Advisory Insights Podcast

What Every Partnership Needs to Know

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What Every Partnership Needs to Know (Advisory Insights Podcast, Episode 12)

On this episode of Advisory Insights, Grace Tillman of Oberman Law Firm talked with Stuart Oberman about some of the key provisions that should be included in an operating agreement for a partnership, such as buy-sell provisions, redemption provisions, and dissolution provisions. Speaking from the experience of working with many other partnerships which have gone sour, the insights Grace offers in this episode could save you costly legal battles down the road.

Advisory Insights is presented by Oberman Law Firm and produced by the North Fulton studio of Business RadioX®. The series can be found on all the major podcast apps. You can find the complete show archive here.

Grace M. Tillman, Senior Corporate and Litigation Counsel, Oberman Law Firm

Grace M. Tillman is Senior Corporate Counsel with Oberman Law Firm. For nearly 25 years, Ms. Tillman has represented small to large corporate clients in a wide variety of practice areas such as commercial litigation, real estate, health care, mergers & acquisitions, governmental compliance, and employment law.

Ms. Tillman provides guidance to clients regarding simple to complex labor and employment law matters, including the complexities of non-compete and non-solicitation agreements. In addition, Ms. Tillman also provides expert guidance on complex HR (Human Resources) issues, including specific employment matters involving the Americans with Disabilities Act (ADA); Family and Medical Leave Act (FMLA); the Age Discrimination in Employment Act (ADEA); and, the National Labor Relations Board (NLRB).

In the area of health care, which continues to evolve at the speed of light, Ms. Tillman’s experience includes oversight of hospital regulations, HIPAA Compliance, fraud and abuse, Medicare and/or Medicaid regulations, Anti-Kickback Statute, Stark Law, Telemedicine, state and federal insurance audits, and licensing board requirements.

Ms. Tillman has extensive litigation experience in federal, state, and appellate courts, as well as before administrative boards.

Ms. Tillman received her undergraduate degree in Business Management from Kennesaw State University, and Doctor of Jurisprudence from the University of Georgia School of Law. In addition, Ms. Tillman is licensed to practice law in Georgia and Tennessee.

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TRANSCRIPT

Intro: [00:00:01] Broadcasting from the studios of Business RadioX, it’s time for Advisory Insights. Brought to you by Oberman Law Firm, serving clients nationwide with tailored service and exceptional results. Now, here’s your host.

Stuart Oberman: [00:00:20] Welcome everyone to Advisory Insights. My name is Stuart Oberman of Oberman Law Firm. We have a fantastic guest with us today who’s going to cover some bombshell topics for those that are in a partnership. Grace Tillman, nice to see you today. How are you?

Grace Tillman: [00:00:38] Hi. Thank you for having me. I’m doing very well.

Stuart Oberman: [00:00:40] For those that don’t know Grace, Grace is our senior counsel at the firm, handles a lot of litigation, handles a lot of federal compliance issues, and loves and adores operating agreements, partnership agreements, everything that makes up a partnership.

Stuart Oberman: [00:01:02] Now, what we’ve got to take a look at is – Grace, you and I say this all the time – it is easy to get into a marriage, it is very difficult to get out. So, again, we could spend so much time on this one topic, but I want you to cover where are partnerships? You know, the buy-sell provisions, redemption provisions, dissolutions, majority of decisions. Who’s making that decisions? What’s the structure of this? And I know you solve a lot of problems in this area.

Stuart Oberman: [00:01:40] So, I want you to talk about some operating agreements, which is sort of like the constitution, if you will, in partnership agreements. But tell us really what’s going on, on some of these things, some of these things you’re running into and some of the problems. I know we could talk all day on this, but I want you to hit on a couple of things that really you’re running into all the time and what our listeners need to know.

Grace Tillman: [00:02:04] Sure. Sure. An operating agreement mostly are used with limited liability companies. They also can be used for partnerships. And while they’re not required, whenever there are two or more members in an LLC, like you said, like for a partnership, it is strongly recommended that you actually have an operating agreement which lays out what the member’s expectations are about what’s going to happen running and operating the LLC or partnership.

Grace Tillman: [00:02:32] But one of the most overlooked items that actually should be in every operating agreement is your exit strategy. I mean, of course nobody goes into a business, much like nobody goes into a marriage, thinking that it’s going to fail. Unfortunately, that does not always happen and people don’t always get along forever and ever, and then the company is passed on to their children.

Grace Tillman: [00:02:56] So, we need to have set in advance, while everybody is still friendly, it’s nice to set out what’s going to happen if the members no longer agree. What happens if one of the partners wants to retire? What happens if somebody dies or becomes disabled? So, these are all very important things to consider when entering into a partnership.

Grace Tillman: [00:03:23] So, some of the things that we see and we wish we would see because, oftentimes, like you said, they come to us because they don’t have a provision and people say, “Well, what do I do now?” And now we need to craft this on the backend when people aren’t in agreement or friendly and it winds up costing – I can’t even tell you how much more money to do it on the back side – because if everybody’s friendly, we can say, “Oh, yeah. It’s fair. Let’s split it this way.”

Grace Tillman: [00:03:49] But when you’re mad at somebody, it’s like a divorce and people are fighting over the dishes. Nobody wants the dishes. They just don’t want the other person to have the dishes. And so, that’s what we find out here.

Grace Tillman: [00:04:02] So, here are some provisions we like to see, some are optional, you can have maybe one or more. But a buy-sell provision, which you mentioned, buy-sell provisions are kind of like if you have two kids, they both want the cookie, and you’re asking them to split it. Somebody’s going to split it very evenly so that both people get an even share. What happens is one of the parties offers to either buy the interest of the other member in the company or sell their interest in the company for the same price.

Grace Tillman: [00:04:34] So, the offering party sets the price, says to the party that they’re trying to buy out, “Here, I would like to buy your interest for this amount.” Now, they’re going to give you a very fair and equitable amount because whatever they offered to buy your interest for, they also have to sell their interest at the same price. If the person who receives the offer says, “No, I don’t want to sell, but I would like to buy you out,” that becomes the set price. So, again, like I said, it becomes a very fair and equitable price because you’re not going to offer to buy somebody else out for $10 a share if you then had to sell your shares for $10. So, you will find generally that helps.

Grace Tillman: [00:05:20] And the problem is maybe sometimes people don’t want to buy or sell. So, now, we have some other options that are available. And one is a mandatory redemption by the company at a fair market value upon the occurrence of certain events. Fair market value is determined generally by the parties in advance. How they calculate that, it would be a predetermined valuation or formula such as an appraisal. And usually this is upon the occurrence of a specific event. Let’s say somebody wants to retire or they passed away or they become permanently disabled. We have a mandatory redemption in those situations at a set value.

Grace Tillman: [00:06:01] And the mandatory redemption, generally, is intended to maximize the value of the selling party, but also to preserve any interests that the company may have. And everybody is looking out for the best interests of both parties in this situation.

Grace Tillman: [00:06:18] Another mandatory redemption event could be upon the occurrence of other events. This time it’s a mandatory redemption at a reduced value. Now, this is usually used in a case where one of the members or a partner has engaged in some type of negative behavior, if you will, that could damage or has damaged the company, the partnership, or the other members of the company or partnership.

Stuart Oberman: [00:06:44] That never happens.

Grace Tillman: [00:06:45] It does happen. Things like this could be if you’re in a business that requires you to be licensed. Well, you’ve lost your license, you’ve done something, it might be some type of negligence, or it could be just some type of administrative error. But you’ve lost your license and now you can’t practice in whatever field that might be. It could be dentistry, medicine, the law practice, engineer, there’s lots of things. Don’t pay those bar dues and see what happens [inaudible].

Grace Tillman: [00:07:16] Other things that could be, maybe one of the members got arrested or indicted or convicted of a crime, and now you don’t want to be associated with them. Or maybe they have materially violated the terms of your partnership or operating agreement. They could have committed fraud or embezzlement. Well, in this instance, the company has a mandatory or a right to purchase the interest of this defaulting member, if you will, at a reduced value. And you can set those reduced values, it might be 75 to 50 percent of the appraised value or it could be the value determined by a specific formula.

Grace Tillman: [00:07:54] Oftentimes, we’ll see these, “We’re going to buy you back, but we’re giving you nothing for goodwill because you did your best to damage it.” So, you don’t get anything for that. You’re going to get a value of assets only.

Grace Tillman: [00:08:05] Another option, there could be mandatory dissolution of the company where everybody gets liquidated. We’re at loggerheads. We’re the complete stalemate. We can’t agree with one another. Fine. Business is over. You don’t want to agree with me. You don’t want to work with me. Then, we’re both packing up our toys and we’re going home.

Stuart Oberman: [00:08:22] I got a question for you on the cases that you work on. You mentioned fraud, so percentage-wise – and it’s maybe a little bit hard to do – but the cases that you and I work on, you work on and the office works on, how many do you think involve fraud when, basically, one partner wants to get out of the marriage, if you will.

Grace Tillman: [00:08:50] It’s actually more than you would think. But to answer the question, in true lawyer fashion I’m coming back with a question, well, how do you define fraud? Because some people, it’s intentional fraud. Other people, it’s unintentional fraud. “Oh, wait. We weren’t supposed to be doing this. I didn’t know I wasn’t allowed to be running my mortgage through the business. Wait.” But it can be a higher percentage than you think. And, again, sometimes it’s minor fraud, something little. Other times it’s a big deal. It can be something that potentially, again, if you’re in a licensed business, could put your license at risk what your partner is doing, especially if the fraud involves your client.

Stuart Oberman: [00:09:36] Well, it’s funny. A lot of businesses as a whole, like embezzlement, that’s a little bit different than what we’re talking about. But embezzlement is about 60 percent of all businesses. I’m just thinking out loud here, that may be another topic that we cover on what to do if you suspect your partner is defrauding you. That’s a whole internal investigation.

Grace Tillman: [00:10:05] It is something that is totally different, and it is absolutely a problem.

Stuart Oberman: [00:10:08] We may look at that down the road. But I’m sorry, I got off track. I’m sorry to interrupt you.

Grace Tillman: [00:10:15] No, no, no. And, again, I think that’s very important. I think it’s worthwhile exploring because I think that our clients, our listeners, everybody would benefit from that knowledge because it happens, like I said, much more often than you think it does.

Grace Tillman: [00:10:28] So, we were talking about mandatory dissolution or sale of a company in the event that the members of the partners reach a stalemate. Again, it’s set out in advance. If we’ve reached a point where we cannot agree anymore, and this is a situation, honestly, when you reach it, you don’t want to be in business with this other person anymore because you’re just fighting.

Grace Tillman: [00:10:51] It’s like the point in the marriage where all you do is fight and everybody knows it’s over. And that’s where you are, and you’re saying, “We need to call an end to it. I’m not going to continue the business without you. You’re not continuing the business without me.” And there could be any number of reasons why that may happen, but we’re done and we’re either going to sell or liquidate.

Stuart Oberman: [00:11:14] Now, you mentioned something going on. I keep going back because you’ve said so much information. I’m trying to absorb it all. I’m thinking from what our clients would say, but you mentioned something along these lines of what we call a put call option as far as sale goes.

Grace Tillman: [00:11:34] Right. That was the first one, kind of like the buy-sell. Say, I’m either going to buy you out or you’re going to buy me out. But either way, one of us is leaving at the end of this deal.

Stuart Oberman: [00:11:43] So, how many of those put call options do you see? I know the ones that I’ve looked at they’re pretty nasty.

Grace Tillman: [00:11:53] A lot of times they are, and they’re usually a whole lot nastier if they’re not equal partners and they’re drafted in a way that gives the majority partner maybe a little more push. Because somebody’s got to come up with a whole lot of money, cash at closing to buy out a partner, that becomes harder to do. But they can be nasty.

Grace Tillman: [00:12:19] Again, if they’re drafted in advance when everybody is still friends or they think the business is going to be continuing for a longer period of time, they’re not. But my recommendation is they should be in every operating agreement, whether you exercise the option or not, I think that you should have, if not that exit strategy, you need to have something. And you need to have something that addresses what happens when the parties, maybe, reach deadlock or stalemate.

Grace Tillman: [00:12:48] And first step maybe isn’t selling. There’s lots of other options that you and your attorney can work and come up with creative options, things that range from mediation to arbitration, and who do we select, do we defer to a third party, can we go to an expert and get an opinion if we disagree. There’s a whole lot of things you can put into an operating or membership agreement or partnership agreement short of shutting everything down, buying one party out. But, again, we’re just talking exit strategy. So, we’ve reached the point where we’re done and the parties aren’t going to continue anymore in this business.

Grace Tillman: [00:13:28] Kind of sort of the last one I want to touch on – and I know we don’t have a tremendous amount of time to talk about all of them because I could go on for hours.

Stuart Oberman: [00:13:35] This is a week long seminar. Are you kidding me?

Grace Tillman: [00:13:37] It could be. It could be. And I have actually spent daylong seminars just talking about operating agreements. So, the last one would be if there is a majority member or partner where one party is disproportionately greater invested in the business, a lot of times we’ll see in an operating agreement or partnership agreement where that member, that majority member, has a right to buy out the minority member if they can’t agree anymore. It’s like, “We’re not going to be in business anymore, but here it is.”

Grace Tillman: [00:14:09] And the formula is established in advance so that the minority member actually enters into the partnership or limited liability company knowing what their payment is on the backend. It’s not that the majority member can squeeze them out and say, “I am going to pay you $0.10 per membership unit that you own.” No. It’s going to be some version of a more equitable, fair market value for the minority member’s interests. And, again, it would be before the minority member entered into the business. They would know what they were getting when they were coming out, if the parties couldn’t agree.

Grace Tillman: [00:14:45] I know we talked about this briefly, and I know I really kind of flew through a bunch of these, but if there’s not an exit strategy in place – which I see a lot – and the members can agree on how to terminate or wrap up their business or what to do, you can be looking at a very costly legal battle for both parties.

Grace Tillman: [00:15:10] And when I talk about a costly legal battle, I’m not just talking about the financial cost because there is a whole bunch of work that goes into creating a business, and a lot of that comes with an emotional component. And when you’re watching that be unsuccessful or dismantled, there’s a cost to that that a lot of people don’t realize. And you don’t want to be in a position where you no longer wish to be associated professionally with someone and you’re forced to still be there.

Stuart Oberman: [00:15:44] Wow. That’s amazing information. Well, I want to mention one other thing, is that, how in tuned you are into the employment side and partnership agreements. And I know we come to the end of our podcast for this particular topic, but you have another podcast that you’ll be doing for the firm regarding EEOC, which I can’t wait to share with our business partners, we have local, national, and some global clients. But you’re also speaking on October 27th for SHRM-Atlanta. So, that’s going to be a great event.

Stuart Oberman: [00:16:30] Again, it’s a great honor because you’ve been in the forefront of what’s going on as far as employment law goes. And I know you did an enormous job during COVID-19, keeping everyone informed by the hour, including us at the firm.

Stuart Oberman: [00:16:43] But in closing, is there anything you want to add on that 10,000 foot view of getting into a marriage and getting out?

Grace Tillman: [00:16:55] Well, it’s much like a pre-nup. If you enter into an agreement or into a business relationship or a romantic relationship, and everybody knows what happens if things go south, you are going to save money, you are going to save time, you are going to save aggravation. And best of all, you have some certainty. You’re not wandering around lost wondering what happens now. You know what happens.

Stuart Oberman: [00:17:21] Perfect. I agree. Grace, thank you so much for joining us today. I can’t wait to hear your subsequent podcast on EEOC’s investigations.

Stuart Oberman: [00:17:32] Ladies and gentlemen, thank you for joining us. If you want to reach Grace Tillman, please feel free to email her at grace, G-R-A-C-E, @obermanlaw.com Phone number 770-886-2400. Thank you again, Grace. It was great having you. Ladies and gentlemen, thanks. Have a fantastic day. And we look forward to our next podcast. Thank you.

Outro: [00:17:56] Thank you for joining us on Advisory Insights. This show is brought to you by Oberman Law Firm, a business-centric law firm representing local, regional, and national clients in a wide range of practice areas, including health care, mergers and acquisitions, corporate transactions, and regulatory compliance.

 

About Advisory Insights Podcast

Presented by Oberman Law Firm, Advisory Insights Podcast covers legal, business, HR, and other topics of vital concern to healthcare practices and other business owners. This show series can be found here as well as on all the major podcast apps.

Stuart Oberman, Oberman Law Firm

Stuart Oberman is the founder and President of Oberman Law Firm. Mr. Oberman graduated from Urbana University and received his law degree from John Marshall Law School. Mr. Oberman has been practicing law for over 25 years, and before going into private practice, Mr. Oberman was in-house counsel for a Fortune 500 Company. Mr. Oberman is widely regarded as the go-to attorney in the area of Dental Law, which includes DSO formation, corporate business structures, mergers and acquisitions, regulatory compliance, advertising regulations, HIPAA, Compliance, and employment law regulations that affect dental practices.

In addition, Mr. Oberman’s expertise in the healthcare industry includes advising clients in the complex regulatory landscape as it relates to telehealth and telemedicine, including compliance of corporate structures, third-party reimbursement, contract negotiations, technology, health care fraud, and abuse law (Anti-Kickback Statute and the State Law), professional liability risk management, federal and state regulations.

As the long-term care industry evolves, Mr. Oberman has the knowledge and experience to guide clients in the long-term care sector with respect to corporate and regulatory matters, assisted living facilities, continuing care retirement communities (CCRCs). In addition, Mr. Oberman’s practice also focuses on health care facility acquisitions and other changes of ownership, as well as related licensure and Medicare/Medicaid certification matters, CCRC registrations, long-term care/skilled nursing facility management, operating agreements, assisted living licensure matters, and health care joint ventures.

In addition to his expertise in the health care industry, Mr. Oberman has a nationwide practice that focuses on all facets of contractual disputes, including corporate governance, fiduciary duty, trade secrets, unfair competition, covenants not to compete, trademark and copyright infringement, fraud, and deceptive trade practices, and other business-related matters. Mr. Oberman also represents clients throughout the United States in a wide range of practice areas, including mergers & acquisitions, partnership agreements, commercial real estate, entity formation, employment law, commercial leasing, intellectual property, and HIPAA/OSHA compliance.

Mr. Oberman is a national lecturer and has published articles in the U.S. and Canada.

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Oberman Law Firm

Oberman Law Firm has a long history of civic service, noted national, regional, and local clients, and stands among the Southeast’s eminent and fast-growing full-service law firms. Oberman Law Firm’s areas of practice include Business Planning, Commercial & Technology Transactions, Corporate, Employment & Labor, Estate Planning, Health Care, Intellectual Property, Litigation, Privacy & Data Security, and Real Estate.

By meeting their client’s goals and becoming a trusted partner and advocate for our clients, their attorneys are recognized as legal go-getters who provide value-added service. Their attorneys understand that in a rapidly changing legal market, clients have new expectations, constantly evolving choices, and operate in an environment of heightened reputational and commercial risk.

Oberman Law Firm’s strength is its ability to solve complex legal problems by collaborating across borders and practice areas.

Connect with Oberman Law Firm:

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