Subscribe: Apple Podcasts · Spotify · YouTube · Amazon Music · iHeartRadio · Pandora · RSS
Episode Summary
You’re three years into a partnership, the business is finally working, and something quiet is starting to fester. The capital partner thinks the operator is getting paid twice. The operator thinks the capital partner just collects checks. Nobody had this conversation on the front end because the operating agreement was a template pulled off the shelf and signed at the closing dinner. I brought Dan Grimsrud back because he’s one of the rare M&A attorneys who actually understands accounting and cash flow, and he’s watched the resentment bomb go off in dozens of partnerships that were otherwise winning. We got into the four buckets every operating agreement has to address (governance, economics, exit, and crisis), why the W-2 wage and the Module 1 — Ownership Goals have to be separated and then tied back together with real mechanics, and why mandatory buyouts without a funding source are how good businesses get wrecked. Real examples on tax distributions, drag-along/tag-along, sweat equity tax traps, and the appraisal that says $500K when the market says $5M.
Watch on YouTube
## Top 10 Takeaways- Every operating agreement has four buckets: governance, economics, exit, and crisis response. Address all four or accept the gap.
- The W-2 wage and the ownership equity are two different conversations. Treat them that way from day one.
- Sweat equity without a tax conversation is an ordinary income event you didn’t see coming.
- Tax distributions belong in the agreement. Otherwise a majority owner can hold the minority hostage when cash is tight.
- The resentment bomb only goes off when the business is succeeding. Defuse it on the front end.
- Mandatory buyouts without a funding source are how good businesses get wrecked.
- Appraisal-based formulas drift over time. Put a collar on them or expect a fight later.
- Drag-along and tag-along are non-negotiable. The majority shouldn’t foist a new partner on the minority.
- If your key lieutenant won’t negotiate their Module 8 — Executive Compensation, they probably aren’t your key lieutenant.
- The right question on the front end is the same one your six-year-old would ask: is that fair?
Sound Bites
“Anybody that tells you they can give you a document that you can just throw in a drawer and that’ll be working well 20 years later is not being realistic about how the world works.” (@TBD) — Daniel Grimsrud
“The problems that really feel really maddening are the ones where the business is doing well and you have a problem. Because you’re sort of like, how did we not create a situation where we could avoid this?” (@TBD) — Daniel Grimsrud
“If you’re hiring a C-level person and you don’t have a negotiation, I think it’s a huge red flag. They’ve got to be able to advocate for themselves or they shouldn’t be in that role.” (@TBD) — Daniel Grimsrud
“Take all of the legal jargon bullshit out of it. Do you think that’s fair or not?” (@TBD) — Ryan Tansom
“No matter how good the document is, you have to be able to work together and work through things together.” (@TBD) — Daniel Grimsrud
About This Episode
Daniel Grimsrud is a partner at Best & Flanagan in the Twin Cities and one of the few M&A attorneys who comes from an accounting and finance background. He has spent 20+ years on both sides of operating agreements, from inception through exit, and is also an active investor in private equity deals. This is his return appearance on the show, and the episode opens Ryan’s mini-series on ownership and leadership alignment. The conversation walks through the four core buckets of every operating agreement (governance, economics, exit, and crisis response) and uses real partnership scenarios to show how the structure either creates alignment or sets the resentment bomb.
Resources Mentioned
- Best & Flanagan — Dan’s law firm in the Twin Cities.
- Intentional Growth Bootcamp — Two-day in-person bootcamp, May 11-12, Orlando, Florida at Rollins College.
- Intentional Growth Academy — Virtual 2.0 version, nine and a half hours, 71 videos.
- Mosaic Advisors — Brandon Henry’s family office, referenced as the next guest in the mini-series.
Connections
Phase + Module:
- Module 1 — Ownership Goals — Partner alignment, ownership equity goals, and income expectations
- Module 8 — Executive Compensation — Where the W-2 comp arrangement gets tied back to the ownership outcome
Milestones:
- Milestone 3 — Net Worth & Valuation Targets — The target equity valuation that anchors the partnership conversation
- Milestone 22 — Company Bonus Pool — Comp mechanics for key lieutenants inside the operating agreement
- Milestone 24 — Long-Term Value Plan — Tying employee owners to the exit event
Concepts referenced:
- The Owner-Operator Trap™ — Why conflating the W-2 seat with the ownership seat creates the resentment bomb
- Enterprise Value vs. Equity Value — The valuation framework behind buyout formulas
- Normalized EBITDA — The metric most buyout formulas anchor to (and where formulas drift)
- Free Cash Flow — Why mandatory buyouts without funding wreck the business