Tarek and Christina’s Lesson for Small Businesses and Entrepreneurs

Despite the separation of Tarek and Christina El Moussa, their split provides a lesson for small business owners and entrepreneurs. While marriage is tough, just look at the American statistics of 40% – 50% ending in divorce by the 10^th year, a partnership is even harder because it normally lacks the emotional ties of a marriage.

Noticing Tarek and Christina in the news reminded me of some of my consulting clients. In particular, I got thinking about Ben and Jerry (not their real names). Ben did something typical of small business owners and entrepreneurs, especially when starting out. He brought in a partner because of the expertise the man would provide the company.

Home Page Picture of Tarek and Christina El Moussa

Now, if you bring in a partner because of money, i.e. capital, you really need, that’s one thing. But even there be careful how you design your agreement. As you grow, you will probably need an infusion of capital again. Will you have stock or a percentage of the business still available to use or will you lose your controlling interest in your own business?

Partner Was More Liability than Asset

But back to Ben’s situation. Jerry did have the expertise so from that viewpoint, he was an asset. Nevertheless, from several other viewpoints, he was a liability.

• He was not dedicated to the business to the degree Ben was so he didn’t work as hard.
• He was much more into having fun so on at least one occasion he raced other employees in company vehicles.*
• He also took space in the company garage for his personal vehicle thereby forcing a company vehicle outside. This becomes a time issue with disconnecting and reconnecting the trailer. It also meant that because the vehicle was outside, someone was able to breaking and steal $6,000 in tools.

Ben was extremely frustrated over the situation. The problem was that he gave away almost half of the company to a partner without any recourse if the relationship went sour.

*That would have been bad enough were Jerry just an employee. However, as a partner, the company would have been liable had there been an accident.

Alternatives to Giving Ownership or Partnership in the Company Outright

1. Use “shadow equity” instead of actual stock ownership.**
2. Tiered Employee Bonus Plan
3. Give a percentage of ownership or percentage of partnership at certain performance milestones over time
4. Have a buy back clause in the ownership or partnership agreement for nonperformance or for other issues
5. Have a sell back plan defined for the partner to be able to exit early
6. Think through your options for how stock splits will work when raising more capital or bringing in another partner

**This is a plan best set up with an attorney as it gives a phantom ownership interest in the company without actually tapping into stock or capital yet still rewarding employees with a participating interest in the company.

I am not an attorney or CPA so for legal and tax issues, be sure to consult with them. In particular, be sure to run your planned agreement past your attorney before signing it. It’s far less expensive to have an attorney review in advance than to lose the ability to enforce your agreement due to a legal defect.

By the way, I do hope they get back together. There are some signals that Tarek and Christina might reconcile. They make a wonderful couple on their show Flip or Flop. Nevertheless, their recent split puts our attention on how difficult partnerships can be to maintain over time. Look at the above options you can use in place of actual stock or partnership. If you do decide to give an actual ownership interest, consider the points above then spell them out in your agreement. Finally, invest in having an attorney draw up the final documents so they will be enforceable and not negated because of a defect.

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Open your heart in selling,

John R. Aberle