The WAY to WOW Shows
Five Conversations to Have Before Becoming Partners
September 9, 2026
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[0:02] The best time to decide what happens when business partners disagree, want out, stop contributing, or suddenly can't continue is when everybody still likes each other. Today on People Making Money, I'm talking about the partnership agreements that can feel unnecessary when things are going well and priceless when they're not.

[0:26] >> Who are you? And where [music] are you going? What do you want?

[0:42] >> Hello and welcome to People Making Money. I'm your host Kevin Bemel and I'm here every Wednesday at 10:00 a.m. Pacific time to talk about job hunting and being an employee, starting and running a business, and building wealth. So, the whole financial side of our life. And I've been running those topics in repertory this this season. And so, today,

[1:05] >> [snorts]

[1:05] >> um I'm going to be talking about starting and running a business in particular when you're when you're going to have partners in a business. So, if you're going to be the sole proprietor, the only one involved, so, you know, all you have to have is an agreement with yourself. And I recognize that sometimes that can be difficult. Um but but the bottom line is in the end um there the you're not going to run into a dispute or an intractable dispute with yourself. But when you have partners, and even, you know, the greatest of

[1:41] friends can have differences of opinions. And [snorts] it is uh um uh I think foolhardy is not too strong a word to take the position that, "Oh, we're such good friends, we have a such such a close relationship, we will be able to work these things out down the road. They're they should all be worked out at the outset so that if things something goes wrong, uh the the business issues can be dealt with

[2:16] uh on their own and the relationship can survive. And so I have uh five thoughts on this topic. Now, I'm going to be talking from a business perspective, not a legal perspective. So, I am not a lawyer. I'm not here to advise you on how an agreement should be worded or anything like that. Uh you know, what what I the process that I'm going to about which I'm going to be talking is one where you and your partner or your partners sit down together, you work out the business aspects of your

[2:53] partnership and then the lawyer can put them into a document of partnership agreement or whatever it's going to be. It could be a LLC operating agreement. I'm using the term uh partner in in a kind of a uh a you know, a loose fashion, if you will. The form of the business is is is not what I'm talking about. Partner I mean partner in the sense of, you know, co-founders, co-workers, that sort of thing. So, the lawyers can put it into proper form. They may have some additional issues that they encourage

[3:31] you to consider, um but but but what I'm going to be talking about is the business aspects of the partnership.

[3:39] >> [snorts]

[3:39] >> So, I think I I I highlighted just a moment ago one of the main misconceptions that uh people starting a business fall into and that is we treat, you know, we [snorts] trust each other, so we don't need to put everything in writing. And that that somehow a detailed agreement signals distrust. That if you're going into a business with a friend or a relative or a long-time colleague or someone you respect, you know, a handshake and and a mutual understanding should be enough. And and that that doesn't seem so

[4:16] unreasonable at the beginning. So the problem really comes if something goes wrong. So, if you really trust each other, right? Why do you need a contract? And it's because memories are unreliable, circumstances change, and and reasonable people can uh they can have a different recollection of the same conversation. And so, a good agreement isn't primarily about distrust, it's

[4:52] about clarifying everything while all while all the part while all the parties are still aligned, right? So, when you're starting a business and you're working out who's going to contribute what and who's going to be doing all those kind of things and you come to an agreement, that partnership agreement, that written agreement, is there to document the understanding that you've created at that point in time. And then later, if people's memories are uh if people's recollection recollections change, well, you've got

[5:27] the written agreement there so that people can go back and refresh their memories. So, one way to look at it is is to treat the agreement like kind of an owner's manual for the business relationship. So, what does each person own? What is each person expected to contribute? Uh who gets paid what and when, right? Who has the authority to spend money, to borrow money, to hire people, to sign on behalf of the business? What decisions require everyone's approval versus

[6:02] what decisions can be made by one of the partners or a majority of the partners, however it works out. And what happens when you disagree, right? And in that way you've you've got this document to which you can go back and and and everybody can can go, "Oh, yeah, yeah, this is what we agreed when we started. Okay, fine." Um another way of looking at it is the process of negotiating the agreement may be as valuable or even more valuable than the document itself. So

[6:36] >> [clears throat]

[6:37] >> difficult questions can reveal different expectations before money magnifies those problems, right? Are you really as aligned with your potential partner as you think you are? It that may not be the case. It also may be the case that you just there were just certain issues that neither one of you thought uh to to discuss or one of you thought to discuss that the other one didn't really think about it and now that issue has arisen and so the person who thought about it has an idea of how it should be

[7:12] handled and the other partner feels like they're being blindsided because they haven't even thought about it before, right? And the fact of the matter is if you can't uh comfortably discuss money and authority and performance and and separation before becoming partners imagine how much more difficult it will be when there's a problem or when there's, you know, even worse than a problem, the business is in a crisis. So, as as uncomfortable as the conversation may be today, or maybe it

[7:49] you know, while you're starting your business, it it it really can prevent an even more extraordinarily uncomfortable situation, not to mention expensive argument tomorrow. Okay? So, that's you know, the the the agreement it it's not about trust or lack of trust, it's about making sure that issues are examined, and that um how everyone agreed is is put down in writing, so that everybody can have the

[8:25] same document to refer back to when their memory needs to be refreshed. Okay. [snorts] Second misconception is, you know, we're we're we're 50/50 partners. Everything is fair. Now, for those of you who have watched my show before, you know, I'm not a big fan of this concept of fair. Um I I you know, just, yes, I'm very in favor of justice, but fairness is a very problematic concept. Uh and and so, you know, what's fair to me may be very unfair to you. That that's why it's it's

[9:00] it's such a difficult standard to achieve. So, equal ownership, um people tend to think equal ownership kind of automatically creates fairness,

[9:14] >> [snorts]

[9:14] >> um and it's also the simplest way to handle the partnership. That is not necessarily the case. First of all, what happens when two 50/50 owners genuine genuinely disagree? Right? Now, you each one has equal decision-making authority, how are they going to decide what's going to happen. So, they've built deadlock into their business, right? So, while 50/50 sounds fair, um it it it

[9:51] it's not necessarily going to work out that way. And here's the here's the situation. What if one partner brings the majority or maybe all of the business experience and expertise, and the other partner is really the financial backer. Should the financial backer have equal decision-making authority with the person who really knows how to make the business successful?

[10:18] >> [snorts]

[10:19] >> On the other hand, should the person who has uh no money uh at stake be the one to make all of the decisions where and the person who uh uh you know, who's who runs the business has no control over what happens, right? So, you can see those are kind of the extremes. There's probably somewhere in the middle where uh decision-making authority is separated from ownership of the business, right? That's probably where you actually want

[10:54] to be. So, uh you know, you can have equal percentage ownerships without making every decision jointly, right? So, delineate areas of responsibility. Maybe uh in the example that I gave where there's a financial backer and there's the person with the knowledge and experience. So, maybe the person with the knowledge and experience, maybe when it comes to decisions about the day-to-day running of the business, they're the one that gets to make those decisions. But if there's going to be something that has a major financial

[11:30] impact on the business, s- for example, maybe the business is going to acquire, I don't know, a building in which to operate or it's going to launch a marketing campaign for a, you know, a an amount of money that's very large. So, maybe at that point then the financial partner, maybe they have the final say since in the end it's, you know, it's their money or you know, I'm just giving examples. These are but these are the kinds of discussions that that that you should have and they're ways of dividing up

[12:08] responsibility for for decisions that make make more sense for the business and will be less likely to lead to gridlock. So, uh you know, just you know, um identify, you know, major decisions and perhaps those, you know, like selling the business or merging with another company. Maybe those require the consent of all the partners, but maybe other decisions don't. That's one way to look at this. Another way

[12:43] uh to to look at it and another potential issue is um just because uh two people are 50/50 partners, what does that mean? Mean, does it mean that they contribute equal amounts of uh money in order to start the business? Does it mean they work the same amount of time, i.e. they both work, you know, 70 hours a week in order to make the business work? I mean, what does 50/50 even mean, right? And so, uh equal ownership doesn't necessarily

[13:19] mean equal contributions forever, right? So, one partner may eventually work 60 hours a week while the other one works 10 hours a week. Now, maybe that's fine if the guy working 60 hours a week is the one who brought the knowledge and expertise and the one working 10 hours a week is the one who contributed the money. Maybe that's a way of sort of balancing out what otherwise could be considered an imbalance, right? Again, it needs to be talked about. So, uh you know, you you may have a situation where one partner is kind of

[13:55] the rainmaker, they're bringing in most of the revenue, and the other partner is really the one, you know, performing the services. Well, are they contributing equally? Well, uh I don't know. If If the business isn't coming in, the one who's performing services doesn't really have that much to do. On the other hand, um you can bring in all the business you want, but if you can't service the clients, so then you don't really have a viable business. So, the again, these are the kinds of issues that that should be um delved into deeply in discussing what it

[14:31] really means to have a so-called 50/50 partnership, right? You may have a situation where one partner wants to reinvest most or all of the profits into the business to make it grow, and another one gets to a point where he wants to start taking some of the profits out as distributions, so that he can, you know, take a vacation, take his family, whatever, he can enjoy life, right? So, when we when you talk about an agreement uh between partners, you should distinguish between equity, i.e., the ownership of the business, compensation,

[15:06] how that's going to be figured out, is it going to be based on the actual time spent, workload, who's going to do the work, capital contributions, profit distributions, instead of treating them all as the same thing, break them down into categories and recognize that 50/50 doesn't necessarily mean that every single one of these aspects of the business needs to be a 50/50 split. It may make better business sense for some of them to be 75/25 or 80/20 or whatever whatever you're

[15:42] going to do, okay? All right, so we're 50/50 partners, everything is fair. That's really a meaningless statement until the details of it have been examined. Okay, next. Another misconception, we'll figure it out if somebody wants to leave, right? So you know, people think well there's no reason to negotiate a breakup while we're you know, really enthusiastic about starting this business. Well what happens when one partner wants out

[16:18] or worse not not worse, but but the other partner doesn't have the resources to buy out the partner. Right? What's going to happen then? I mean, this is this is one of the reasons why businesses fail. Is somebody wants out, the other person can't buy them out, the person who wants out you know, stops being active, the business can't sustain itself and the whole thing falls apart. Right? So you know, a partnership interest is not

[16:53] like you know, publicly traded stock. That's why they're called closely held interests, meaning that they're just held by the person. There's no ready exchange for ownership of closely held businesses. Now, there is a market for the sale of businesses, but that's it's it's really the sale of the entire business, not an you know, a partial interest in a business. It's not to say that they it can't be sold, but it's not a readily saleable,

[17:29] you know, it's not a readily saleable investment, if you will. So, without an agreed-upon process, one person's desire can can really become everyone one person's desire to leave, I should say, could become everyone else's problem, right? So, maybe you have four partners in a business, three are working at it really actively, they're very focused on generating business, delivering for the customers, marketing the business, all this kind of and all of a sudden the fourth one wants out, it's like they've all got to stop now

[18:05] and and deal with this problem. It's also demotivating, because one wants out, there's no plan for him leaving, now we've got to figure this out, oh my gosh, are we going to survive? Um are are the other partners going to continue to, you know, devote all all their work time to it as as diligently as they did before, when there's so much uncertainty? The answer it may be no. That that may not be the case, right? So, the So, one of the best reasons for having an agreement among partners up front is so

[18:40] that they can um decide in advance what are going to be the rules governing a buy-sell event, right? So, first of all, which events allow for or require a buyout, okay? So, I see this um in in my work as a professional trustee and probate administrator. Uh if somebody dies, right? Uh oftentimes businesses will have an will

[19:15] have in their uh partnership agreement that uh when some when one of the partners dies, um that triggers that partner's interest being bought out, okay? Otherwise, they may be stuck with having the estate as a partner while it's going through probate or going through the administration of a trust or whatever. They could end up with the partner's spouse who knows nothing about the business now being their partner, right? And so, rather than that, there is a sort of a a a mandatory uh buyout event that happens

[19:52] when a partner dies, right? So, which events allow or require a buyout, right? Who gets the first opportunity to purchase the departing owner's interest? Again, let's look at that example where there's four partners. Maybe one of them wants out or maybe he's passed away, right? Do the three remaining partners all get to take over 1/3 of the departing partner's interest? So, now they'll all become equal 1/3 owners. Is that how it's going to work or is it going to work some other way? Maybe, you

[20:27] know, out of the four partners, one of them is the financial who put up the money and the other two are are the other three, I should say, were putting up sweat equity, as we call it, right? The effort. And let's say uh one of the sweat equity partners is out or is leaving, uh you know, maybe it's fairer uh to let the other two sweat equity partners have first opportunity to acquire the departing partner's interest. And so, now the business is going to be um you know, uh 25%

[21:03] and 37.5% and 37.5%, right? Uh or, you know, maybe, I don't know, there's some kind of auction. Who knows? There's, again, there's lots of ways that these can be decided, but they should be decided up front. Now, another issue, can an owner uh sell his interest to an outsider? Right? Do you really want to be in a business and somebody, again, everybody's working hard, making the business successful, one wants out, he goes, "Well, you know, I've got Joe over here and he'll he'll buy me out for whatever the number is." And and now you're partners with Joe, you don't know this guy, you

[21:39] have no history with him. Is that going to be allowed, right? And um how will the business or the ownership interest be valued? And and will there be an a formula or an appraisal process or some other valuation mechanism to set that? Again, that should all be decided as part of this issue. And then finally, um how will the purchase be funded and paid, right? Is an earnout a possibility? Uh, will the person uh

[22:14] uh I'm not an earnout, I mean a payout. In other words, can can the person be bought out by through a payout of uh revenue that the business is generating, so he has to work? Or is the business going to have to borrow money to buy out that partner? How is that all going to work? So, uh you know, these are um important aspects uh of of a partnership agreement and and some of the most difficult because, you know, they they are contemplating a time when, you know, maybe people are

[22:51] not as uh have as much goodwill toward each other as they did in the beginning, um but better to work out these issues then uh rather than waiting until there's someone who wants out and now and now it's happening under a lot of pressure. So, don't just agree on how to get into the partnership, agree on how each of the partners can get out. Okay, let's take a quick a quick break and we'll come back for more. When life brings unexpected changes,

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[24:02] or visit magnumprops.com. Okay. So, um next and and that is uh let's see, number four.

[24:16] >> [laughter]

[24:16] >> I clicked on another app and it came up in front of me. So, okay. Um So, misconception number four. Um the only thing we really need to plan for is someone quitting. Um that that actually is uh a a a terribly mistaken misconception. So,

[24:38] >> [snorts]

[24:38] >> um partnership you know, the idea that partnership agreements mainly protect against somebody voluntaril- voluntarily walking away is is not the case. And uh oftentimes it it it's it's when a partner like involuntarily uh walks away that are the biggest problems. So, and I I I mentioned that a little bit in the in the last one. What if somebody, you know, God forbid, dies? Or what if somebody becomes incapacitated?

[25:14] What if they, you know, have a personal bankruptcy or a divorce, right? Or some kind of, you know, serious illness and they they're no longer able to participate in the business. What is going to happen, right? So, this is a situation where your partner can't continue rather than doesn't want to continue, right? And by the way, specifically about divorce, right? If the if your partner's interest if you're in here in California, and which is a

[25:50] community property state, and your partner's interest in the business is owned in community property with his spouse, and now there's a divorce, you know, what's going to happen? You know, now you've got a married couple, you know, unless it's an amicable divorce, which does happen, but oftentimes does not, what's going to happen to the business now that there's, you know, one spouse who maybe wasn't involved in the in the business before is now going to become a part owner maybe because of

[26:25] the divorce, right? So, maybe, you know, divorce is also a mandatory incident whereby, you know, the partner, you know, can be bought out, something like that, right? So, you know, when we have these sort of involuntary situations, and I I, you know, we don't we tend not to think of divorce as being involuntary, but but oftentimes it is. Oftentimes divorce is arising out

[27:00] of one spouse demand demanding a divorce um and the other spouse not wanting it, but in a state like California not being able to do anything to prevent it, right? So,

[27:12] >> [snorts]

[27:13] >> part of planning the agreement should be playing a sort of what happens if game, right? Before signing the agreement, before actually, you know, boiling it down and onto paper. So, what happens if one of us dies? What what happens if one of us becomes unable to work? What happens if one of us stops working in the business? Goes through a divorce, has financial or creditor problems, right? Wants to retire. Uh dies and leaves the ownership

[27:48] interest to family members. What is going to happen in all of those eventualities? Uh sorry. [snorts] Air quality today is really bad here in LA. My just my face is itching. Okay. Um so, all of those should be discussed uh prior to concluding the agreement and some kind of decision made for each one of those. Now, the And by the way, there may be others, okay? So, uh you know, it's going to depend on your personal circumstances, okay? This is where a lawyer will help you. Uh

[28:24] a good business lawyer has seen the breakup of partnerships and he may have some thoughts about other uh situations that that should be considered uh and for which decisions should be made. So, that's one way of looking at it. So, another question to ask that's often overlooked is who might become my partner without my choosing them. This is I I mentioned this before. This is particularly in a case where someone dies, they leave their their interest in the business to their estate, and now the heirs are going to become the

[29:00] owners. I mean, you didn't choose these people as your partners. Uh they may know nothing about the business. By the way, they could be children, they could be teenagers, they could be young adults who have other things going on, but they know nothing about the running of the business. Uh uh you know, do you want to be their partners? Maybe, okay? And if if that's something you've willingly agreed to, willingly agreed to, that's that seems uh redundant. If if that's something to which you've agreed, well, so then then it maybe it's fine. But if you haven't, it can cause a lot of consternation. And

[29:36] by the way, let's say that your partner's interest is going to be split up among three or four heirs. Now all of a sudden, instead of having one partner, you have three or four, right? And and and how is that going to affect the ability to make decisions, especially decisions that require uh you know, unanimity or something like that. So, one another good reason for having an agreement is that way you can choose your business partner. Okay? Even if there's some kind of change, partners will will have some

[30:11] rights with respect to what what will happen in a succession situation, right? So, um you probably didn't choose your partner's heirs or former spouse or creditors or their estate to be your partner. That all can be worked out in an agreement. Also, ownership transfer provisions can be created that address who is permitted to receive an economic interest in the business and under what circumstances ownership can change hands. So, depending on the business and the

[30:46] circumstances, there may be a need for an insurance policy so that the funds will be available in the event that that a buyout needs to happen. So, the partners may mutually insure each other, okay? And that way, um if there if you know, if if one of them dies, that life insurance pays off to the business who can now buy out the deceased partner. That's That's, you know, one provision that can be created that can make the whole process easier, right? So, um a

[31:21] good agreement doesn't merely prepare for bad behavior, it also prepares for just life happening. That That is That's just the reality of life. Okay. So, finally, number five. The lawyer will handle the agreement. This is a big misconception. So, you know, many people think, "Look, I just described the basic deal to the attorney, and then they put it all into an agreement, and I signed the document, and and now we're protected. We're good to go." No, not at all. Uh

[31:56] you know, unless the lawyer takes you through a process like what I've just described, there's liable to be a lot of a lot as many problems arising out of the agreement as there are uh solutions to it. Okay? Because most of these things, uh not most, all of the things I've talked about, these are business issues, not legal issues. The way they're documented and the mechanisms created to accommodate your decisions may have legal aspects to them. But what you want

[32:33] to do and why you want to do it, these are fundamentally business decisions. Now, the league the legal mechanisms and such may cause you to modify some of your decisions. Okay, that's fine, right? But the fundamental decisions should be on a on a business basis, on a relationship basis, not a legal basis, right? So, the attorney really just can't handle the partnership agreement without input from the partners, okay? So,

[33:08] you know, the question could be should be asked, who is ultimately responsible for making an agreement that reflects how you intend to operate this business? And that question should be the people who are going to operate the business, okay? So, presumably your lawyers are not going to be involved in the day-to-day running of the business. And so, for them to dictate how it should work could become problematic because it may not reflect how you as partners want to do things.

[33:43] So, your attorney can help identify legal risks, he can explain consequences, he can draft appropriate provisions, and he can advise you about applicable law. But the lawyer really cannot decide what kind of partnership you want unless you the partners first confront these issues, discuss them, and come to an agreement about them, right? That's the fundamental heart of the agreement. So, um do the business conversation either

[34:20] before or alongside the legal conversation and drafting, okay? So, what does success look like for each partner? All right? What what would make the what would make them consider the business successful? What it What is that? Okay? For some, it may be I want to have a business that can support my lifestyle. I'm not looking to, you know, create a a unicorn and cuz I don't want to work that hard or whatever. Okay, that that's fine, right? We all should be able to define what success looks like. But what if that's one partner and

[34:56] the other partner's like, "Are you kidding? I want this thing to be the biggest thing in the world, right?" Those are very different goals, okay? And and that could be a very bumpy partnership, right? How much money does each partner expect to make? How much time does each expect to contribute, right? How are the profits going to be distributed or reinvested? How much additional capital um could the partners be required to contribute, right? What's the long-term objective for the business? Is it income growth, sales succession, something else, right? Um

[35:34] being well-known in the cat in the in the industry. I mean, and and by the way, there doesn't necessarily have to be one of these, one long-term objective. There can be multiple long-term objectives, but it's a good a good idea to know what they are and for the partners to be in alignment, otherwise they may be working at at at cross-purposes. So, that's one way to look at the the the sort of broader agreement. The other is don't let the signed agreement become a historical fact, okay? So, the company you started

[36:11] um may not look like the company you have 5 years later, right? And so, ownership can change, uh revenue can become, you know, significant, um new investors may may, you know, get involved. Um, partners' roles and financial contributions may change. So, you know, all of these things are part of the evolution of the business and they may require from time to time revising the agreement, right? So, the agreement shouldn't be this sort of, uh,

[36:47] you know, archival document that, okay, now it's done, we file this away and we're good, right? They're they're probably should be a periodic review. Should it be every year? Uh, every two years, every five years, every six months? It really depends on the business, how dynamic it is, how many partners are involved, how old they are, how how rapidly their fam- family situations are changing. All of these should be considered and then, you know, again, maybe, you know, once a year you sit down with your attorney for an hour or two and you review everything and

[37:23] decide, do we need to make any alterations, right? So, your lawyer is there to help you turn your decisions into an effective, legally binding agreement, but your your lawyer should not be inventing or creating decisions for you. That's for you and your partner or partners to decide. So, uh, some some, uh, final thoughts. Um, a partnership agreement isn't written for the day when everyone is excited and and

[37:59] trusting and and healthy and productive and really, uh, you know, just looking forward to working on it, right? It's written for the day when one of those things is no longer the case, right? And the goal isn't to predict every possible problem, right? It's to agree on the rules while you still have uh the luxury of deciding them together without a problem or a crisis in the offing and you have qualified legal and

[38:34] tax professionals to help make sure that what you want to do will actually work. That's what the agreement is there to do. So, curious to know if you are in a partnership, did you do a partnership agreement before you started? If so, what led you to you know, decide that yeah, this is this is the best time to do it is is to set up the agreement uh you know, before we really get deeply into this business. If you don't have a partnership

[39:10] agreement, how has it worked out for you uh in terms of working with your partner or partners without a written agreement, right? If you look right down below you, you'll see links to social media. You can post a comment and I like as I always say, I'm happy to read your comments and and uh respond to them. That That would be terrific and we can all learn from each other. So, uh real quickly then, schedule of shows, all based on Pacific time. Uh Monday at 10:00 a.m., Trust and Estates Weekly. Tuesday at 10:00 a.m., Business Lessons

[39:46] from the Military. Wednesdays, like today at 10:00 a.m., People Making Money. And then every other Thursday at 5:00 p.m., join me at Jigger's Place for a cocktail and a schmooze and we'll talk about all kinds of things not related to finances like books and movies and ideas and relationships and all that all that great stuff. So, I thank you again very much for joining me. Wishing you a wonderful rest of the day and signing off as I always do, Marie darling. You are my bell.

[40:21] Courage at all times, my friends.