New Business Relationships & Aligning Interests

Aligning Interests In A New Business Relationship

A new business relationship is both exciting and challenging. We can achieve more by working together. A new relationship needs to be built on a good foundation, with both a solid relationship and likely a mutually-beneficial contract, depending what country you’re in. I’m currently in Philadelphia but have experience in NYC, Toronto, Manila, Philipines, and Shanghai, China.

13% of startups fail because of disharmony between investors and founders, or even between co-founders. I’ve seen business relationships fail between property managers and building owners due to lop-sided contracts that clearly only benefitted one party. Startups often fail when one founder wants to build an empire, and the other wants less. Other relationships are at-risk too.

Aligning interests and goals is one key to success.

Example in Real Estate Property Management

I recently acquired an out of state property and needed a local property manager. Some of my requirements were fundamental and non-negotiable:

  • Someone reputable, honest, and licensed
  • Good with people
  • Experienced

The rest came down to financial compensation. In Real Estate, property management companies have a reputation for charging too many fees: each time a new lease is signed, a lease renewal fee, eviction fees, etc. Some even charge just for driving to the property and insist on all decision-making rights to approve maintenance. All this on top of a flat dollar amount per door or percent of gross rent collected. The going rate for Property Management in Philadelphia right now is 10% of gross rent plus fees.

There are certainly good property management companies out there, that deserve to be compensated. However, a few bad apples that care more about fees than actually taking care of the property, ruin the industry reputation.

I knew a building owner that signed such a lop-sided contract. As you’d expect, the relationship ended on the last day of the one-year contract, without renewal. In fact, there was at least one lawyer involved to end the contract on the final day. The property manager collected every fee imaginable for one year, including fees for driving to the property (even though it was within walking distance), answering the phone after hours, and much more.

Presenting a contract with such lop-sided terms is incredibly short-sighted. It’s a missed opportunity to build a mutually-beneficial, long-lasting relationship.

For my recent acquisition, I talked with five different property managers. Two of them met my criteria and were great to deal with. In the end, I signed a very simple contract with one of them:

  • The management company gets a flat 10% of gross rent collected
  • The manager approves expenses up to $200; my approval is needed for higher amounts
  • When maintenance is needed, they get a small markup for coordinating

The first bullet is key. There are no other fees for renting out a vacant unit. Think about what would happen if a property management company charges each time they advertise a new unit and get a new tenant. The management company would make money through:

  • Maintenance markup on a vacant unit to get it rent-ready
  • Likely, a marketing fee to advertise the vacancy
  • Money charged to the landlord for securing a new tenant on a lease

That’s expensive for the landlord or building owner, who also loses at least one month’s rent due to the vacancy.

Aligning interests means securing terms that incentivize each party towards a common goal. In this case, my goal is to keep tenants in their units, paying rent, and avoiding turnover. Since the property manager makes most revenue from a percent of the gross rent, and nothing from vacancies, marketing or turning over units, our incentives are aligned. The manager should collect the most rent possible to maximize revenue, and that benefits me. It’s been a while, and we still have a good relationship, which I anticipate will last a lot longer than a year.

Failed Start-up Co-founders

I had a start-up once in China. A friend and I started a business in the fashion industry. We got along well personally. The plan was for him to move back to the US and run the sales side of the business, and I would remain in China to setup the supply chain. Unfortunately, we didn’t follow common advice for co-founders to sit down and have a deep conversation about what we both wanted, and how to resolve disputes.

We discussed goals for the business and were aligned.

A business plan was written, vetted, and agreed to.

We did sign a partnership agreement.

What we didn’t do, was talk about our personal situations and commitment to the business. In the end, one of us had changing personal circumstances, took a full-time job, and the business fell to the wayside. We didn’t have a plan to deal with this.

After a few months, the business fell apart. A shame, since it actually was profitable, and all of this could have been avoided.

Lessons Learned

A few lessons I’ve learned with business relationships:

  • Communicate well
  • Align incentives
  • Deal with people you are comfortable with
  • Have the difficult conversations to get to know people and how they handle challenging situations

Take the time to get to know someone before a business relationship starts, and align your incentives so you each achieve your goals. Contracts are fine and dandy, but a solid relationship will minimize the chances you need to pull out that contract to review your options. My next business relationships in South Carolina and Philadelphia were different, and have gone very well.

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