How to Avoid Bad Partnerships

How to Avoid Bad Partnerships

In 2017, I entered into what would turn out to be the worst business deal of my life. In short, we were trying to merge two companies in order to gain market share, create value for our customers, and increase the valuation of our company.

All very respectable goals.

Unfortunately, for a number of reasons that I am going to list below, the partnership blew up in our faces. It has ended up in a court case that is still going until this very day, but we will talk about that later.

Now, it might sound all doom and gloom, but the truth of it is, I learned a lot from this. For lack of a better word, it’s been a shit show, but I want to share with you the good, the bad, and the ugly, so you can try and avoid doing the same. 

Negotiate like it’s your mom?

The old saying ‘hindsight is 20/20’ is absolutely true. Looking back on this, we made so many mistakes that it is no surprise that the deal fell apart. We had the bulk of our meetings over the phone. There were way too many cooks in the kitchen. We argued over stupid things like names and titles. We went tit-for-tat over equity distribution, and no one on either side of the deal seemed to be the final decision maker.

All of this created a really toxic environment for both parties from the outset.


The main things I took away from this were:

  • Don’t argue with your future partners: Remember these people aren’t your enemies. They are people you are going to presumably be doing business with for a long time. If it ever gets to that point, either take a step back or put someone else in. If it persists, take a long hard thought about whether you should really be doing this deal in the first place. Getting into tit-for-tat negotiations with our potential partners really soured the whole vibe of the deal from the start. Most of this revolved around the equity distribution between shareholders, and it created an us-versus-them scenario and pushed everyone further into their corners. 
  • Sit in the balcony: It is really easy to get caught up in the us-versus-them and focus only on what you want. Worse, you can get so locked in that you get tunnel vision and lose sight of the overall deal. My advice is to stop for a moment and take a seat in the balcony. In other words, get off the stage, or out of the ring, and take an unbiased view of what a third party looking in on this might think or say. If you can’t do this, then ask the counsel of a third party. They can help you come up with ideas and solutions you may have never thought of otherwise. 
  • Be creative: Don’t get caught up in simple equity negotiations, as one simple rule to follow. Consider how you want to handle things like performance bonuses, earnouts, vested equity, cash / equity exchanges, and so on. There are a million ways to negotiate things: give more equity. take less voting rights, and so on. The point is not to get stuck on a number. Figure out what they care more about that you might care less about, and go from there.
  • Make one person the final decision maker.
  • Don’t be afraid to make the first offer.
  • Strategy is great, but don’t forget to be human in the process.

Relationships are EVERYTHING 

It was clear from the beginning that we were two VERY different companies, from the way we looked and spoke to the way we ran our businesses. We had expectations about ourselves and each other, and in the beginning that was part of why we wanted to do the deal. Their back office and admin were stronger than ours, while our operations, marketing, and tech systems were better than theirs. It should have been a match made in heaven… but it was far from that.

Lessons

  • Don’t go into business with someone you would not go on vacation with: I mean exactly what I say by this, so take it literally. If you are going into business with someone that you just don’t like as a person and can’t imagine hanging out with outside of business, you probably shouldn’t be doing it. 
  • Look for red flags: As you might expect, these are things that seem out of place or catch you off guard. This could be something as small as an offhand comment or something as big as a completely unethical business practice. If there is something that is off, make a note of it. It doesn’t mean you have to stop working with them, just be aware it’s happening. If you see the behavior repeated, it might be time to take a long hard look about what you are doing. 
  • What’s your ‘Why’? Different people get into business for different reasons. Some people want to grow an empire, while others want to hang out and drink beer on the beach and make enough money to survive while working as little as possible. This is not to say either way is right or wrong, but if your vision does not line up with your potential partners, you are going to be in for a lot of frustration. It’s not because you are right and they are wrong, you just aren’t speaking the same language: It would be like yelling at someone who doesn’t speak English and saying they are stupid for not understanding you, while they are yelling the same thing back at you in Spanish, and you don’t speak Spanish. Knowing why both of you are in business and what you both want out of the relationship is huge.
  • Meet face-to-face instead of by phone or text: we really messed up here. Our counterparts were always asking us to meet face-to-face and we kept pushing for phone calls. In retrospect, I think it might have been the downfall of the deal and the relationship. Meeting face-to-face almost always decreases the level of animosity and tension. It’s more collaborative, and factors in good old fashioned human nature which is HUGELY important. This might have been the single biggest lesson I learned from this other than NEVER TEXT! Texting is without a doubt the worst thing you can be doing when things are even slightly emotional or any kind of misunderstanding has taken place. Weigh your communication options carefully, and always choose whichever one requires more human connection. If your only options are email or the phone, then get on the phone. If your options are the phone or face-to-face, ALWAYS meet face-to-face. 
  • Be honest and upfront: Whether in business or a relationship with your significant other, don’t sweep things under the rug and move on. If there is something that is bothering you, address it then and there. Don’t let it build up into an epic meltdown over who left the toilet seat up. The reason why most people do this is conflict avoidance, but truth be told this tactic never works. Avoiding short-term uncomfortable conversations leads to guaranteed long-term issues. 
  • Don’t attack people in public: If you want a sure fire way to destroy a relationship in 2 seconds or less, call someone out in public on a group phone call or in a group meeting. If you want then really want to alienate yourself and piss off everyone on the call, justify this outburst by saying you said this because you were the only one with the balls to say it. This is like the royal flush of emotional stupidity. I am not proud to say this, but I did this — not once, but twice during the course of this debacle. Learn from me: bite your tongue, don’t say a word, count to 10, hang up if you have to, but DO NOT attack someone else. It will not help you no matter how much you think that it will. 

Don’t start until you are FINISHED! 

Without a doubt, the single biggest mistake we made when doing this deal was charging forward at 1,000mph before the contract was even signed. I know this sounds f**cking crazy, and looking back on it, it was, but we all got caught up in the heat of the moment. The excitement and the possibilities created unintended consequences for both sides before we even began. Now you might be asking yourself, “What does Edmund mean?” well let me explain to you in plain English how ridiculously, incredibly, dare I say recklessly stupid we all were: 

  • We switched over signs 
  • Changed uniforms 
  • Updated websites 
  • Announced our partnership to the world
  • We taught them our marketing and pricing strategy
  • We began training their team 
  • We implemented our products and tech systems 
  • We basically taught them how we do business and gave them all of our proprietary information. In the end when the whole thing blew up we walked away with a lawsuit. Having created our biggest competitor, their business literally changed from a non-competitor to being a carbon copy of ourselves. Even worse, because the relationship was so damaged, it was AGGRESSIVE competition. 

Even to this day, I look back on this and wonder how three reasonably intelligent people on our side of the deal ever allowed this to happen… but I can’t change the past.


Lessons:

  • Don’t start work until the ink is dried, no matter what. Just don’t do it
  • It’s never too late to pause or pull out. Don’t get caught in the Concorde fallacy (AKA the sunk cost fallacy). If it is going wrong and you know it, STOP!
  • Don’t get consumed by what other people think. Iif you know it’s not working, it’s better to have a public M&A failure rather than a public legal war. 
  • NEVER share your IP until you know the deal is done. Make sure there are very clear expectations and safety measures around this in your contract in case the deal does fall apart. 

It won’t always be nice, so plan for it

Things won’t always be unicorns and rainbows. There will be disagreements, and it’s best to decide the arena, format, and process for settling such disputes when you are not in a disagreement. Also, just putting yourself in this mindset will have you both negotiating and thinking about what happens during disagreements. It will give you a bit of insight into what life in the future might look like when there’s a disagreement with your partner. Here are a few things to plan for:

  • Voting rights: Who has the power to do what, when, and how. The more clearly this is stated, the better. If you get to the point that you have to go back and look at the contract, then shit has probably gone really wrong, and you better pray you thought about this long in advance.  
  • Rip cord: Make sure there is a mechanism in your contract for getting out of your contract. The last thing you want to be doing when things have totally broken down is start negotiating over how to get out of the agreement and valuation models. Decide it in advance and it will make things way easier if and when it does go wrong.  
  • Mediation: I strongly recommend you choose mediation, which means you get a neutral 3rd party to help you resolve the conflict as the means for settling disputes. If and when things do go south, the first step isn’t to end up in a courtroom. 

End it Nicely

If your deal does start to fall apart and you decide it’s time to call it quits END IT NICELY. If you have already gotten to the point where things aren’t working, the worst thing you can do is make it worse. Keep the BIG PICTURE in mind and don’t get caught up in positional arguing and winning little battles when there is a much greater war ahead of you. Further, if the relationship has gotten to the point where communication is damaged and every conversation turns into an argument, HIRE A MEDIATOR. You DO NOT want to go to court, trust me. No matter how right you think you are, the way the judge and lawyers see it is often very different, and it’s very rarely a matter of right and wrong. Courts aren’t designed to solve moral and ethical dilemmas. They are designed to enforce contracts and award financial damages for breaches of them.


My Advice:

  • Don’t get sucked into the drama: remember the end goal. Focus on attacking the problem and not the people. 
  • Don’t make emotional decisions: Have you ever heard someone say “I’m so glad I made these incredibly important decisions when I was pissed off and breathing fire, it really changed things for the better”…? Me neither. It’s impossible to do that when you are pissed off. You are literally, and scientifically proven to be, at your worst during these moments, and your evolutionary history as a human is working against you. When you are in a high stress situation, your body simply views it as “danger”. 300,000 years ago, that was useful — when you were being attacked by, say, a saber tooth tiger, your body would put you into fight or flight mode. Adrenaline shoots into your veins, blood rushes to your hands and feet, and you prepare to fight or run… but when you are negotiating with your partner, this is unfortunately far less useful. Force yourself to answer some questions. For example: What’s my goal here? What is the big picture? Why am I angry? What is the underlying feeling?, etc. The answers to these questions are far less important than the action of getting blood flowing to the prefrontal cortex and getting blood flowing away from your reptilian brain, which is decidedly less skilled at making analytical decisions. At least it’s great for running from tigers. 
  • Don’t go to court: It’s a waste of time, money, and above all drains your positive energy. If all that weren’t enough, remember this: you are probably wrong or at least very unlikely that you are 100% right. If you find a lawyer that says “You are 100% right, we got this in the bag” say “Great, let’s work out a fee based on the success of the case”, which thankfully we did. 
  • Don’t be an idiot: Unfortunately, our former partners started vandalizing our businesses, harassing our customers, attacking us online and writing false reviews to try and damage our business. This sucked… but what was even harder was not reacting to it. Of all the missteps that took place along the way as a business, this is one area I am proud to say we stood our ground and didn’t react to what was happening. Trust me when I say it was not easy.

But what we always kept in mind was:

  • Anger isn’t anger: there is an emotion behind this. In this case, I believe it was fear. I understood why they felt the way they did, and believed reacting would only push things further in the wrong direction. 
  • It will stop: No matter how bad things get, it will eventually stop.
  • What message do you want to send to your staff and family: Whether you fight back or you decide not to react, you are setting an example for everyone around you. Think about what example you want to set. 
  • Be above it: As this was a fairly public break-up in our industry, we believed this was an opportunity to earn or lose respect with our handling of the situation and we decided that we wanted to earn respect. Just ask yourself if you want to look like the bigger person publicly, or be the bitter ex who is keying your car and being a complete psycho. 

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