#349: Achieving Ownership & Leadership Alignment [Part 1]: Operating Agreements, Partnerships, Long-Term Equity and Cash Flow Goals, Exit Strategies, Shotgun Clauses, and More.

Ep. #1 [THEME NINE]

It's super easy to get on the same page with your partner(s) and leadership team, right!?

I don't think anyone argues how important it is to get ownership and leadership alignment. This topic is discussed a ton in entrepreneurial circles. EOS© / Traction even has their "same page meeting" baked into the system. However, if it is so important, and there are systems devoted to helping people achieve this alignment, why is it SO difficult to actually accomplish?

In this mini-series, I propose that one of the biggest reasons there is still so much conflict between partners, ownership groups, and leadership is a lack of clarity on the long-term equity valuation goal, the desired cash flow owners want along the way, and how to handle leadership roles and responsibilities.

Kicking off the mini-series today is Dan Grimsrud, a seasoned M&A Attorney with a background in accounting and finance. Dan does dozens of M&A transactions a year - and sees behind the curtain of all the conflict that we all know exists - and is willing to share what he sees works and doesn't work.

In our conversation, we cover the importance of operating agreements in creating ownership alignment and providing a roadmap for a company's governance, economics, exit strategies, and crisis response plans.

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What You Will Learn

Operating agreements are crucial for establishing ownership alignment between parties and provide a roadmap for governance, economics, exit strategies, and crisis response plans.
The four key elements to address in an operating agreement are governance, economics, exit, and crisis response plan.
Involving tax advisors is essential to ensure proper handling of tax implications and make the agreement fair and legally sound.
Focus on the core elements of an operating agreement and have open conversations about priorities and concerns.
Regularly revisit and update operating agreements to ensure they remain relevant and useful.
Clearly define expectations, roles, and compensation structures in business partnerships, especially when one partner contributes capital and the other contributes expertise or labor.
Have separate agreements for ownership and management roles in a partnership.
Consider different tranches of compensation to balance the needs of both partners as the business evolves.
Establish voting rights, employment agreements, and bonus structures to create alignment between owners and key executives.
Different businesses require different approaches for buyouts and valuations, depending on their stage in the life cycle.
Plan for various exit scenarios, including external sales, the death of an owner, and voluntary departures.
Set parameters for determining valuation and be prepared to revisit and revise agreements as needed.
Insurance, specifically life insurance, can provide a funding mechanism for buyouts in the event of an owner's death.
Hire an attorney who listens to your concerns, asks the right questions, and helps you think through potential scenarios.
Regularly review and update operating agreements to ensure they remain relevant and effective.

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Bio:

Dan Grimsrud serves as an advisor to privately held companies and tax exempt organizations of all shapes and sizes. In his role as outside general counsel and in quarterbacking M&A transactions, Dan offers a holistic point of view together with thoughtful and practical advice on the variety of issues our clients face, including structure and governance, contract and regulatory matters, tax, and transition and transaction planning and execution.

Interview Quotes:

10:32 - “The messes are sometimes where you learn the most.” - Dan Grimsrud

14:15 - “[An operating agreement] is really just setting the rules of the road.” - Dan Grimsrud

15:10 - “You tell me first what you really care about here. What are the core elements of this business and this partnership?” - Dan Grimsrud

32:13 - “If you’ve never had a conversation about leadership vs ownership you’ll run into problems.” - Dan Grimsrud

32:47 - “Nobody ever wants to fight over a carcass.” - Dan Grimsrud

40:56 - “Don’t create a situation where the time where you have the biggest problems is when you have a successful business.” - Dan Grimsrud

48:14 - “If you and I are going into business together (and there are going to be exceptions to this but) there are going to be things that we should have unanimity around.” - Dan Grimsrud

52:00 - “The this or that is all about alignment.” - Dan Grimsrud

57:56 - “I don’t like mandatory buy-outs absent some kind of funding mechanism.” - Dan Grimsrud