Webster’s defines “partnership” as “a pair of people engaged together in the same activity”. But as simple as that sounds, there are some concrete steps to take in structuring these relationships. That’s the topic of this episode of the RV Park Mastery podcast. We’ll talk about what makes for good partners, how to divide duties and compensation, why partnerships fail, and what to do when they do. If you’re thinking of entering into a partnership to buy an RV park, then this episode is filled with important considerations.
Episode 31: Successfully Structuring Partnerships Transcript
You probably own an Apple product, and you're probably also aware of the important partnership between Jobs and Wozniak that created that product. Without Wozniak, Jobs, a master sales person or probably one of America's greatest salesman in some form of product, and without Jobs, Wozniak would have gone on to do circuit boards and selling them at weekend fairs, which is what he had been doing. But when you combine the two together, a salesperson and a techno wizard, the end result is one of the greatest technology companies in history. This is Frank Rolfe, the RV Park Mastery Podcast surge. We're gonna be talking about successfully structuring partnerships. So what makes for great partners? Well, Apple leads the examples. If you have two people who share a common vision but very different skill sets, sometimes when you unite them, they're more powerful than they were individually. It's not just in business, you see it in all forms of endeavor. Martin and Lewis were never as good individually in their comedy careers as they were together.
The same could be true with various musical groups, such as The Beatles, they never went on in individual success that would rival what they've done as a group. So partnerships can be a very, very important thing but you've gotta have the right partner. Partnering with somebody just to have someone to bounce ideas back and forth with someone, just to serve as a peer that you can talk to and share your thoughts for the day, that doesn't always make for a good partner. Seek out people who have similar goals and visions to you, they wanna buy an RV park for a certain reason, they have a certain mission that they're on, and if you share the mission, but you each help each other, you each complements the other skill set, that's what you should be watching for. Now, when you find the right person as a partner then the next issue is, how is the partnership structured? Typically, there are multiple parts to a partnership construction. The first is to buy the RV park traditionally will require capital. Who is contributing the capital and how much? Are both people contributing the capital 50-50? Is one person contributing more capital than the other? Because it's important that in any partnership the capital be in the number one position.
The goal has to be the return of the capital. Remember the old saying, you cannot have return on capital until you have return of capital, so capital is key, and it's very, very important that everyone acknowledge on the front end that that capital will be protected. There will be no money given out to either partner until the capital is returned. Also you need a preferred rate of return on the capital because capital has opportunity cost. So if someone puts $300,000 down on that RV park, they could have put the $300,000 down on a different RV park or a different endeavor altogether. They could put it in the bank, in a CD or in the stock market. Now, it's up to you what you define that preferred rate of return to be. In many partnerships, it can be as low as 3 or 4%, and in others, it's more commonly around 10%. So now what do we have? Well, we have the return of capital, that's the number one position. In the number two position comes the return of that preferred rate of return on the capital. The money after that, that is the actual profit.
So if you're going to have someone who's gonna be putting the capital in, those are normally the terms you have to do to make it fair for them to put that capital in. Now, as far as the split of profits after the capital and the preferred rate of return, that's entirely negotiable. Many deals are just straight 50-50; 50% for the person put the capital and 50% for the person who found the property and operated it, but I've seen that split change in both directions. I've seen 60-40, 70-30, 80-20. It's basically based on what you can negotiate as well as how risky the deal is. If the deal is extremely risky, therefore the person puts the capital and has more risk, they need a higher rate of award. So how you do that split? What is often called the waterfall of profits, that after the capital and preferred rate of return, that's entirely up to you on what you can negotiate. I can tell you right now, it won't work unless you both can figure out something that everyone feels is fair. As far as the duties go, that should also be acknowledged on the front end. Who is gonna be finding the RV park to purchase? And if you had the RV park, who is gonna be responsible for managing it? One person always ultimately ends up doing more work than the other. So again, the partnership has to reflect what happens when one person puts in not more capital than the other, but more effort.
Now, you might say, "Well, we counted that in, that's why we're 50-50. This person puts up all the capital, the other puts in up all the work." And that's fine if that's truly how it's structured. The problem some time on that level, not on the capital side, capital is quantifiable, it's objective. But sometimes people cheat a little on the duties. One person says, "Yes, I'll go ahead and check on that RV park every so often." But they never do. Or they say, "Yeah, I'll watch over, we'll split the duties 50-50." But they don't show up. They don't put out the effort. They always have an excuse, they can't do it. They're busy, they're sick, something else came up. That's not the mark of a good partnership. Good partnerships are win-win. All parties feel fair in the way that they are treated in the partnership. You will not have a successful partnership if one person feels slighted that the other person did not put in their fair shake. Which then leads to the question what happens when partnerships fall apart? What happens when the partners can no longer work together? They no longer share that common mission or maybe they just don't like and they feel neglected and unfair in the way the partnership is constructed?
When that happens, typically, you have a couple of things that can happen; you can have the ability for the one partner to buy out the other, or you can theoretically sell the asset and just split it up for however it was meant to be in that initial formation of what happens with the profit splits. But remember that typically partnerships are fairly illiquid. It's kind of hard, you can't just push a button like selling a stock. So as a result, you really have to have some well thought out written instruments as to what happens when partnerships fall apart. It has to be in writing to really, truly mitigate the risk. I get called frequently from people, they just find me on the internet, they find my phone number, they call me up with crazy questions and problems regarding RV parks. I got a call a while back from someone who had entered into a partnership in the most terrible way. They put in all the capital and all the work. It was a situation with someone and they were trying to get their son-in-law off on the right foot, and in the end, he had had an affair on his wife and they got divorced.
So this person now wanted to get rid of the son-in-law, he put in no money and no effort at all, the problem was he never actually had a written partnership agreement. So the son-in-law refused to go ahead and give his share back to the person who actually done all the work and all the effort and put in all the capital. That was a terrible failure. You can't have a partnership with any significant amount of money at stake unless you have it clearly defined, not only what happens on the front end, as far as the splits and who's gonna do what, but also in the back end of what happens in the event it doesn't work out as originally planned. I was in a museum years ago in the Bahamas, The Museum of the Piracy, pirates who were all over the Caribbean at that time, and I didn't realize that pirates had a very sophisticated partnering arrangement. They saw really everyone on the pirate ship kind of as a partner. These were all guys who had been on a former partnering piracy runs, even maybe they met in a bar and they said, "Hey, let's go out and do something." They would have a very sophisticated discussion on the front end before they went out to see who was gonna do what and how much they would get paid, and then as they return to port, they would have it again, to find it if everyone thought that person had done their job and if they were still should be receiving the amount that they were cut out to get.
Now, the reason they did this, which I did not know, is most of your pirating captains were in fact British seaman who went over to capture pirates in the Caribbean from the Royal Navy and then realized, when they got there, they kind of like to life on the pirates more than being someone enlisted in the British Navy and they jump ship and went on the pirate team. And along with that, they brought their best thoughts of things they didn't like about the Royal Navy, and one thing they didn't like about the Royal Navy was, in fact, there wasn't a lot of discussion. The officers basically told people what to do and never got their input. So these pirating captains, they wanted to get everyone's input. They thought that was the only fair way. They thought that you could create more successful teams in this manner, and most importantly, everyone always felt recognized and fairly treated. And I think that's the big thing with all RV park partnerships is everyone must, at all times, feel like they're getting their fair shake. When you have situations where people are unhappy in partnerships, what would ultimately happen is it will grow like a cancer. They will just get more and more mad, more and more tired of the arrangement, and it's not productive.
If you're in a partnership and you're not feeling like you're properly loved, you need to let the other person know why. You need to have a discussion, possibly you can change the terms of who gets what split, but don't get involved with things for people harbor ill will, that never works out well. Sometimes you can create solutions to partnership problems if you will just discuss them. Most people like having a win-win relationship with others. It's a very rare person who is happy and actually likes the concept of their partner not doing well. So when you're out there looking for partnerships, always remember that partnerships can be very, very powerful, but only in a positive manner. Seek out those who complement your skills, forge partnerships from which everyone feels acknowledged and respected and that they're being treated fairly. And sometimes if you find the right partner, amazing things can happen. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.