Yesterday, a long-time capital partner and I finalized the operating agreement for the entity for a new deal we’re doing and, because the process unfolded in precisely the way I like to do business, I want to highlight it here:
- We brought the deal to this partner about a month ago, after we had inspected the building but prior to getting it under contract… our proposal included reasonable deal terms
- He indicated interest in the project, drove the neighborhood, then confirmed he wanted to explore the deal with us – all within a day or so
- We gave him all of the relevant numbers and then worked together to determine our bid price
- We won the auction, then kept our partner in the loop as we went through the diligence process… when issues emerged, we discussed them and agreed reasonable solutions
- Prior to removing contingencies, we produced a deal memo setting out our final plan and forecasts, plus identifying the key risk factors as we collectively understood them
- After reviewing the memo, he agreed to our proposal to remove contingencies without asking for any price reduction (this is a major point for me… we never try to renegotiate deals in escrow, so we can’t work with investors who expect that we will)
- Then, during the period between contingency removal and closing, I marked up an operating agreement we had used previously to reflect the deal terms for this new project
- He requested one reasonable change to the terms (one which did not hurt us at all), then we finalized the agreement
Take a look at the steps above again. Did we spend time beating each other up over economic terms? Did he start calling contractors to check our construction numbers to see if we’re telling the truth? Did I have to worry about whether he actually has the capital? Did he call rental agents to check if our rent estimates were legit? Did he question our proposed layouts for the units? Did either of us employ lawyers to try to screw over the other guy?
No, because we have done business with this partner for six years and everything he ever promised to do, he did, and everything I ever promised to do, I did.
It’s not that every deal has gone perfectly. Among other issues (most of which I can’t disclose here), a building we were renovating for him once had a major fire during the renovations. But, every time we’ve run into a problem, we’ve worked together to solve it, and the deals have all come out (REALLY) well.
And, because we’ve built up so much trust, we can work together in a close-to-frictionless manner. He gets good returns on his capital. And we get to make money, doing the thing we’re best at.
Once you’ve had a taste of doing business with partners like this, it’s extremely difficult to imagine doing business any other way.