Episode 320

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As part of our succession planning work, we have seen and worked with owners going through every stage of agency life. We’ve seen agencies evolve and dissolve and there are complexities along the way regardless of the journey. One of the most complicated relationships can be between partners, whether that be partners who own and run an agency together, or an agency owner who is transitioning to selling his agency to one or more employees.

In this solocast, we’re going to look at the important elements that make a strong partnership agreement. These documents can be created internally or developed with outside guidance but regardless of how it comes together, it must clearly define how all opportunities and challenges will be met as the agency moves forward. Think of it as a prenuptial agreement. You want to write it when things are good and the future is bright so you have a rulebook to turn to when things get difficult.

Agency partnership is a thrilling but complicated relationship. If you take the time to clearly define the rules of the game, you set a solid foundation on which the agency can grow. AMI is here to help you make the most of this adventure.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev, or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here.

Partnership Agreements

What You Will Learn in This Episode:

  • Who benefits from a Partnership Agreement
  • The need to outline out the company is established and divided
  • If and how ownership percentages can change
  • The importance of spelling out each partner’s contributions and responsibilities
  • Why you need to specify how money is handled
  • What it means to have partnership authority
  • Outlining conflict resolution
  • The important clauses of partnership agreements
  • The need to include incapacitation, divorce, and death language in these agreements
  • Explaining the methodology by which you will define valuation
  • Defining how the business can be dissolved
“One of the most important pieces of the partnership agreement is really clear definitions of each partners’ contributions and responsibilities. So, think of them as ‘SMART goals,' only they’re ‘SMART roles.’” @DrewMcLellan Click To Tweet “Think of partnership agreements as prenuptial agreements in a marriage.” @DrewMcLellan Click To Tweet “In the partnership agreement, you need to be really clear about the partnership authority. Who has the power to bind the agency in a contract?” @DrewMcLellan Click To Tweet “You need to be very specific about how ties are broken and you need to have it in writing. It will save you so much headache and such heartache if it is predetermined when you do not have conflict.” @DrewMcLellan Click To Tweet “In this partnership agreement we are going to define how we are going to evaluate the agency.” @DrewMcLellan Click To Tweet “You’re going to want to think about. under what circumstances would we be dissolving the business and what are the rules for each of those circumstances?” @DrewMcLellan Click To Tweet “Sooner or later, you’re not going to agree on everything. Sooner or later you are going to want to be able to turn to this document as the rulebook and you can’t do that if you don’t have it written.” @DrewMcLellan Click To Tweet

Ways to contact Drew McLellan:

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About the Author: Drew McLellan

For 30+ years, Drew McLellan has been in the advertising industry. He started his career at Y&R, worked in boutique-sized agencies, and then started his own (which he still owns and runs) agency in 1995. Additionally, Drew owns and leads the Agency Management Institute, which advises hundreds of small to mid-sized agencies on how to grow their agency and its profitability through agency owner peer groups, consulting, coaching, workshops, and more.

  • Leading agency owner peer groups
  • Offering workshops for agency owners and their leadership teams
  • Offering AE Bootcamps
  • Conducting individual agency owner coaching
  • Doing on-site consulting
  • Offering online courses in agency new business and account service

Because he works with over 250+ agencies every year, Drew has the unique opportunity to see the patterns and the habits (both good and bad) that happen over and over again. He has also written several books, including Sell With Authority (2020) and been featured in The New York Times, Forbes, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”

Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency Podcast, presented by White Label IQ. Tune in every week for insights on how small to mid-sized agencies are surviving and thriving in today’s market. We’ll show you how to make more money and keep more of what you make. We want to help you build an agency that is sustainable, scalable, and if you want, down the road, sellable. With 25+ years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody. Drew McLellan here from Agency Management Institute. Welcome back to the Build a Better Agency Podcast. Hopefully, you are a regular listener and you’re just coming back like you always do every week. But if you’re new, welcome. Every week, we have a new episode, usually a new guest, and a new topic. So, I hope you’ll go back and listen to some of the other 300 episodes that we’ve already done as well as follow along with us as we move into the future.

This week’s episode is one of my solocasts. So, again, for those of you that are familiar with the show, this means no guest this week. It’s just you and me talking about something that I think needs to be on your radar screen. I’ll be back next week with another guest. Before I talk about what we’re going to talk about, a couple of quick housekeeping things. Number one, as you know, on every solocast, we give away a free seat at one of our workshops. The way that you get in the drawing for the free seat is you just leave a rating and review for the podcast. So, go to wherever you download your podcast, whether that’s Apple Podcasts or Google or wherever you may get it. I know we’re in a lot of different places. All I need you to do is leave a rating and review.

But when you do that, make sure you take a screenshot of it and email it to me at [email protected], because a lot of you have different usernames tied to your podcast subscription. Sometimes you’re using something that I’m not going to recognize or I’m not going to be able to associate with your agency. So, if you have Dodgers or the best baseball team in the world 62 as your username, which, by the way, would be a really good username if somebody hasn’t already used it, I don’t know that that’s you.

So, take a screenshot, send it to me, and I will make sure that you stay in the drawing and you stay in the drawing till you win. So, odds are good for you that sooner or later, you’re going to win a seat at either one of our live workshops or one of our on-demand workshops. That’s about a $2,000 value. So, pretty good odds for a pretty good price for very little time and effort. So, hopefully, you think that’s worth it. So, all you have to do is again, leave the rating and review, send it to me, and we will put you in the drawing.

I want to tell you a little bit more about a workshop that we have coming up as well. It is February 17th and 18th, which seems far away but actually is not. It’s only a few months away. It’s a brand new workshop that we have never offered before called Rethink Innovation. I’m super excited about this workshop, because if you’re watching the video of the podcast and you’re seeing this alligator over my shoulder, this alligator painting, I’m in New Orleans for a peer group meeting. The hotel is quite New Orleans themed. So, gators everywhere in my room. Anyway, I just looked over my own shoulder on the video inside. So, I thought I probably need to explain it to you.

Anyway, as I was saying, we have this great workshop called Rethink Innovation. The person that I am co-teaching it with and she’s going to be doing most of the teaching, I’m really more of the color man. But anyway, the person who’s going to be teaching this workshop is a woman named Carla Johnson. Carla is an innovation specialist, I guess you might call her. She studied innovation for much of her professional career. She helps reinvigorate the ability to think and think big time and demand. She talks about in her book, and she was a podcast guest about a year ago, I think. She talks about the idea that when we’re kids, all of us are innovative. We can turn a couple boxes in a pan and a wooden spoon into a circus or whatever we want it to be.

But as we get older, that drive and that natural ability to be innovative somehow gets squelched in us, especially in our line of work. This is a skill that we have to be able to tap into on a regular basis. Many agency owners tell me that they’re the only ones in their shop that can really think big or come up with the big idea. So, one of the great things about this workshop is that Carla has built a framework to reinvigorate our ability to be innovative thinkers. The framework is something you can learn at the workshop and then take back to your shop and teach everyone in your shop, because her premise is that everyone in the agency can and should be innovative and have big ideas. There’s no reason why they can’t come from the CFO or the intern or anybody in between.

So, I think it’s going to be a spectacular workshop. It’s going to be super active, lots of small group activities, and all kinds of, I think, really fun ways to learn our framework. So, again, if you’re interested, head over to the Agency Management Institute website. Under the How We Help, you’ll find a Workshops tab and look for Rethink Innovation. Again, February 17th and 18th on Disney property. So, that doesn’t suck. So, we would love to have you there.

So, I started to tell you how to win the free workshops, but I didn’t tell you who won this month. So, Jen Brilliant, which is really a great name for an agency owner. Jen Brilliant from CND Advertising, you are this month’s lucky winner. I’ll also shoot you an email, so you know, but thank you for your review. I look forward to meeting you at a workshop soon, maybe the Rethink Innovation workshop. So, all right, enough housekeeping. Let’s get to the content at hand.

So, as some of you know, we do a lot of work at AMI, helping agency owners think through succession planning. In particular, we come alongside them if they are working on an internal sale. In other words, an employee or group of employees are buying out the current owner. Sometimes that process, we can get that done in six to nine months. Sometimes the agency owner or the buyers or circumstances means that we’re hands in it for a couple of years.

But one of the things that always ends up coming up is the need for partnership agreement, because typically, in many cases and most of the cases actually, the agency is owned by a single person and they are selling to either another single person or a group of people. But oftentimes, that sale takes place over time. So, the buying partner, if you will, might buy 5% or 10% or 20%, and then over the course of a few years, buys out the rest of the agency. So, for a period of time, the selling owner and the buying owner are business partners. The selling owner never had a partnership agreement because they used to own it all by themselves. Now, that’s not the case anymore.

So, if you were at the Builder a Better Agency Summit this past August and you heard my keynote, you heard a horrible story of how I as a young agency owner had a business partner and we did not have a partnership agreement. That ended badly. That is the understatement of the planet. It ended very badly because we weren’t smart enough to have the documentation that we needed to easily dissolve our partnership. So, it got problematic, let’s say.

So, what I wanted to talk about today was the elements that should be in a partnership agreement. So, if you have a partnership agreement already, if you already have a business partner, I want you to listen carefully to all of the elements that should be in your partnership agreement. Maybe it’s time for you to update or augment your partnership agreement. If you are a solo owner and you’re thinking about bringing on a partner, this is a document you’re going to want to talk through and work through and build together with that person. Prior to selling them any piece of your business, you want to have this in place.

If you are solo owner and you have no intention of having a partner, then this is probably an episode that is interesting to you, but perhaps not something you’re going to put into play right away. So, I’m hoping that this has some insight and value for all of you. By the way, some of these things are also good things just to have on employment agreements, but as you’re going to hear, some of them are specific to ownership. So, all right, let’s dig in.

Obviously, the very first thing that’s going to be in your partnership agreement is the name of the organization and the legal designation as an S corp, an LLC, a C corp, whatever that may be. So, just again, nuts and bolts, here’s who we are and here’s what we are. And then you need to outline how the ownership is divided. So, that’s probably a percentage. If you own shares of stock, it can be that. It can be if you’re an LLC, it might just be membership entities, pieces.

But however ownership is handled, so it may be you’re 50/50 partners, it may be that one of you own 75% and the other owns 25%. But you need to define how the business is owned by the one, two, three, four, seven partners, whoever is a partner, and also how that ownership percentage can change. So, are people allowed to buy each other’s parts and pieces of the agency? Is there a schedule to that? Is it a formal plan that’s already in place, or is it just something that you can deal with as you want it to moving forward?

The next one is one that a lot of partnership agreements, when people asked me to look at their partnership agreements, the next one is one that’s often missing. It’s actually one of the most important pieces of the partnership agreement, which is really clear definitions of each partner’s contributions and responsibilities. So, think of them as smart goals, only they’re smart roles. So, they should be something that all the other partners can look at and say, “Yup, Drew did that. Yup, Drew did that,” or “Oh, Drew is dropping the ball on that. That’s not happening.”

So, the purpose of these definitions of the contributions of the partners is so that the business partners, it’s tough when your business partners to hold each other accountable. So, the roles clearly defined as smart roles, either specific or measurable, all those things. It gives me a mechanism as a business partner to have a conversation with one of my business partners if they aren’t meeting our expectations. It’s also a way for me as a partner to know what I’m responsible for and for me to stay in my own lane. A lot of times business partners, how they work is fluid. So, you want to make sure that everybody is doing their portion of the work and staying focused on their job. So, these clear definitions and contributions for each partner is a way to do that.

As you might imagine, it’s really important to define in writing. So, think of partnership agreements as prenuptial agreements in a marriage. You write those when you are madly in love with each other and you don’t think you’re ever going to have a fight, let alone a conflict or let alone thinking about dissolving the marriage. Partnership agreements are exactly the same thing. You want to write these when there is no conflict or when the conflict is super manageable. You’re going to want to write these in a way that you’re writing them in a moment in time when everything is going well. You can’t imagine actually having to trigger any of these things, but you are smart enough to know that sometimes even in the best partnerships, things go sideways, maybe even temporarily.

None of these are about breaking up or the deal ending. Well, some of them are, but it really is more about the idea of you being able to use this document as talking points and for clarity. So, it’s really important to do this together. It’s important to do this at a time when you can really have good candid conversations, and everybody can be really honest about what they want under the partnership. So, anyway, back to the next topic.

As you might imagine, one of the most important things to have in your partnership agreement is, “How do you divvy up the money?” So how do we handle profits? How do we handle losses if everybody has to put money back in the business? How much loss are we willing to tolerate before we take action? How are draws or distributions handled amongst all the partners? So, this is all about basically, “How are we handling the proceeds of the agency and how are we dividing that up?” Again, it might be by ownership percentages. It’s also about how often, for example, you’re going to take draws. Can a partner trigger a draw that’s out of the sequence?

All of a sudden, I want to buy a car. Can I take a draw? So, it just outlines the rules around money. When you’re talking about money, one of the currencies I don’t want you to forget about is points. So, for many of you, you played the points game with credit cards and you’ve accumulated a lot of points. So, understanding how those are going to be used and how somebody can tap into those for whatever reason is also an important currency to cover in the profits, losses, draws section of your partnership agreement.

One of the most important things that business partners do in agencies is they are responsible for making commitments on behalf of the agency. So, in the partnership agreement, you need to be really clear about the partnership authority. So, who has the power to bind the agency in a contract? Think about all the ways that you commit the agency to things as an agency owner. You sign media contracts, you sign loan documents, you rent the copier for five years, you sign a telephone contract, you sign a lease. I mean, big and small, as agency owners, we bind the agency to lots of different financial commitments. So, you want in this document who can do that and at what level.

So, is that each of the partners can commit the agency without talking to the other partners for up to 25 grand? You require two signatures for something that is in duration longer than a year. Lots of different ways to think about this, but you want to be really thoughtful about it and really, really clear in your language about who can do what.

As we’re doing succession work with buying and selling partners, one of the places that is really fascinating where we have a lot of conversation as we’re thinking through the partnership agreement is, “How are we as partners going to make decisions?” So, in a lot of cases, you have a solo owner selling to either one more person or multiple people. Remember, the solo owner is used to making all these decisions by themselves. They don’t have to get anybody else’s vote. Oftentimes, they’ll talk about it with their leadership team or maybe the person who actually is not buying into the agency. That’s usually a right hand person that they confide in. But everybody in the agency knows that the buck stops with the agency owner and they make decisions.

So, all of a sudden, when you take out a partner and all of a sudden, you have to actually run things by someone else and they get to vote on your vote, that’s a very different shift for agency owners. So, in this part of the partnership agreement, you need to decide who owns what decisions. So, sometimes it’s divided up by areas of responsibility, like Partner A takes care of finance decisions ups to X dollars, Partner B handles most operating day-to-day decisions.

Whatever it is, you have to decide what decisions can be made independent of each other, where each of you has authority and responsibility, what decisions need to be unanimous, like moving the agency to a different building or taking on a large contract or maybe a big loan or maybe hiring decisions at a certain level. So, you have to decide, “What decisions have to be unanimous and what is the process of decision making?”

So, when do I inform my partners I’ve made a decision? Do I talk to them before I do it? Is it an ask or is it a tell or report again after I’ve made a decision? But where the discussion gets really interesting is what happens when the partners are stuck and you’re at a deadlock and you can’t make a decision. You are in disagreement with one another. How do you handle in essence breaking the tie?

I have seen it all over the years. Literally, I have helped partners negotiate that they’re going to do rock, paper, scissors to decide. In other cases, they’re going to take turns. So, if it’s Drew’s turn this time, then it’s Babette’s turn next time. They just alternate through the partners. I have seen coin flips. I actually am in some partnership agreements as I’m the tiebreaker, so a trusted advisor of some kind. Sometimes it’s an attorney or a CPA or like I said, in some cases, it’s me. However you determine and define your tiebreaking methodology, it doesn’t matter. As long as it works for you and all the partners, it doesn’t matter what it is, but it does matter that you have it.

This is a place where if an agency does not have a partnership agreement, sooner or later, I don’t care how aligned you and your partner are, it doesn’t matter, sooner or later, you are going to disagree. We’re human beings. You really do want a predetermined, clearly defined, no wiggle room or arguments