumstance that I would give somebody a percentage of equity unless I had worked with this person for an extended period of time and I would put in some type of things they have to do to get vested.

I would just not. And again, I’m assuming that this is a subcontractor you don’t fairly well but Z. I mean this guy is on the verge of tripling his business and an outsource to an outside party saying, Hey, I want to team up with you. Would you give a guy equity in any of your businesses? The wants to team up with you when you have that kind of momentum going? No, absolutely not. Do not give a part of the baby. Here’s the thing. The only time you give a part of the Chili, the only time you give a part of the, the only time you give a part of Cheddar, the Chata, the Tenet cheese fries at better is in the beginning when you’re all on the same area of we’re not sure this things even going to work, which you should never have that attitude because you’re always going to make it work because you’re the pig and not the chicken at breakfast and you’re committed to doing it.

So my point is, my point is, is that is that if you’re going to give up part of the business, it’s early on before you get it started to get an equity partner that helps you drive the business. What’s the business gets going and it’s rocking and it’s rolling. Someone comes in and goes, hey man, I want a piece of this action. Hey, everybody wants one. I want equity. Why don’t you want to roderick hotels? And the. The problem is this, there’s, there’s a, there’s a couple problem in selling a part of your business because that’s what you’re doing after you get it rolling. And that is valuation because I promise you you bring in 10 experts and they’re going to value it at different levels. Okay. And a lot of times when you check in on the experts, we bring in an expert to evaluate your business.

You’re bringing in the expert. The expert will be over there with the computers work and he’ll say, hey dr z Dot Eric Marshall, I have to go for awhile. You guys could go and have lunch with them. I’m going to be in here evaluating a company and I built out 250 an hour and I’m going to be evaluating the company. Will you guys just have lunch? I’ll be over here. I’ll be back in about process guys. Come back and about you’re from Canada. I’ll come back in about 20 hours, you know, two or three days from now and it’ll be about four to $5,000 minimum for me to go ahead and tell you what the value of your company is and you think to yourself, this guy’s a great guy. He’s working 20 hours, 20 hours. I’m going to go get some great foods. I’m going to get some nice salad with the crew tons and I’m going to drop it by his office just to tell them thank you. And you go buy this guy’s business coaching office who’s evaluating your business, who is determining the value of business, and you walk in and you say, hey dude, I brought lunch and then you turn to your right and you and you see this.

Let’s release during the last 20 hours. Here’s, here’s the, here’s the deal. When you go through all the hard business coaching work to start a business, come on now and then get that business rocking and rolling, rolling everybody and their dog is going to want it. Now, jump on your coattails because guess what?

Everybody wants to

rule the world and they want to come in and say, you know what? Hey Man, I, you know what you know, but we work really good together. You know, bro. So I think I should come in and be like a partner with you and get like a piece of this action because you know, I can, I can help. You know, I can bring a lot to the table Guy. I can, I can help like the Beatles song, I can help not just any body. Here’s the, here’s the thing, don’t bring on a partner unless you absolutely have to, don’t sell part of your business unless you absolutely have to, to z. let me ask you this. Okay, so would a good solution for um, for our listener here and our thriver be to build a wind, wind commission structure that they could then combine forces on. But it’s not based on owning part equity stake or the business. If it’s a subcontractor, you’re giving him business. He should be happy with the business. He shouldn’t be doing. They should be working for you because it’s a subcontractor. That’s what subcontractors do. They find a guy that’s a contractor and they work under under

because you’ve had a couple of successful projects is not me, man. Hey man, you know, we, we built a couple homes and we’re good. I think I need to own a piece of your action broke because this thing could really work out pretty good.

I want to share just a whole bunch of of bad, very personal examples of hasn’t been that the rash is not. This is business coach diaries. Just help somebody out there. Okay. Okay. Um, years ago I was working with a doctor, very successful guy, and he thought, you know what I do? I’m friends with a surgeon. I’m going to team up with it, I’m going to fund the surgeon, I’m going to fund them, I’m going to pay for his, I’m going to have fun with him. I’m going to funding funyuns, I’m going to fund his business, I’m going to fund this business. By the way, it was up in the Denver area and he’s funding this, the surgeon, you know. And so, uh, the surgeon needed funding? Yes. Okay. He used out of medical school. He had done his residency. He’d worked for some places.

That young surgeon. Yeah. He was a less than 30. Okay. And the other guy was in his forties. He’s funding this guy and he discovers that the other guy won’t shut the door figuratively speaking behind him, you know, because if you shut the door, it makes sure that there’s no air conditioning that has excess energy that has to be used. You know, he was driving his business figuratively speaking like a rental car. So he goes to check on him and he’s like, here’s this guy that I’m funding and he’s treating the money that I’m giving him, like it’s a rental car as fast as possible. It’s not his own. And I just find that people don’t value how hard it was to make the money, how hard it was to build the business so hard to get the momentum going. Right. And it’s so easy to find people that want to partner.

And so this particular a gentleman and I know very, very well, uh, he ended up having to buy out this or get the surgeon out. In the end, he hired another surgeon who is just an employee, not a partner, and things are going great now, but it just seems like whenever you have somebody who’s just coming in and riding your coattails and you give them equity, that’s a rough deal. Now, here’s one thing I I would talk about if you absolutely are set on developing an equity relationship. Let’s say that this is a different situation or maybe we don’t understand the context and you definitely know equities appropriate than have them buy it based upon business coaching evaluation that’s bankable. Now, when we talk about a bankable valuation, talk about it. See a regent bank, the majority of small business loans are SBA loans. Come on, come on, and the bank on the bank board, when they decide to approve a loan or not, do they not specialize in saying no? No, no, no. Don’t. Don’t. Most banks specialize in saying no.

It’s a shorter word than yes. So it’s. I guess it’s easier if efficiency comes first in the alphabet. Yeah. Yeah.

So here’s an example. Here’s an example, Craig. You might say, so let’s say that you were a landscaper. Let’s say to this question comes in from a landscaper, let’s say that your business produces a profit of $200,000 a year. A typical bank will say, okay, we’ll take your profit times two and a half and the, the depreciated value of all your equipment, you know, after it’s been written off and beat up. And I were going to say your company’s worth a Max, maybe have for 50 plus some weed eaters. It’s worth 4:56. Your whole business. It’s profit times two and a half. Maybe that’s Kinda high, but that’s it. And then you say, but what about the branding? What about my customer list and the blue sky and the networks and the relationships and the cool name that I gave. And then people go, that’s really not our landscaping.

That’s not really something that we’re into, uh, here at the bank. But we will approve a loan, a loan for 4:50, but Europe, the person who wants to get the loan has to put 20 percent down and then the SBA will guarantee and lung surgery to be able to bring 20 percent down. So the person who wants to buy the equity has to come to the table and that scenario with at least $90,000 to have a conversation. Right? And so if you’re going to give, give quote unquote somebody equity, they make them buy it, make it bite it and some evaluation and some value. I mean, don’t let him know that you would want to give somebody equity. I mean that giving. This is not a move for equity is it? No, you don’t, don’t listen. Hey,

according to Forbes, anywhere between 80 and 90 percent of all businesses fail. That’s just so when you get a successful business, you covered that. You protect that, you cherish that, you protected it all means and not giving any of it away to someone comes up to you and said, hey, you know, mentioned Ciba, you know, um, uh, you know, you’ve, you’ve used a few times, we’ve worked good together and we weren’t, we worked together like peanut butter, jelly, peanut butter, peanut butter. You’re the jelly or the one of the I want to work, I don’t know frog ribbit, but we aren’t working together now. And if you know, you gave me a piece of that deal, I’ll tell you what I take to the next level, I can get that thing to the next level because you know what, because I’m committed, I’m committed and I’m.

And I’m a hard worker. I mean I don’t work on Fridays and Saturdays and Sundays and Mondays and I take every other Wednesday off. But I’m a hard, I’m there, I’m there a hundred and 12 percent 100 percent of the time when I’m 100 percent there. I’m there, I’m there. I’ll tell you what I’m telling you. Mondays. I mean, I mean that’s, I’m getting ready for Monday night football. I can’t work on that day. So I mean forget about that day. But I mean the other days that I’m there when I’m sober, I’m always over. You know what I’m saying? Come on. That’s just something I wrote down. I wrote down like an hour ago I moved on. I thought kind of clever. And that’s what I bring to the table. Marshall, I’m not to have you answer this next part of this question here from the thriver. So Eric Job, if you can read them words on that paper, because I didn’t really did at that Marshall, break it in, he says, how do you know how much equity to give marketplace partners that can help you grow? And then this partnership for this section of the business would allow faster growth and help me reach my goal to scale and create a training program in this particular part of the business.

Oh man, that is good. I want to throw a punch someone right now. So by the spiritual interaction with Marshall. Alright. So

well we just finished talking about you don’t need to give up any portion of equity for any part of the business. And so if you’re committed to going into this area of the business, whether it’s a new service or a new product line or whatever it is, what you’re going to have to do is you’re going to have to line item list everything that needs to be done. Now what you can do is you can maybe pay the subcontractor to help you create that process. Pay Them, you know, send them more business. Because like Dr z was saying, that’s what they do. That is their job, that’s what they are getting paid to be a subcontract, so, so you can pay them a premium and uh, bring them in and continue to send them business and maybe you know, equity isn’t the only way to incentivize them.

Maybe you set up, hey, what we’re going to do is we’re going to work over the next six months to create these systems. I’m going to pay you this much upon the completion of these systems, which will allow you to grow the business, but don’t give up any of the equity of the overall business. That doesn’t mean you shouldn’t go into this part of the service or the industry or the product, but don’t give up equity of the business. Well, I’m glad you went to him first that are clicking. So I was going to say give them 51 percent. Those are the two roles to roles. Alibis. Don’t give too much equity, you know, because that’s where her obvious, right? If you’re going to get a bus and not really doing anything with it for the first 10 years, let it appreciate and value. Get that tree growing through it.

Get that whole deal. Then take what is the way you want to go back. Here’s my, here’s my final business coaching debate. Me, or here’s my final story for you about, about partnerships that went well, but these are real examples. Um, I had somebody who years ago I was starting a business and I knew nothing about that industry, so I called up a guy who was awesome at that particular skill but terrible business. And I said, here’s the deal. I will pay you x percent of gross revenue for five years if you will teach my team five years x percent. At the end of those five years, I’ll revisit whether we, whether we renew that deal and I’m telling you what, Z, we got to the end of that fourth year and it was really helpful. Year one, two, and three because he really worked hard to train the team.

Come on, but your four, he wouldn’t return the calls. He wouldn’t help because he’s coasted on that big. I mean he got a small percentage of a big total shares, really good mailbox money. We’re talking, you know, almost $70,000 a year for doing nothing shirt. And his argument on year four and five was it, I don’t need to do anything and I’ve done all the work. Right? And so all I would say I would say is that the relationships have an expiration date where the other person gets decreasingly they become increasingly less motivated over time. Midday they, they have sort of like a. I’m excited because the world is filled with neo files. So we got to the end of our files with somebody who has a love or addiction for new things, shiny objects. Sure. So we got to the end of the fourth year, the guy’s wife calls me up and she says, here’s the deal.

I’d like to do a mediation because obviously you’re going to want not want to renew and we want to take this to mediation when the contract clearly states that it’s over. So we go to mediation, meet with this attorney guy, and he says, well, the deal is clearly over going to being better. Boom, it was done, but his own wife in mediation couldn’t justify it. He was doing anything anymore, but at the beginning he did a lot and all I’m saying is, is it general rule? Relationships get worse over time unless you tend to them because eventually expectations or communication gets weird, so if you want to keep a great relationship, you want to have expectations and communication and so if you do partner with somebody, get it and writing whatever the deal is, get it in writing and be clear about how you’re going to break up and get yourself sort of a business prenup, so to speak. Why is he, why is it so important? You get into plus an agreement from from day one where you get kind of like a a, a, a business prenup, but basically says, this is how we’re going to break up. If we do, this is what happens. Why do you want to get that in writing before you start a new relationship? Just in it will break up, it will be finished. My timing was off there, man. Let me tell you one more time there and trying. I’ll hit the button and this just in

it will end. It will in.

Now

you want to. When it’s all fun and fresh and flavorful and good news. You want to decide how you want to end it in that mindset then not that mindset and that’s why you weren’t into that business prenup. You want to have the business plan. You want to have the how’s it’s going, how’s this going to end? By sell agreement? Well mean. Whatever it is, there’s a lot of different ways to do that. A lot of people out there that can help you with that. You don’t have to come up with that yourself, but you have to figure out how it’s going to end because it’s going to end.

When you have those rose colored glasses on and your things are going well and you’re just about ready to consummate the new deal. You’d want to look at that new potential partner and you’d say, I just, you and I have something special right now. We ain’t go to break. Oh baby. I was just in a few other places in time. If, if, if we were adopted by a, the until we had to wrap the thing up and we wouldn’t have the baby, but if we had to, um, you know how we’re going to do and then you just sign on that line and then it’s just, it’s, it’s, it’s better than. It’s better than. It’s similar to a hot tub of love and sign an agreement while you’re still in love.

Yeah, exactly. And often that’s. And that’s that business prenup that you talk about because here’s, here’s the reality. You want to have it written down. You want to have an arrangement, you want to have a deal. Because what happens is three years down the road you’re like, remember you said the other day, they’re like that. I didn’t say that in your life. Say that.

And now without any further ado, we’ve got to wrap this up because we have an interview with the senior editor for go.