3 Things To Consider When It Comes To Sharing Fees With Partners

0 comments

Written by: Topics: Dealmaking

3thingstoconsidersharingfees.23aug16losize

Let me begin with a little story.

Some time ago, I established an advisory firm with two other people.

The idea was straightforward: to structure lucrative deals and raise capital from some of the largest investors in the world. [This course explains how.]

With a healthy dose of hustle and persistence my partners and I managed to land a client in Eastern Europe. A logistics business in desperate need of capital. There was little investment appetite domestically so they asked us to source money from abroad. Enter my Rolodex.

After some phone calls and a visit to the Arab Gulf, I convinced a Middle Eastern sovereign wealth fund I knew to look carefully into the proposition.

Note: Up until now, my partners and I had not agreed on how the three of us would share fees. There were broad discussions but nothing had been settled in writing. That’s because from the moment we agreed to launch a business we jumped straight in and sought out clients instead of firming up important partnership matters.

In the months that followed, a great number of e-mails traveled back and forth among all parties (the client, the sovereign wealth fund and our nascent business). Dozens of conference calls took place. Eventually, the Gulf investor made a non-binding offer to acquire a majority stake in logistics business. They also asked for exclusivity for 3 months. We were thrilled. Thereafter began the due diligence process. Next, the investor hired one of the Big Four accounting firms and tasked them with carrying out in-depth financial diligence. At this point, my two partners and I knew there was a chance this deal would materialize.

Even at this point, my partners and I hadn’t agreed on a fee sharing structure, despite encouraging signs of a deal getting done.

Another month passed and then, with roughly another month to go before the deal closed, I received a call from the investor. “Due diligence is progressing very well,” said the investment officer. “Barring any unexpected surprise, we will do the deal.”

I was elated. The sovereign wealth fund would potentially pull the trigger very soon.

I called a meeting with my two partners. The e-mail to them contained one sentence: “Time to discuss fee split.”

The carve out of approximately €1,350,000 was no trivial matter.

The meetup

It was a Saturday morning.

We met in a café a short walk from Hyde Park, right off High Street Kensington.

The event lasted about an hour and by the time we stepped out of the cafe, our relationship was never the same again.

I won’t bore you with all the details but allow me to list the main points raised:

  • Partner A, who had done by far the least amount of work, expected a 3-way equal split of fees
  • Partner B, who was of a gentle constitution, and averse to any sort of confrontation, remained for the most part silent and meekly agreed to go with whatever outcome was agreed by Partner A and me
  • I argued the split should reflect the contributions made; and they were very much uneven

To begin with, all three of us maintained composure in the cafe. The discussion started off as a civilised affair. As time passed and arguments were made, Partner A began to grow resentful at the possibility that he may not receive a third of the fees. His resentment hit a tipping point, after which he erupted into a harsh fit. What followed – I’ll spare you the details – confirmed that a divorce – not long after the wedding – was imminent.

The good news is that you can avoid the mistakes we made.

Below, I touch on some steps you should take when trying to agree on a way to share fees with one or more business partners.

Unfortunately, I’m unable to give you a precise formula as there are too many variables that go into the equation and much depends on the deal at hand, your relationship with the partner(s) and circumstance.

Address important matters in person

Sit face to face with your partner(s) to sort out how the money gets split. In fact, do that to discuss any important matter.

Bear in mind, everyone’s goal is to make as much money as possible. Coupled with the unquestionable certainty that money is an emotive topic of discussion and can easily lead to disputes approach the exercise cautiously and with a positive tone.

So many disastrous fallouts could have been avoided with a little bit of tact.

Imagine if you e-mailed someone to say:

Hi Shah Rukh,

It looks like our Mumbai hotel deal is going to close soon.

I propose the following fee split: me (70%) and you (30%). As I brought the investor into the deal it’s only fair I receive the lion’s share of the proceeds.

Cheers,

Salman

Or if you wrote the following:

Hi Sylvester,

I thought we should split the deal like this: you take 25% and I take the rest. We had agreed that whoever was responsible for the deal closing would take most of the fee.

Shall we discuss over the phone tomorrow?

Regards,

Arnold

Those aren’t points you make in an e-mail. Trust me, I made that mistake before and it cost me. Early on in my career, I proposed fee splits over e-mail and nearly every time it was either a bad move or one that would have had a more positive end result if I had done it in person.

Always meet with your partner(s) face to face. Make the process human. Be considerate.

Again, important business decisions ought to be made in person. If that’s not possible, then over the phone.

When you speak to someone in person, there are more than just words that comes across, including body language, tone and inflection. You can accent a word or phrase by raising your voice, making a face or gesticulating. There’s an infinite number of ways you can calibrate the delivery of words. E-mail doesn’t communicate emotions or sentiments the same way. And it’s very easy to interpret or misinterpret a sentence. Sometimes with dangerous consequences.

Discuss compensation early on

Compensation structures should be addressed as soon as possible. You and your partner(s) want to know how a success fee will be split before a deal reaches closing stage.

Problems arise when you broach the subject once you are close to the finish line. By the time a successful outcome is imminent, it’s more likely that you’ll experience tension during discussions with your partner(s). That’s because the stakes are higher. The individual(s) who contributed more to the deal will argue that they deserve more. The individual(s) who contributed less to the deal will argue their contribution was meaningful and therefore should weigh more. Emotions will have their way and danger will be right around the corner. Whereas if you addressed the topic early on, then the whole thing tends to be a more balanced exercise.

Save yourself headache and stress by coming up with a formula that works for you and your partner(s) early on. It could be an even split or a more sophisticated division that incorporates specific accomplishments / milestones. There are countless ways to do it. Some include:

  • Scenario A: all partners receiving equal split
  • Scenario B: the person responsible for originating the deal gets X%; the individual(s) who closes the deal (e.g. bring the investor into the transaction) gets X%; and X% is to reward the work done to support the deal throughout the process
  • And many more…

There’s no single right structure that works every time.

Whatever you decide on put it in writing. And every once in a while revisit that formula and decide if it needs amending.

Something is better than nothing

30% of something is better than 100% of nothing. In other words, don’t be a greedy pig.

I’ve seen deals fall apart because business partners battled over how fees ought to be split. They got emotional, said things they wished they hadn’t and took their eyes off a deal that needed their full and undivided attention.

If there’s one piece of advice I’d urge you to consider it’s to be flexible. You want to avoid situations that lead to resentment. If you’re working on a deal with someone you think you can build a great business with then give up a little to make them happy. One day he or she will be responsible for a deal and will do the same in the spirit of partnership. Put the business ahead of personal interest.

Business is a long-term game and relationships matter. Especially, the one(s) with your business partner(s). [Here’s an article on how to start building relationships with powerful people.]

A final note

Consider these pointers as you craft a fee sharing arrangement with your partner(s). But remember that there’s no one-size-fits-all formula. You’ll need to find what works for you and to hammer out the details yourself. And over time you may change how the fee-sharing model works.

The process is a great learning experience. Embrace it.

==

Question: I’d be interested to know what type / structure of fee sharing agreements or formulas have worked for you and your partner(s) in the past?

Leave a Comment

Previous post:

Next post: