Herman: John L. Herman Jr., Author

Cash Creates Conflicts

Having partners is sometimes a very necessary thing. You either have a good idea and no money, or money and someone else has a great idea, so you form a partnership and start down the road to big money.

If anyone out there has a partnership story that has lasted over time, with never a conflict over cash, let me know…that would be a rare partnership. In the real world cash creates conflicts. Let me give you a few examples from my business lifetime.

Three men form a corporation but are actually equal “partners” in the venture. Except that one guy was critical because he was the one recognized as a leader in the industry. A second partner put up a significant amount of cash and therefore insisted on managing the checkbook. The third man was needed because he offered extra hands due to the high volume of business created even from the start of the project. He had no money in the pot and brought no unique skill set to the table.

Success actually happened fairly quickly. Money came in and the bank account started to grow. The partner who put up the cash took back his initial investment, and the thirty-five percent profit permitted for his “loan to the company.” At that point we had the same three men involved with new dynamics. The “idea guy” well known in the industry was still in that role, being the rainmaker that was bringing in the fees to the firm. The original “money in partner” was now fully paid out and was learning to be a rainmaker like the original “idea guy partner”, while the third man was proving his worth to be that of a back room support player, not bringing in any fees, and taking out one-third of the pot, and therefore the big winner since he brought no cash or ideas to the table on day one.

Now, all three men were making north of one hundred thousand dollars annualized, and there was in excess of two hundred thousand dollars in the company savings account. At this time the original “idea guy partner” wanted to buy a house. He needed his share, seventy-five thousand dollars, from the savings account to purchase his house. He made a motion that each partner be paid a bonus, so that each man got the same seventy-five thousand dollars and all would be even. The other two men voted against the bonus measure. And immediately the notion that the company founded on the strength of the “idea guy partner’s” knowledge and reputation was doing well, but he was not getting any benefit commensurate with his value. So the idea guy was stuck. Either he had to quit or put up with the fact that the other two partners controlled his economic situation. Being the guy who was the “idea partner” with the industry reputation, I threatened to quit and dissolve the company. The money was “let loose” to me and we continued the company.

Later, when even more money was rolling in a new dynamic evolved. Why were the two rainmakers giving the third guy an equal amount of the proceeds? The third man was nice, and professional, and very helpful in completing our work and thereby earning our fees, but someone paid a lot less than his 1/3 share could be hired to do what he did.

Next came the day when the “original money guy” who had been fully paid back with his nice profit, actually started to generate real significant fees, equal for a time period to my fees as the original idea partner. Now, to be sure it was my formula being used by this partner, but he started to see that when he put a big bucket of money in the pot he was getting less back as the other two partners got their shares. And he wanted out at that point because he felt he could do better on his own.

The company split into three separate entities, all marketing the same services, but with clients limited to the person whose company they contracted with, and no longer getting more than any one of us in a deal. Thank the gods above. My best years of earnings came after the other two partners were gone, and I started taking in associates at far less than partnership split rates, thereby giving myself a far greater portion of all revenue earned.

I can tell dozens of stories of improper utilization of cash by partners, of one guy getting a car when another one’s wife got mad. When one partners liberal use of his expense account raised eyebrows over what was an acceptable expenditure when entertaining clients. Always understand that with partners it is never “your money” but “our money” and those others involved don’t always share your needs or wants or philosophy on how money should be spent or distributed, and this can distract you from creating a strong profitable business.

• Posted: 22 February 2008
• Comments: 1
• Category: Running a business

Comments