E599 | What To Do When Someone Wants To Partner

In this episode of the PT Entrepreneur Podcast, Danny is discussing business partners and if it is necessary to take on one or if it is better to bring a staff member in as a business partner.

He has noticed a trend of businesses growing quickly and staff members wanting an opportunity to gain equity in the business as they grow with it. He mentions that this is a common scenario they see, but he is unsure if it is a common occurrence in other types of businesses. He is exploring the idea of taking on a business partner and the pros and cons of doing so.

This conversation focuses on the idea of whether or not it is possible or worth asking for equity in a company. Danny has worked for two businesses, one being the Army and the other being The Ready State. Neither time did Danny think about asking for equity, as they weren't fully committed to the companies. In the startup culture of software companies, it is more common to exchange equity for sweat equity, but this is not the same for service-driven companies such as CPA firms, law firms, engineering firms, and other professional services. In these types of companies, employees will usually move up to director roles and have compensation that is tied to how the business is doing via profit shares or actual equity.

Danny covers a common scenario for business owners and clinicians, which is when an employee asks for a portion of the business in exchange for their work. He explains that this is a situation that will likely need to be faced at some point as the business grows, but cautions against giving away equity without it being earned or bought.

They suggest that the better question to ask is what type of person would be the ideal partner and that it is better to partner with someone who is good at things that the business owner is not good at. They mention the Rocket Fuel book by Gino Wickman, which is about the concept of a visionary and an integrator coming together to form a catalyst in the business.  Employees should not have unrealistic expectations such as asking for half the company after a year.

Danny concludes the episode by advising business owners to define what it looks like to earn equity in the company and to be cautious when staff members ask for equity in a business they have not started or taken any risk for.

Overall, this episode is a must-listen for anyone who is considering taking on a staff member as a business partner, and wants to make sure they are making the right decision for their business.

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Podcast Transcript

Hey, real quick before we start the podcast episode, I want you guys to check out our new YouTube channel for PT Biz. We are putting out a weekly video on the most common questions that we get, and we are breaking those down in a way that's more engaging. Where you can learn better and really focus on one thing at a time.

So if you're interested in really learning more skills to upgrade your cash and hybrid practice, head over to YouTube. Subscribe to the PT Biz Channel and check out the weekly videos that we're coming out with to help you win in the cash-based practice game. So here's the question. How do physical therapists like us who don't wanna see 30 patients a day, who don't want to work home health and have real student loans create a career and life for ourselves that we've always dreamed about?

This is the question, and this podcast is the answer. My name's Danny Matte, and welcome to the PT Entrepreneur Podcast.

Hey, what's going on, doc? Danny here with the PT Entrepreneur Podcast, and today we're talking about business partners and how do you know if you need one or if you should entertain the idea of taking a staff member and bringing them in as a business partner. And I bring this up just because one of the things, as part of.

PT Biz Mastermind Group is just access to myself and other business partners as well as ev all of our coaches for, whatever questions that people have. So I get questions every single day. Specifically about different things that are going on in, in people's businesses and sometimes there are, there's I don't know, trends and themes of, I get a bunch of questions about the same thing.

In a short period of time and I realized, oh, a lot of people are dealing with the same problem. And one of the things that we have right now is we have a lot of businesses that are growing quite quick and they are dealing with staff members that are pretty, solid employees that are looking for potentially an opportunity to.

Gain equity in the business as they grow with the business, right? So this is something that is a very common scenario that we see now. I don't know personally if I've, if this is something that is really common in-network practices, Or really any other type of business. I'm not sure. All the businesses that I've ever worked for.

One was the Army, so I wasn't gonna ask them for equity. It's not happening. The other one was the Tourette's company, the Ready State. I never once thought about actually asking them for equity in the company. I had started my own company and my own practice. So I don't know, I never really thought about it.

I guess I wasn't fully committed just to that company but maybe that is something that would've become a conversation if I'd really just focused on that exclusively. I don't know. But I see it happening a lot. I think it has more to do with the startup culture of software companies and a lot of those, they.

Exchange equity for sweat equity, basically. And the difference being they're typically venture backed. They're not really worth anything unless they sell they're usually running off of somebody else's money that is an investor, and then those things can get diluted and they're not really worth what they're worth.

So when we talk about businesses like this, the challenge is that there's this is not a venture backed company. It's not like there's a bunch of money that somebody gave. For you to start your company. And they're hoping to get a return on that, or they're expecting to be able to sell within a couple years outta multiple because they can grow this, massive company.

This is really gonna be more of a, a cash flow driven company, a service driven company, much more similar to a CPA firm, a law firm, a engineering firm, professional services. And they're typically. Is like a track for people to move up to director roles and things like that where they probably have some sort of compensation that's tied to how the business is doing, whether it be in a profit share or be in actual equity.

So I see the natural tendency for that. And I also, what I see is a lot of clinicians, they get frustrated with. And maybe rightfully if they feel like somebody just wants, part of their company and they haven't earned it, that's definitely something that I think you can feel frustrated with.

But on the employee side, if they feel like they're helping you grow something and they're taking a risk on your company, maybe they feel the opposite of you, right? So you have to keep this in mind, and either way, probably gonna aircraft across this bridge at some point as your company grows.

So one of the things that I have now responded with on multiple occasions or in the same scenario, Is that I think the better question than, is this person, the right person to partner with? Is what kind of person is the ideal person that you would want to partner with? And when I look at partners, I look at people that are they're good at things I'm not good at.

So whatever their skillset is. Better than mine in different ways. So if I'm really good at sales and marketing, then, and I, and there's somebody that's a, just a great operator, like they, they love organizing the business and building systems and all the things that maybe I'm really bad at. That type of partnership can work really well.

That's actually my wife and. Now we didn't come. We didn't agree that we're gonna be business partners. We married each other. Far be well before we had a business. But what we realized as we start, started to work together was that it actually worked really well because the things that she was really good at, I was bad at, and things that I was good at, she was bad at.

So we offset each other in a really positive way. And there's a book called Rocket Fuel that Gino Wickman wrote that is about this concept he calls Rocket Fuel. The, integrator or the operations person and a visionary, which is more sales and marketing typically. They come together and they create this really great sort of blend of people and it's it's a catalyst in the business versus one of the mistakes I see people make is they will partner with somebody or they'll agree to partner with somebody that's just like them, and they have the same strengths and they have the same weakness.

And they're really not in any better place for it because they basically double down on their themself, which will only get them so far because you need skills in other areas. Now you can hire other people. Let's say you fall more into the sales and marketing category, which is probably most of you.

You can hire people that are great operators. You pay them, they'll, they have to be paid pretty good salary, but it doesn't involve any ownership in the. So you can offset that with a hire a really, senior, your person that's a skilled operator and not necessarily need to take on a business partner.

If you have somebody that's gonna help grow another location potentially, or they're going to help develop your staff in a way that you can't, and these things that maybe are really important, then yeah, sure you can look at that. But one thing that I want you to keep in mind, whether you are. The, you're the business owner in this situation, or you are a staff member.

Equity is something that's either earned or bought. It is not given away. It should not be given away, and it should not be. It's not something that should be received without, monetary exchange and or time, sweat equity exchange because, The truth is, starting any business is very hard. It's very difficult to do.

It takes just a massive amount of work. You have to take risk. There's probably capital that has been put into that as well. So actual money to start and grow the business. If the only time I see anybody that's like asking for ownership in a company without buying it or without having legitimately earned it, are just people that don't know any better and it's not really their fault, but it's also not, it's sometimes hard to explain to someone that I know you feel like you've done a lot for our business, but you.

But you've been like compensated the whole time and you've taken no risk. So you just have a job then I've paid you for that job. You haven't necessarily earned anything. And I don't know, I'm not sure the best way to explain that sometimes without people getting frustrated because there's just such a different lens in which people view companies.

I think as an employee, it's very common to see, oh they're only doing X, Y, and Z and I'm doing all this stuff and whatever, and it's just, you don't really see what people are doing on a day-to-day basis and honestly, it doesn't really matter because if somebody's getting paid to fulfill a job, and that's the agreement that's in place, it's as simple as that.

People asking like, oh, great, I've been here for a year. I want half the company, otherwise I'm gonna leave. That person should just leave because that is an unrealistic expectation and they probably need to know what it feels like to go through the discomfort of actually starting something.

That's something that, I don't know if you can, if, I don't know if you can explain that to someone. And I'm not sure if you can in a conversation, explain that. It would be like my wife trying to explain childbirth to somebody. There's a big difference between somebody telling you about childbirth, somebody reading a book on childbirth, and then you pushing a baby outta your body, think about that for a second. How would someone be able to relate? I can't even relate to her and I saw both of our kids being born right? Yet I just don't know what that was like and I never will be able to. And it's like starting a business is very hard. It's very challenging mentally, physically, emotionally.

It's crazy. It's easy to get frustrated with people whenever they devalue what you've done and they say, oh, I want half of this, or whatever. And it's like that is just something that I don't tolerate very well. And I feel like a lot of people have to learn lessons the hard way and they should.

And if you can have that conversation with them about how do you earn. That's really the best way to go. What does that look like? You need to do, be able to do this, and this. You need to be able to show that you can help grow the company. You need to show you can help go into this other vertical and we can build this out, and that you have these skills that are going to grow this, make this bigger.

So it would make sense to even partner with somebody versus just hire another person to fulfill visits like that's. I guess the options that you have. So if you are in a situation. A, if you're a staff clinician at this point and you're listening to this, you're probably already too far gone. If you probably are at a point where you probably aren't gonna work for someone too much longer at least from what I've seen, it tends to be the case.

You get interested in this. You start hearing about what other people are doing, that it's possible. And then within a matter of time you're at least trying to do something on your own. And I have a lot of respect for people to do that. But please don't just go up to somebody that.

Their ass off and ask for part of whatever they've built when you've really, frankly done nothing and taken no risk. I think that's just something that you don't even realize that you're, what you're asking for is just irrational and it's not something that, that is that anybody would probably would say yes to.

And if you're on the business owner's side and somebody does that, when they put you in a position where it's hey. Ownership in this. I think you have to realize they don't probably know what the heck they're talking about and that you need to define for them what it looks like to be able to.

Equity in the company, right? Let's say your company is making half a million dollars in revenue a year top line. So $500,000 and if they want to own 20% of that company, most service businesses, simple valuations for those are gonna be like one times. Top line. So it would be valued at $500,000.

It could be more than that as well. But that's just like a simple example. Okay, you wanna buy 20% of this, then that's gonna be a hundred thousand dollars. So you gimme a hundred thousand dollars today and we draft up the paperwork. That cool, you're a 20% owner, you've earned it. Now that person's gonna take that a heck of a lot more seriously than.

If they're just trying to be given equity, if you can imagine, if you just given somebody a hundred thousand dollars to be a part of a company. I bet you're gonna work pretty damn hard to try to make sure that a hundred thousand dollars investment is gonna be is going to increase and it's gonna be a good investment versus just someone giving you equity and then, like you have no, you haven't earned anything and you, you don't really understand the value of that thing.

Sweat equity is another thing, right? Where it's like, all right, if we can build out this element of the company, then we can look at what that looks like. And there's lots of ways you can go about. There's so many ways, it's just so hard to even say what the best options for everyone, because there's just so many possibilities in terms of how you can mold these things and what works.

But either way, if you're gonna have the conversation, and inevitably, you probably will to some degree, just make sure that you understand what you have is very valuable. Don't give it up. Don't give it away. Equity is either earned or it's bought. You should never give your company away to somebody that asks for it.

It's no different than my son thinking that I, my, my mother-in-law has a lawn care company and we were recently around her and my son was like why can't I come down? Here's in Florida. Why can't I come down here and I'll work with you for a week. And we'll do some lawns together.

And she's yeah, that'd be great. What? And she asked him, she said, what kind of, what compensation do you think you should get for that? Like, how much do you think you should make? And he goes I think I actually get half. And she laughed out loud. She laughed out loud, Adam. She goes, I don't think so.

And he doesn't know any better. He's 11. He doesn't know anything about business except for the fact that half seems reasonable. It's like you kick your half, I take my half. And that's even right. Yeah, except for the fact. She bought all the equipments, she's got all the sales agreements, she fulfills all this.

She's the one running the company paying for all the things that it requires to run that business like. He doesn't deserve half. He just doesn't know any better, but she does because she knows how hard it's, and that's what it feels like sometimes when people ask for, part of a company that they didn't actually start without actually putting in any money and or any sweat equity.

So that's my advice to you if it comes up. Hopefully this helps. If it hasn't come up yet, it probably will at some point.

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