Webinar Transcript (4/16/2026): When the Family Is the Business: Why You Need a Real Partnership Agreement
Host: Jonathan I. Shenkman, President & Chief Investment Officer of ParkBridge Wealth Management (Contact: jonathan@parkbridgewealth.com)
Panelists: : Av Sinensky, Esq., Partner, Falcon Rappaport & Berkman LLP (Contact: asinensky@frblaw.com)
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Jonathan Shenkman: Good morning, and welcome to the Park Bridge Wealth Management Spring Webinar Series. This program is entitled, When the Family is the Business, Why You Need a Real Partnership Agreement. As always, my name is Jonathan Shankman, and I'm the President and Chief Investment Officer of Park Bridge Wealth Management.
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Jonathan Shenkman: In that role, I serve in a fiduciary capacity to help my clients achieve their financial objectives. The goal of my programs is to bring professionals together to help them better serve their clients, and this is done by educating attendees on the latest topics in wealth planning, and by encouraging collaboration between a client's attorney, CPA, and financial advisor where appropriate.
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Jonathan Shenkman: My practice focuses on working with high net worth families, businesses, and not-for-profits. I manage individual investment portfolios, trust accounts, corporate retirement plans, and endowments to help my clients achieve their financial goals.
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Jonathan Shenkman: In addition to the 20 or so events I run every year, I also do a fair amount of writing on the topics of investing and financial planning, and you can read my work in a variety of periodicals, including Barron, CNBC, Forbes.
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Jonathan Shenkman: Kiplinger, The Wall Street Journal, and Trust and Estates magazine, to name just a few. You can see all my work on my website at parkbridgewealth.com forward slash articles.
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Jonathan Shenkman: or by following me on social media at Jonathan on Money. Additionally, you can check out my weekly podcast, which is also called Jonathan on Money, and you can listen to that on Apple, Spotify, or wherever you get your podcasts.
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Jonathan Shenkman: Finally, I published my first book, The Use for Diversification, The ABCs of Personal Finance, which can now be purchased on Amazon or at JonathanOfMoney.com.
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Jonathan Shenkman: Before I introduce our speaker, please pay close attention if you are an attorney or CPA in Connecticut, New Jersey, or New York, and are taking this program for credit. I'll be giving a code during the program that you'll need to write down. There will only be one code, and it will be given at some point in the middle of the program, so have a pen and paper ready.
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Jonathan Shenkman: After the program, we'll receive an evaluation form where you'll need to insert the code in order to receive credit, so please stick around until the end of the program for further instructions on receiving credit.
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Jonathan Shenkman: Today, we're privileged to hear from Av Sinensky, who's a partner at Falcon, Rappaport & Berkman, based in Long Island, New York. Av works in FRB's Corporate and Securities Practice Group, where he advises business owners, independent sponsors, private equity firms, and middle-market companies on mergers, acquisitions, investments, joint ventures, and other complex transactions.
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Jonathan Shenkman: He also counsels founders and investors on startup formations, capital raises, partnership agreements, employment matters, and commercial contracts. Known for his client-centered approach, Av guides entrepreneurs and investors through transformative business events with a focus on education, clarity, and long-term success. A recognized thought leader, he frequently writes and speaks on corporate and business law topics.
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Jonathan Shenkman: His work has appeared in Long Island Business News and the New York Law Journal, and he has presented for the New York Bar Association, Small Business Expo, and numerous professional and industry groups.
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Jonathan Shenkman: And with that introduction, I'll now turn the program over to Av.
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Av Sinensky: Thank you. That was quite an introduction. I'm impressed with myself sometimes. Just kidding. But thank you very much, Jonathan, and thank you to
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Av Sinensky: Park Bridge for hosting today's webinar on the topic of why every family business needs to have a real, written, solid partnership agreement.
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Av Sinensky: And, you know, one way of framing it is that even
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Av Sinensky: A family business needs a partnership, but often a better way to frame it is that, especially, a family business needs to have a good partnership agreement.
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Av Sinensky: It's… this is a situation that I have dealt with, unfortunately, too many times in my career, is…
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Av Sinensky: A new client comes in, there's some sort of simmering dispute, some sort of deadlock, something that requires some sort of intervention, and my first question is, well, what does the partnership agreement say?
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Av Sinensky: and…
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Av Sinensky: All too often, the answer that comes back is some form of, well, we don't really technically even have one, or, well, we just used the one that was in the corporate book that came when we formed the company back in the 80s.
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Av Sinensky: Or, yeah, I think we have one, but I would have to find it. No one's really looked at it in 10 years.
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Av Sinensky: And those are all really… Potentially a big problem for…
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Av Sinensky: A successful family business, especially one that is trying to perpetuate the family aspect of the business, and have it be an asset
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Av Sinensky: a part of the family that passes on to future generations.
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Av Sinensky: Before we really dig into some of the whys and hows here's.
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Av Sinensky: it makes sense to first define some terms. So, basic question is, what are we talking about when we say partnership agreement?
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Av Sinensky: And related to that, what are we talking about when we use the word partnership at all? So, to me, and kind of the way the dictionary would define it, is that a partnership is any association of two or more people engaged in some sort of economic activity, which really means almost anything. So…
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Av Sinensky: Whether it's a operating business, manufacturing, services, consulting, what have you, or some sort of joint venture of a real estate investment, or any other combination where
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Av Sinensky: multiple people are coming together to create some sort of economic arrangement, hopefully from which they will make money, but maybe not, and that's part of the rub here. And the partnership agreement, then, is the governing document that
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Av Sinensky: Determines how the internal operations of that partnership work.
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Av Sinensky: Now, I put on here on the slides a somewhat helpful chart, just to kind of define some terminology. If these are all things that are obvious to you, you're familiar with all of this, that's great. If not, this might be one of the slides you may want to
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Av Sinensky: take a screenshot of, because we'll be using these words a lot over the course of the next 50 minutes or so. I just want to make sure we have some clarifying terms.
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Av Sinensky: So… there are…
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Av Sinensky: different terms that kind of blend together when we talk about partnership agreement, and I'm kind of going to be talking about them all in the colloquial sense, not specific to a particular entity type. But just for frame of reference.
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Av Sinensky: When we talk about an LLC, a limited liability company, we typically view those as the owners being called members. The document that governs the operations is called the operating agreement.
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Av Sinensky: in a corporation, whether it's a C corporation or an S corporation.
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Av Sinensky: The owners are called shareholders, or stockholders, and we have a shareholders agreement, or a stockholders agreement.
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Av Sinensky: And in a partnership, whether it's a limited partnership or a general partnership, we would have a partnership agreement between the partners.
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Av Sinensky: we're… so when I say partnership agreement, I mean any of these. Operating agreement, shareholders agreement, or partnership agreement. The irony is that we will basically not be talking at all about the bottom part, because in today's day and age, it's pretty uncommon to see a closely held business
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Av Sinensky: being formed via partnership. If this is an entity that you're investing in for purposes of some, you know, Cayman hedge fund or private equity fund, that's where you might come across partnerships more these days.
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Av Sinensky: But, most closely held businesses are going to either be a corporation or an LLC. So, we're going to be using the word partnership and partnership agreement a lot today, but we're basically almost never going to be talking about an actual legal partnership.
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Av Sinensky: entity type. We're going to be talking mostly about LLCs and corporations.
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Av Sinensky: So…
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Av Sinensky: Talking about my earlier framing about why these agreements are particularly important in the context of family business, is that
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Av Sinensky: when we talk… use the term family business, a lot of people conjure up, you know, small mom and pops, businesses that are really local in nature, small in nature, and that isn't the reality. Family businesses are a hugely significant portion of the U.S. economy.
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Av Sinensky: More than half, close to 60% of the employment
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Av Sinensky: in the United States is from family businesses. Similarly, about 60% of the GDP generated on an annual basis in the United States comes from family businesses.
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Av Sinensky: and… If you view the nature of family businesses as being ones that
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Av Sinensky: have the ability, and often the goal, of passing to future generations, then some of these other stats might be a little startling to you. Namely, that only 30% of family businesses survive even to the second generation.
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Av Sinensky: And that it just gets worse from there. 12% make it to the grandchildren, less than 3% make it to the great-grandchildren.
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Av Sinensky: And a number of surveys have been done over the years to try to determine what is the cause for this. In recent years, it's becoming more of a trend because of
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Av Sinensky: the realities of generations that don't necessarily want to step into the same businesses as their parents or grandparents. That's its own separate trend, but
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Av Sinensky: The consistent trend over Decades, is that…
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Av Sinensky: The number one reason why… cited for why family businesses end up failing
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Av Sinensky: Or not being able to be passed along to future generations, is that there are governance issues that arise that either force a sale, force a dispute, force a liquidation.
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Av Sinensky: And the ability of the family to stay in control of that business.
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Av Sinensky: And knowing that, One way to think about having a partnership agreement is
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Av Sinensky: A really cost-effective form of insurance.
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Av Sinensky: It's a… it's a product, it's a process that you can go through that can set clear and established guidelines for your business, can create certainty.
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Av Sinensky: and can ensure against the disastrous situations that, unfortunately, I've seen over the course of my life and my career, where governance issues, disagreements, disputes, not only can destroy a business, but they can destroy a family.
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Av Sinensky: One of the most important ways to think about why this is important is to think about this purely as a game, and the partnership agreement being the rules of the game.
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Av Sinensky: Which means that we have to talk about Monopoly. Now…
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Av Sinensky: When you sit down to play Monopoly.
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Av Sinensky: there often are some questions that have to be answered, in terms of the rules of the game. For example, what happens if you land on the space called free parking?
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Av Sinensky: What happens if you land on the space that says go? What happens when you… Cross Go.
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Av Sinensky: If you look at the actual book of Monopoly.
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Av Sinensky: What happens when you land on free parking is nothing.
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Av Sinensky: And what happens when you…
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Av Sinensky: land on go is you get the same $200 that you get for pass and go.
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Av Sinensky: But I'll tell you, I've been in many games where that's not the case, where if you land on free parking, you get some amount of money from somewhere, I don't even remember the details.
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Av Sinensky: But the point is that every house, for whatever reason, has its own version of Monopoly, its own wrinkles, its own idiosyncrasies of how we play house, how we play Monopoly in this house.
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Av Sinensky: And it's really important to…
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Av Sinensky: establish what those rules are before you start playing. You would never say, let's just start playing, and we'll figure it out along the way. The first time somebody lands on free parking, we'll fight about it then. That's not a conducive way to…
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Av Sinensky: Play a normal game.
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Av Sinensky: I actually had an acquaintance that I knew about, a number of years ago. I wasn't a good friend, but it was someone who I had met a few times, and I've actually engaged with him in competitive activities a few times, in board games and whatnot, and…
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Av Sinensky: What always struck me about this person is that they were very intense about rules. They were always the one to, you know, point to the rulebook, make sure the rules were clear.
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Av Sinensky: And then, I happened to… Go out for,
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Av Sinensky: go for dinner or for a beer, I don't even remember at this point with this person, and just, you know, catching up on stuff, and when I asked him how's business, he said, actually, not so great. We're having a huge fight, and I asked my question that I mentioned at the beginning, well, what does the partnership agreement say? You know, have you thought this through? And that's where he told me, yeah, we don't have a partnership agreement. We've just been operating on trust, on figuring things out, and…
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Av Sinensky: It was astonishing to me.
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Av Sinensky: Not just in general, but that this specific person, who, when it comes to
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Av Sinensky: Frivolous games will be super intense about clear and established rules, but when it came to the most important asset in their life.
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Av Sinensky: from which they derived the majority of their net worth that they were leaving to WIMS,
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Av Sinensky: And… we'll figure it out, we trust each other, we don't need it.
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Av Sinensky: And there's a few, kind of, high-level reasons why.
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Av Sinensky: Establishing the rules is extremely helpful.
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Av Sinensky: And…
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Av Sinensky: a big part of that has… comes from thinking about who the audience of a partnership agreement is. It's… I think this is a framework that is very helpful
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Av Sinensky: to help clients understand why shareholders agreement are important, because the primary audience of the shareholders agreement is the shareholders themselves. It's the actual parties.
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Av Sinensky: First and foremost, the audience is the shareholders as they are entering into the agreement.
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Av Sinensky: Having the shareholders agreement allows them to
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Av Sinensky: Create intentionality in what they are doing.
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Av Sinensky: It makes sure that
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Av Sinensky: the parties themselves understand what the agreement says. This is what it'll allow, this is what doesn't allow, and I'm okay with that, and I'm willing to sign that. That itself is a really important factor to help
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Av Sinensky: Reduce tension in the future.
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Av Sinensky: Similarly, The audience of…
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Av Sinensky: the agreement is, again, the shareholders themselves. Not today when we're signing it, but sometime down the road, where the shareholders agreement can work as a kind of roadmap to help navigate what might otherwise be a tricky situation. Because a really helpful thing to do
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Av Sinensky: When an issue comes up, when you're not sure who's allowed to do what, am I allowed to do this, are they allowed to prevent me, is, hey, let's take out the shareholders agreement and see what that says. Because we've already agreed to that. We've made deliberate choices about how these situations work, and oh, look, right there, it provides us a roadmap for how to settle this issue.
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Av Sinensky: Again, a really helpful thing to have, as opposed to just, well, we'll talk about it then.
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Av Sinensky: And the third thing is the way in which it can diffuse a conflict.
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Av Sinensky: people are always going to be inherently biased. People will always want to…
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Av Sinensky: Have things play out in their favor, if possible.
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Av Sinensky: But there is something about seeing in black and white that you're wrong, that tends to diffuse…
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Av Sinensky: The attention for a lot of people.
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Av Sinensky: it makes it less personal. You're not arguing in the abstract about what's fair and what's not fair. You're looking at an agreement that everyone had an opportunity to weigh in on, and there it says what
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Av Sinensky: the resolution is. We don't really have to argue in the abstract about what it should have said. We see what it does say.
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Av Sinensky: And that, by itself, can just…
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Av Sinensky: Help reduce the simmering tension in a lot of these disputes.
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Av Sinensky: You know, most people
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Av Sinensky: are usually acting in good faith. When these disputes arise, believe it or not, they actually do believe that they are right.
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Av Sinensky: And it's often because maybe they were told something, and their brother or their first cousin who's involved in the business was told something else, and maybe there was a miscommunication. Maybe there is real good faith disagreement about how
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Av Sinensky: You know, previous generations intended for things to work out.
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Av Sinensky: But those can never be resolved if previous generation is gone now. But if there is a written document that says very clearly what previous generation intended, it leaves a lot less to argue about.
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Av Sinensky: Another reason why it's really important to have a shareholders agreement, even if you think you, quote, don't need one, is that, in fact, you kind of already do have a shareholders agreement.
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Av Sinensky: There are several ways where, even in the absence of a formal written agreement that's, you know, 10, 20, 30 pages long, with all sorts of provisions that you think might not even be relevant.
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Av Sinensky: That of course is a partnership agreement, but in the absence of that.
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Av Sinensky: you still have rules that govern your business. Only, rather than it being rules that you came up with, it's going to be the default rules of whichever state and whichever entity and the statute that governs that. So, for example.
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Av Sinensky: As we have here on the screen, state law will fill the vacuum. If you are a corporation in Delaware, your default rules are the Delaware General Corporation Law. If you're an LLC that is based in New York.
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Av Sinensky: The default rules of your company are the New York… Limited Liability Company Law.
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Av Sinensky: What the operating agreement Offers you is an opportunity to modify those rules.
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Av Sinensky: Now, sometimes within reason, it doesn't literally allow you to do anything under the sun, but particularly with an LLC, it comes pretty close. And even in a corporation, there's a lot more flexibility than what the default rules offer. So, again, when you're thinking about this being my most important asset.
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Av Sinensky: given the choice between, I get to make up the rules for my business together with my partners, versus, well, we'll just do whatever the legislators in Delaware thought was smart.
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Av Sinensky: I mean, the answer there is pretty clear.
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Av Sinensky: The second way in which You may already have.
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Av Sinensky: an operating agreement without even realizing it is that, like I said, that 20, 30, 40-page document that's really formal and official, that, of course, is a partnership agreement. But you know what else can be a partnership agreement? An email. Something written on the back of a paper.
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Av Sinensky: something that is informal, but still represents a binding contract. If there's an email between me and my partners where
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Av Sinensky: My partner tells me, hey, If you're… if you take on these extra duties, we'll increase your…
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Av Sinensky: profit share by 5%, that's a binding agreement, as long as it's in writing. It doesn't even have to be in writing. If the parties agree that that's what happened, even an oral agreement can be an agreement. So for this, I look to the family dispute that arose in the last season of Succession, where
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Av Sinensky: Spoiler alert, with Logan Roy now gone.
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Av Sinensky: a piece of paper emerged in which it appeared that he had named his son Kendall to succeed him as the head of the business.
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Av Sinensky: Only there was a hard-to-decipher line going through his name, which led to a big dispute both among the family members and on the internet among viewers and audience members, of whether or not the name Kendall Logan Roy here was underlined or crossed out.
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Av Sinensky: And it's really hard to tell. Some people are arguing, oh, clearly this is crossed out, this is his brothers and sisters who don't want the paper to have sent Kendall, whereas Kendall insists that, actually, this is underlined for emphasis. Who's right? Who's wrong? Nobody knows. The point is, we now have this informal writing out there that, in theory, could be binding.
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Av Sinensky: And it would be really great if we had established those intentions in a clearer way.
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Av Sinensky: Although, as Kendall will point out, the only thing we know for sure is it doesn't say Shiv.
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Av Sinensky: Lastly, ongoing arrangements can be a contract. Even if never in writing, the fact that things have been operating in a certain way, people have been taking certain benefits, being provided a certain salary, certain titles.
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Av Sinensky: Can be considered evidence of the existence of an agreement.
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Av Sinensky: Now, will I tell you that Michael Scott carrying around the world's best boss mug means that now he is officially the world's best boss? Maybe. I don't know how official that title really is.
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Av Sinensky: But the point being that if somebody is acting as the CEO, is getting all the benefits and perks of CEO, is getting all the responsibilities of a CEO, he has a pretty good case that he is the CEO, even if he's never been
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Av Sinensky: Officially named that by the board of directors.
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Av Sinensky: So that's why you really want to kind of eliminate the risks of those types of
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Av Sinensky: Arrangements or default rules being the ones that govern, and instead.
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Av Sinensky: have the business be governed by your deliberate choice. And the way we do that is that there's actually a
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Av Sinensky: provision in almost every agreement, and specifically in partnership agreements, that you'll… any agreement that you ever look at has something called a merger clause, which says something to the effect of, this is the entire agreement between the parties, it supersedes any previous agreements. Anything else that you ever find that ever turns out that came before this, that is
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Av Sinensky: erased and superseded by this. And that kind of wipes away the risk of any of those things being out there that are not part of the agreements.
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Av Sinensky: the… Last really good reason why
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Av Sinensky: The partnership agreement is really paramount, is that… The process of actually
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Av Sinensky: doing it, of going through the motions, of the journey, of drafting the partnership agreement, negotiating it, putting pen to paper, and signing it, can actually be a really useful tool for flagging some of these issues. And it's really important to flag these issues as soon as possible.
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Av Sinensky: The first thing that happens a lot is that this negotiation, this process.
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Av Sinensky: reveals the fact that there were some hidden assumptions going on that actually were not good assumptions. That people thought they were on the same page about how certain things are going to work.
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Av Sinensky: About what would happen in certain scenarios, and by forcing them to have those conversations, actually…
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Av Sinensky: Arises that there is a disagreement here, and that this is something that we need to address.
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Av Sinensky: Kicking the can down the road, waiting for something to happen, will often end up in disaster.
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Av Sinensky: And that is because of the concept of the Veil of ignorance, which is a…
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Av Sinensky: Idea from political philosophy, where the theory states that the only real fair way to design a system of government, of how a society should
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Av Sinensky: Be governed is for the people
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Av Sinensky: who are creating the rules to not know what their specific situation is going to be in that society. So, it's not really realistic, it's really more of a thought experiment. But the idea is…
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Av Sinensky: equally true in the concept… in the context of a business. Because think of an example where
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Av Sinensky: We want to figure out what should happen to a partner if they come under investigation for…
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Av Sinensky: You know, embezzling, or tax fraud, or something like that.
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Av Sinensky: If we wait until that happens, then…
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Av Sinensky: We have a pretty good idea how that's gonna play out.
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Av Sinensky: If you have two partners, the partner who got arrested is going to have a very different perspective on how that person should be treated than the partner who did not get arrested.
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Av Sinensky: It will, you know, in many ways, be very clear to both of them that they are right, and this is what's fair.
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Av Sinensky: But again, establishing what is fair in the abstract is not helpful in the context of a business that needs to operate. And especially when you're dealing with family, you know, when it comes to siblings, everything is always about fair, right?
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Av Sinensky: what fair means often in the context of a family doesn't even mean what's fair about this. It's… this is not fair, because I'm viewing it in the context of some other unrelated thing that happened 10 years ago, or 30 years ago, and mom and dad are being unfair to me, just like they were when we were growing up.
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Av Sinensky: and Timmy always got the extra…
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Av Sinensky: prize, you know, whenever we went to the fair, and Jill was always the favorite.
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Av Sinensky: and now I'm the one who's getting screwed again.
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Av Sinensky: But…
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Av Sinensky: Being able to make those rules in advance, where nobody has skin in the game, because nobody knows yet who's going to be the one who gets into trouble, or who's going to be the first to die.
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Av Sinensky: Although you might have some idea based on, you know, knowing your family members really well, but…
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Av Sinensky: It's obviously going to be a much better situation if you establish these rules in advance rather than waiting.
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Av Sinensky: The other important thing to notice is that this is not
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Av Sinensky: panacea. This is not going to completely save the day. There always can still be disagreements, there can be ambiguities, but with a good partnership agreement, at least you are starting from a common place. You have
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Av Sinensky: Somewhere to start that resolution process, rather than everyone flying in all sorts of different directions, trying to make their case.
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Av Sinensky: Some reasons why… Family businesses are particularly vulnerable to these issues, because
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Av Sinensky: pretty much everything I've said so far of the importance of these agreements applies to all sorts of businesses. You know, when you're dealing with strangers, or dealing with friends, or dealing with investors, it's also really important to have these, but…
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Av Sinensky: Specifically in the context of a family, they can be particularly important. Some of this are things that we've already kind of talked about, the informality that can exist in family businesses, where things kind of just go on a handshake and through understanding.
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Av Sinensky: The fact that you are…
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Av Sinensky: not just partners, you are family, and that could cause a lot of weird blurring of lines. When somebody tells you to do something, are they telling you that as your boss, or are they telling you that as your parents? And what if the roles are reversed, and for whatever reason, the child is the one who has more power in
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Av Sinensky: in the business, but this is still my parents. It can create just a lot of ambiguities about who should be doing what.
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Av Sinensky: Similar to the informalities, expectations are often just gone… gone unsaid, or…
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Av Sinensky: children sometimes hear what they want to hear from their parents, and the fact that, you know, my mom made a comment 10 years ago that she thinks I would be the right person to take over.
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Av Sinensky: Maybe she meant that, maybe she didn't.
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Av Sinensky: But is that what, collectively, the founding generation decided should be what happens, or was it just something my mom was saying to make me feel good?
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Av Sinensky: There can be a lot of emotion, there can be a lot of situations where decisions are not made because of rationality and logic, but rather just because of guilt or trying to even things out for other aspects of family share.
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Av Sinensky: And that, too, can just create all sorts of unintended consequences.
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Av Sinensky: The most important and main reason that we hear, like I said before, is we don't need it. We trust each other.
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Av Sinensky: People almost tend to think that having an agreement is an admission that they don't trust each other, and that is just…
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Av Sinensky: Couldn't be further from the truth.
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Av Sinensky: It's… it's an essential element for…
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Av Sinensky: any business who really wants to have stability, to have clarity, and as I said, particularly if this is something that you want to persist to future generations.
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Av Sinensky: It is one of the best things you can do to prevent disputes among those future generations, and make sure that they can continue running the business in as effective a way as you did without having to deal with a lot of these types of issues.
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Av Sinensky: So, now that we've kind of established why this is important,
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Av Sinensky: Well, for the, you know, the next half of this, we're going to kind of jump into some of the different pressure points of
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Av Sinensky: The different topics and different concepts that can be negotiated and can be customized in any partnership agreement.
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Jonathan Shenkman: Great, don't mean to interrupt, but let's just, insert the code here, for accountants and attorneys who are taking this program for credit. Please make sure to write this down. The code is B31, again, B as in banana, the number 3, and the number 1. One final time, B31. Back to you.
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Av Sinensky: All right, thank you. Okay, so the pressure points of every partnership agreement, obviously there's a lot of different things that go into agreements, all sorts of different provisions, different sections. They are not one-size-fits-all by any means.
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Av Sinensky: But almost every partnership agreement will be centered around these four… main ideas.
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Av Sinensky: Economics, money in, money out.
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Av Sinensky: Management, how does the company operate? How does it get governed?
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Av Sinensky: Succession, what can I do with my ownership? Can I transfer it? Does it automatically go somewhere? Who takes over the business after we're gone? And resolution. When something happens, how do we get through it to the other side?
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Av Sinensky: So, first, starting with economics.
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Av Sinensky: money in. How does money get into the business? How does the business get funded? So, typically, when a business gets started, the founding partners will contribute some amount of capital to the business in order to get the business going.
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Av Sinensky: That contribution can come in one of three different forms, the most, common and…
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Av Sinensky: easiest to understand is cash. We have 3 partners, we each put in 100 bucks, we each own a third, and that's how we…
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Av Sinensky: Buy our first, equipment to get stuff going.
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Av Sinensky: In other types of businesses, property can be something that makes sense. Obviously, if we're in a real estate business, there's going to be some sort of contribution of real estate into the business.
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Av Sinensky: But even in an operating business, there can often be IP that somebody owns, whether it's technology, whether it's a trademark, whether it's some sort of other trade secret that is going to have value to this business, and that is what their contribution to
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Av Sinensky: the enterprise is. And the last category is the provision of services. Now, we're not going to get too much into the detail there, but that is
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Av Sinensky: An area where you need to be careful from a tax perspective about how you are setting things up when you are
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Av Sinensky: getting equity in a company in exchange for services, as a general rule, if that is all that is happening, that
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Av Sinensky: The value of that equity will be taxable to you, and it will be taxable as the same rate at which you pay on your income.
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Av Sinensky: So that is definitely something you want to avoid, and there are tools to kind of work around that, whether it's in the form of options or phantom equity, profits and trusts, but those are all kind of beyond the scope of today. In terms of when you make these contributions, so we talked about
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Av Sinensky: You know, when you get started, typically you're going to need some amount of capital to get off the ground, but you also want to address future funding of the business, whether it's in the form of every year everyone is required to put in some specific amount of money, or whether certain people but not others are required to put in money.
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Av Sinensky: And then there's the concept of a capital call, which means that…
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Av Sinensky: not that there's a, you know, an automatic obligation to put in additional funds, but there is a mechanism by which, if it is determined by whether it's the board, whether it's the CEO, whether it's everybody, and we'll get into management on our next part about, you know, how these types of decisions get made, but assuming that the decision has been made that
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Av Sinensky: The business needs more money, and the way that we need to get that money is for all of the partners to put in some amount of money.
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Av Sinensky: That is when… You would use the capital call mechanism.
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Av Sinensky: And the capital call is a really important danger zone to be aware of when you are entering into one of these agreements or one of these arrangements.
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Av Sinensky: Especially if you are either one of the minority owners, in terms of ownership, or Most importantly, if you…
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Av Sinensky: Don't necessarily have the liquidity that some of your other partners have, because
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Av Sinensky: Generally speaking, there are 3 consequences of a default when it comes to a capital call. If there's a capital call, you're required to put in $100,000, and you don't, what happens?
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Av Sinensky: Option number one is you get diluted. There's some sort of calculation that says, my brother and sister, they put in the money, I didn't, so my share goes down.
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Av Sinensky: That can be pretty punitive.
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Av Sinensky: So there's, there's an alternative that is often used called a default loan, where rather than it automatically knocking down your interest, it basically gets treated as a loan to you, as if they're putting up the money for you, and you pay them back out of the next
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Av Sinensky: Tranche of distributions that comes out.
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Av Sinensky: The third, and, you know, this was probably pretty punitive too, so it's something that, you know, you only want to…
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Av Sinensky: agree to if you think it makes sense under the right set of circumstances, but that if you're not able to any longer help fund this business, then maybe you don't get to be part of this business, and that could be a mechanism that forces the right of the other shareholders to buy you out.
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Av Sinensky: One important thing, while we're still on the contributions page, is don't forget about debt.
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Av Sinensky: debt can be a really useful tool, and I don't mean going to a bank and getting a loan, because we all know about that, but there could be a mechanism that, rather than forcing
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Av Sinensky: members to put in capital. If there's one particular member who happens to have more capital than others, let them make a loan to the business. And you can even agree in advance that they can get
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Av Sinensky: interest at a higher rate than would be available on the public market, give them a little bit of incentive to do so, and that can often solve a lot of these problems, because the capital call, like I said, can be very dangerous. It can be used as a tool to squeeze out minority owners.
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Av Sinensky: Or owners who just don't have the means to be able to keep up with
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Av Sinensky: These types of future capital requirements.
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Av Sinensky: Okay, so we talked about money in. Now, more importantly, I think for most people's perspective, is money out. How does everyone get paid? How does everybody share?
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Av Sinensky: Probably the most common is pro-rata, right? I own 20% of my business.
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Av Sinensky: And so I get 20% of the profits. That is, you know, the way most people would say is probably the starting point.
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Av Sinensky: And entity-specific thing here, if you are in an S-Corp, then it's your only option, so you better be doing it pro-rata. In fact, if you are getting distributions in an S-Corp and they are not pro-rata, you're actually not an S-Corp.
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Av Sinensky: Similarly, when it comes to putting money in as an S-Corp, it's a little bit more nuanced there, but there, too, you need to be very careful that you don't have capital call provisions or additional capital requirements that would require
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Av Sinensky: disproportionate contributions to the capital, because that could ruin your S-Corp election.
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Av Sinensky: But pro-rata distributions doesn't always make sense.
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Av Sinensky: Especially in the context where either one person is a silent partner, or really more of an investor, or, like I said before, in families where maybe it's the older generation that has built up savings and has the money to be able to fund operations, and then there's the younger generation that is, you know, gonna be the workers.
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Av Sinensky: And in those contexts, that's where ideas like return of capital, or preferred return, or PREF, as they call them, call it in the biz.
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Av Sinensky: Where certain owners have the right to get back their money first, or get back their money with a specified return on their investment before profits get split among the owners. And this provides downside protection for the people putting up the money, that
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Av Sinensky: even if the company doesn't end up being super profitable, at least I get some of my money back, so that I don't, end up losing my whole shirt.
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Av Sinensky: In terms of… whether…
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Av Sinensky: Distributions are required, whether they are permissive, when they have to be made, how often they have to be made.
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Av Sinensky: Another tool that can be used by…
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Av Sinensky: I don't want to say nefarious, but…
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Av Sinensky: Members in control with an agenda.
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Av Sinensky: Is to close off the flow of money.
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Av Sinensky: Usually, people view the… Discretion around distributions as a mutually assured destruction protection, where
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Av Sinensky: well, if I can't get my money, then they can't get their money either, because if money comes out, it needs to go to everybody according to the proportions that we've set up.
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Av Sinensky: But again, if you are not in the same financial situation as the person who controls the purse, they may be able to tolerate not getting distributions for a year, or two years, or more.
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Av Sinensky: And you might be relying on the distributions from this business to finance your life. So, if you're not in the same situation as your members, your fellow partners, then you need to make sure that…
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Av Sinensky: The agreement, especially in this area, is written in a way to protect you.
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Av Sinensky: And at a bare minimum, especially when you are in an LLC or S-Corp that has pass-through taxation, you need to really strongly consider whether or not to provide for mandatory tax distributions, because…
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Av Sinensky: In those pass-through entities, you get taxed based on your proportionate share of the company's income, not on the amount that is distributed to you, which means that even if you did not get a dollar of distribution in a particular year, you can still owe tax.
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Av Sinensky: And if you are in that situation where you were relying on that cash to finance your life.
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Av Sinensky: you almost certainly don't have the money to pay the tax on the cash that you didn't even get. So, requiring the business to, at a minimum, make distributions in an amount
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Av Sinensky: Sufficient to allow the partners to satisfy their tax obligations is really important.
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Av Sinensky: Next, we will turn to management, and this just kind of goes to who's in control.
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Av Sinensky: When we talk about management, there's really two main powers we're talking about. It's the power to do something, and the power to stop somebody from doing something.
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Av Sinensky: In an LLC, the most basic
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Av Sinensky: structure, again, just like we have pro-rata distributions as the most basic and default structure, pro-rata default voting and management is the most basic. Democracy, right? One man, one vote, or really one share, one vote.
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Av Sinensky: This can work well in lots of companies. For a lot of people, this is what makes sense.
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Av Sinensky: But it doesn't always.
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Av Sinensky: In a situation like, again, like we're talking about, where you have different generations.
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Av Sinensky: It likely will make more sense to have one of these other
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Av Sinensky: types of structures, because you don't want everyone to have the same power. There are… there could be family members who are actively involved in the business, and family members who are doing something else, but they still have a 5% or 10% ownership.
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Av Sinensky: There can be family members who are part of the management generation, and there are family members who are part of the next generation that are still working their way up. They shouldn't necessarily all have the same right.
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Av Sinensky: When it comes to making management decisions.
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Av Sinensky: So, an LLC, the main other alternative is what we call a manager-managed LLC.
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Av Sinensky: Which is that one person or multiple people are appointed
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Av Sinensky: To make all of the decisions regarding the company, or at least most of the decisions, such as the day-to-day decisions.
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Av Sinensky: The other members, even though they are owners of the company.
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Av Sinensky: wouldn't actually have a say in the vast majority of management decisions simply by virtue of being owners. They've agreed to defer all those decisions to a centralized body.
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Av Sinensky: a more… Complicated version of that.
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Av Sinensky: is having a board. Now, it's not that complicated. Many companies have them, both in corporations and LLCs. In the family context, though.
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Av Sinensky: having some sort of board and a structure that can persist to future generations is a really elegant tool that can be used to create the certainty that we're talking about. So, for example, if you have 3 siblings that started a business.
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Av Sinensky: Let's say two sisters and a brother, and then they each have kids, and then those kids each have kids.
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Av Sinensky: What you would, in theory, want to try to accomplish is create some sort of board structure where
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Av Sinensky: Representation on the board?
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Av Sinensky: can be tied to each of those individual nuclear families. So that way, original brother and original brother's children and grandchildren
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Av Sinensky: Would have, collectively, the right to appoint one seat.
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Av Sinensky: on the board, and his brother and his sister, or was it two sisters and a brother? Either way, you could structure it in a way so that way.
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Av Sinensky: each… Family unit, and it could be…
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Av Sinensky: The next generation where there are 9 family units, and the generation after that, there can be 15 family units, but they kind of can all band together, and…
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Av Sinensky: Make it so that the company continues to be operated
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Av Sinensky: In a way that reflects the original reality of…
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Av Sinensky: The three… the three siblings, or whatever your original structure was.
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Av Sinensky: Like I said, not all business decisions are created equal.
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Av Sinensky: When it comes to day-to-day decisions, things like…
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Av Sinensky: How much money should we spend on…
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Av Sinensky: A new copier for the office, or, you know, Firing or hiring.
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Av Sinensky: middle management types employees. Those are the types of things that
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Av Sinensky: are usually prudent to have made at that manager or CEO, president.
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Av Sinensky: level. You don't want to have to have a family meeting every time any sort of decision needs to be made.
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Av Sinensky: But a good operating agreement will usually build in different tiers of decision making and have different thresholds required to make those. So you might have decisions that require a simple majority, you might have others that are more fundamental, like should we sell the company, should we
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Av Sinensky: expend a significant amount of capital to get a new facility? Should we enter a new line of business? Those might be decisions that you say, we need to have a supermajority, 66%, 75%.
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Av Sinensky: And then there are things that you might say, They need to be unanimous.
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Av Sinensky: We're not doing this unless everybody agrees.
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Av Sinensky: And that is… A concept that can work, something like whether or not you can amend the agreement.
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Av Sinensky: It's something that you would virtually always want to see as unanimous, but it's also something that you need to be very careful with, because it allows any particular owner to veto anything.
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Av Sinensky: And that might work really well when there's 3 of you, and you want it to be that, hey, if we get to a point where we can't agree, then…
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Av Sinensky: we can't get all on the same page, then we just won't do it. We want to make sure that everybody feels good about it. And that could work with 3 people. But when you get to Generation 2, or Generation 3, and now you don't have 3 owners, you have 22 owners, the idea that any one of them would have the right to veto something can be really problematic.
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Av Sinensky: Okay.
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Av Sinensky: succession. How… Can my shares, my management rights, whatever else I have with respect to this company pass along?
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Av Sinensky: The starting point, and the general rule of thumb, is that…
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Av Sinensky: Under corporate law, your shares in a company are
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Av Sinensky: freely transferable property. The same as a house, the same as a car, the same as a pen.
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Av Sinensky: It belongs to me.
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Av Sinensky: I can give it to whoever I want, for whatever consideration I think is fair.
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Av Sinensky: That, of course, is a potential disaster for a family business. The idea that…
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Av Sinensky: future generation, or even current generation, can just one day say, oh, by the way, I sold my shares to some guy I met at a conference, this person is your partner now.
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Av Sinensky: is something you really want to protect against for obvious reasons, and that is why the default for almost every partnership agreement is that transfers are not allowed at all. That is the starting point. Now.
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Av Sinensky: There's always going to be exceptions to that.
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Av Sinensky: The most common being the idea of a permitted transfer. Usually what we're talking about there are transfers that a member wants to make to their family members, to a trust, to an LLC that they control.
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Av Sinensky: And that is to…
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Av Sinensky: be done for asset protection reasons, for estate planning purposes, and generally speaking, you want to facilitate that. Especially, you want to facilitate that if you do it in a way where
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Av Sinensky: You allow people to transfer the economics to their family members or to trusts, but they retain control over those shares.
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Av Sinensky: You may allow transfers to occur subject to some sort of right or first refusal, which means that
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Av Sinensky: You know, the downside of blocking
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Av Sinensky: Free transfers is that there could genuinely be people who, you know, next generation, they don't want to be in this business necessarily, and they don't want to be stuck holding, you know, 3% of some company that they're not even involved in.
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Av Sinensky: And you may want to create an exit ramp for those members to be able to get out of the business, if it just not… doesn't make sense.
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Av Sinensky: So you could have an idea of a right of first refusal or first offer that does allow them to go sell to a third party, but they need to first offer it to their partners, or give their partners an ability to match the bid.
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Av Sinensky: It's probably, you know, my general advice is to usually not even allow this in family businesses. You really want to keep
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Av Sinensky: The ownership in the family.
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Av Sinensky: But those are the voluntary transfers, and while those are important, the involuntary transfers are the ones that really can get
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Av Sinensky: dangerous for a family business. When we talk about an infant voluntary transfer, we're talking about transfers of ownership that happen without anyone intending them to do it, per se. For example, somebody passes away, what happens to their shares? Well, if they have a will, or even if they don't have a will, there's laws of intestacy.
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Av Sinensky: And whatever the will says, or whatever the laws say, is where those shares go, unless you have a mechanism in your partnership agreement that overrides that, that says the company has a right to buy out your shares upon death, or upon a divorce.
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Av Sinensky: You know, pretty much the last thing you would want to see happen in a family business is for somebody's ex to all of a sudden get the shares and management rights of a business as part of a divorce settlement, and now you have
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Av Sinensky: your, you know, your daughter's ex-husband now is sitting on the board of your company when he's not even really part of your family anymore. Similarly, bankruptcy, operation of law.
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Av Sinensky: You don't want your…
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Av Sinensky: company's ownership or a piece of it to end up in the hands of a third-party creditor who now has all of these rights when they have nothing to do with your business.
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Av Sinensky: Calls and puts, they exist on the stock market, they can also be helpful here for some of the situations that we just described, where either the owner themselves has some right based on some trigger, based on some valuation, to just say, you know what, I want out.
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Av Sinensky: I want to give my shares back to the company, and you have to buy me out. The…
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Av Sinensky: Opposite of that is, for whatever reason, the company decides that this per… you know, the other members decide that one of the particular owners
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Av Sinensky: we don't really want them around anymore, for whatever reason, and we should have an ability to take them out. Maybe it's because they did something wrong, maybe it's because, you know, it's just, we want to reduce the cap table.
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Av Sinensky: But this, you know, could give you a mechanism by which these
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Av Sinensky: Succession, mechanisms can happen in a more orderly fashion.
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Av Sinensky: The question of how you determine how to…
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Av Sinensky: value those interests when they're getting bought out. Again, these are the things that you want to establish in advance. You don't want to just leave it to, well, we'll negotiate it then and figure it out what's fair for the business. Everyone's going to have a very different idea of what's fair, and
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Av Sinensky: As you kind of see here on the left, there's a lot of different ways that this can happen, and…
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Av Sinensky: depending on what the trigger is, is going to lead to different variations of what is, quote, fair, right? If the reason why you have the right to buy me out is because I died, well, you know, everyone's gonna die, so don't blame me for that. You know, that should be treated differently than if it's because you terminated me because I was caught
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Av Sinensky: Embezzling money from the company.
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Av Sinensky: I would put very different values on what you… I should be entitled to in each of those two different situations. So it's really important to set the methodology. The three most common ways we see of valuing those businesses, or those shares is having some sort of agreed-upon value that gets updated every year. It's called a certificate. I really don't like that, because what tends to happen is you do it the first couple years, and then you forget.
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Av Sinensky: And now you have the value of the company pegged to something from decades ago. Formula-based, such as, you know, some sort of multiple of revenues or EBITDA, is very common, and that can be very effective. The thing you need to be wary about there is that
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Av Sinensky: If the person who has the right to, you know, cause this process to happen is also in control of the books, and they have the ability to
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Av Sinensky: Use accounting tricks to artificially make earnings
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Av Sinensky: higher or lower than they actually are, that could cause issues, obviously. The, you know, the gold standard, and kind of the, you know, the most effective, is to get a formal appraisal. The problem with that is that it can be expensive, it can take time.
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Av Sinensky: So, what I usually like to do is have something that is tied to some sort of formula or some sort of pre-approved valuation mechanism, and then only go to an appraisal if somebody disputes it. So, it kind of sets a way to establish it, and then we're only going to use the appraisal escape hash if we need to.
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Av Sinensky: And finally, Conflict resolution. What do we do if something goes wrong?
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Av Sinensky: And in the context of businesses.
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Av Sinensky: There's two different types of resolutions.
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Av Sinensky: There's gonna be a dispute.
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Av Sinensky: And there can be a deadlock.
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Av Sinensky: When we have a dispute, for the most part.
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Av Sinensky: We go through the same protocols that any business would have.
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Av Sinensky: and… Hopefully, you don't end up on…
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Av Sinensky: this slide, but if you do, these are kind of your basic choices. Number one is really what you want to
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Av Sinensky: have happened, again, especially in a family. If your family… if your family business ends up in litigation, you've really failed as the founders. You want that to be the absolute last result. Internal escalation, having some sort of formal process to hash these things out.
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Av Sinensky: like I said earlier, sometimes…
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Av Sinensky: The mere fact of going through the motions, going on this journey, having a way of
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Av Sinensky: establishing how these things get resolved is more important than what the actual resolution is. It makes sure that people feel heard, makes sure that people feel like there was a process that was fair.
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Av Sinensky: And…
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Av Sinensky: that alone could diffuse a lot of the conflict, a lot of the tension that results in some of the nightmare scenarios we see in family businesses that crumble. But beyond that, you have the ordinary tools available to you. You can go for mediation, you can go for arbitration, and all that failing.
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Av Sinensky: A big public, nasty, litigation, which…
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Av Sinensky: Again, let's… let's not get there.
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Av Sinensky: And finally, what happens when we can't agree?
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Av Sinensky: What happens if the business just, like, hits a stalemate?
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Av Sinensky: the default rule is the status quo would prevail, right? If me and my partner are 50-50, I really want to sell the business, she doesn't want to sell the business.
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Av Sinensky: If we can't agree, and the partnership agreement requires us to agree, then…
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Av Sinensky: The default just stays how it is. We retain the status quo. We can't sell the business.
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Av Sinensky: But that can just create deadlock, and deadlock can just be terrible for culture, and could bring operations to a standstill, and you don't want to be in a situation where governance is getting in the way of being able to move forward and make money tomorrow.
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Av Sinensky: So that's why you want to kind of introduce
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Av Sinensky: at least one, if not more, of these potential ways to settle disagreements.
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Av Sinensky: a very common…
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Av Sinensky: concept in family businesses is agreeing on who will be the tiebreaker. Appointing a trusted family advisor, a family friend, somebody from, you know, the other side of the family who everybody trusts to come in and say, I'm gonna look at the situation, and I'm gonna tell you what I think, and then that's binding.
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Av Sinensky: Depending on the family, depending on the person, that could be a really elegant, easy way to sell things.
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Av Sinensky: The other really effective thing that we often see happen is the concept of a forced buyout.
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Av Sinensky: Where, if the company gets to a point where the owners don't feel like they can operate anymore.
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Av Sinensky: It can trigger what we call a buy-sell.
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Av Sinensky: Where one partner gets the opportunity to say to the other.
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Av Sinensky: this needs… this, this marriage needs to end, and they throw out a price. I think this company is worth $30 million.
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Av Sinensky: That then gives the other partners the opportunity to either buy out that
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Av Sinensky: Original partner at that $30 million number, or…
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Av Sinensky: be bought out at that $30 million number. So, it's, it's kind of one of those concepts of, pigs get rich, hogs get slaughtered, whichever way it is.
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Av Sinensky: Because, it's kind of like the,
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Av Sinensky: cutting a pie, right? If you… the person who cuts the pie, the other person gets to choose the slice. So it almost ensures fairness in that sort of way.
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Av Sinensky: I see we are running out of time, so just to quickly recap,
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Av Sinensky: these are kind of, like, some of the main takeaways from today. Trust is not a governance document. Saying we trust each other, saying we will figure it out, is a recipe for disaster.
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Av Sinensky: If you think you don't have an agreement, you actually do. You just have to open up the LLC code, and that will tell you how your business operates, unless you take the time to actually make up your own rules, which you should do because it's your company. The best time to do this is yesterday. If not, today is the next best option.
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Av Sinensky: Don't wait, because by the time something happens, it's already too late.
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Av Sinensky: Be mindful of what type of entity you're in, and be mindful of the particulars of your company and the dynamic, because
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Av Sinensky: If there's anything to take away from this, it's the optionality, it's the flexibility, it's the ability to make the rules for your business
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Av Sinensky: That make sense for your particular business.
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Av Sinensky: And… that's what they should be, because it is your business.
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Av Sinensky: So, right up against the clock, I will thank you all for giving me your time to listen. I…
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Av Sinensky: would…
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Av Sinensky: greatly, appreciate and entertain. If anyone has any questions, feel free to reach out. I mean that genuinely. I am always happy to talk with people about these topics, even outside.
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Av Sinensky: The course of a formal engagement, so if you have a question, if you have a client or a friend who you think would benefit from having a further discussion about anything
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Av Sinensky: I talked about today, please send them my way, and I would be happy to talk through whatever. So, thank you again, Jonathan, thank you, ParkBridge, and thank you, audience.
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Jonathan Shenkman: Great, thank you so much, Av, and again, if anyone has any specific questions, new business opportunities, or any other issues they'd like to discuss, please feel free to reach out directly to Av or myself, where appropriate, and I'll also be sure to include his contact information in the follow-up email to this program. Four more quick items before I let you go. First, and most important.
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Jonathan Shenkman: Later today, you'll receive an email from me with an evaluation form for the program. It will ask you to input the code that I mentioned here today in order to receive your credit. After that is submitted, in the coming days, you'll receive an email from ACE Seminars
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Jonathan Shenkman: with your certificate. Again, keep an eye out for an email from Ace Seminars. If you don't see that email in the next few days, be sure to check your spam folder. Again, the email with your certificate will not be from me.
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Jonathan Shenkman: It will be from Ace Seminars. Second, my next webinar is on Thursday, April 30th, on Qualified Charitable distributions, Rules, Opportunities, and Tax Craps for 2026 and beyond, featuring Brian Balduzzi and Lisa Presser of Fager, Drinker, Biddle, and Reef, LLP, based in Princeton, New Jersey, and Philadelphia. I'll be sure to send out the invitation to this program in the coming days. In the meantime.
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Jonathan Shenkman: If you have a friend or colleague who'd find these webinars of interest, they can subscribe to my webinar distribution list on my website at parkbridgewealth.com forward slash webinars.
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Jonathan Shenkman: Third, you can follow all my work on X and Instagram at Jonathan on Money, and by connecting with me on LinkedIn, you could also listen to my weekly podcast called Jonathan on Money, which is available on Apple, Spotify, or wherever you get your podcasts, and you can watch my practical planning videos, which I post several times a week by following me on YouTube at Jonathan on Money as well. And fourth, please take 30 seconds to fill out my survey at the end of this program.
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Jonathan Shenkman: It helps me improve my webinars and provide timely and interesting content to attendees. I thank you in advance for that. And with that, this concludes today's session. Please stay safe and healthy, and have a wonderful day, everybody.