A Tale of Two Partnerships [Video]

After 50 years in business starting or working 20+ companies, people ask me to tell them stories of what I’ve learned. In this video, which is my first, I share two stories about healthy and unhealthy business partnerships (including one where my partner pointed the shotgun clause at me, and I pointed it back at him). I’ve titled the post, “A Tale of Two Partnerships”.

This is a transcript of the video, provided for those that prefer reading:

Hey, it’s Grayson Bain coming to you with my very first video. And I just wanted to share some stories from the last 50 years of being in business with various partners and senior managers. This morning I come to you with two specific stories: one with Jacob, Co-founder of Rocky Mountain Bicycles, and the other is Ron, partner in George’s Cycle.

Let’s first talk about Jacob. Jacob started as a mechanic at West Point Cycles and he was specifically interested in creating bicycles that were stronger than the typical 10 speed of the day, using parts that were available throughout Europe and in Japan. That was not a mountain bike. In fact, there was no such thing as a mountain bike – the words weren’t even in existence. There were bikes and they went on the road (10 speeds predominantly) and then there was mountains where you hiked. But there was no mountain bike.

And so we were kind of figuring out how to build a bike that would work on a trail – a stronger quality bike. And Jacob was really good at this. He’s really good at sourcing parts, etc. But we needed a company vehicle beyond the four bike shops that we had that would legitimize our buying from suppliers around the world.

So we started a small wholesale division of West Point Cycles called Rocky Mountain Bicycles. And part of this agreement together was that that would be a separate company, but have the same share structure as West Point. Now the share structure in West Point was I was the majority owner and Jacob and Sam were minority owners, and so they also owned the same amount in Rocky Mountain Bicycles.

One day Jacob and I had gone to Sam and said, “We’d like to buy you out. You take a larger portion of West Point Cycle shares.” And that left myself and Jacob as partners in Rocky. And then Jacob came to me not long after, about a year later, and exercised what’s called the shotgun clause – which means that he gave me a price, and he felt it was book value, at my share value, which was about a $50,000 book value, if you looked at the balance sheet, and subtracted the liabilities from the assets. And the balance was about $50,000, and I owned about 60% so you could see how much I would get from that. No goodwill. He felt that was a good valuation.

Now I was really focused on business building, so I saw Rocky Mountain and these retail stores, and their balance sheets, and how to raise more equity, and how to get the best staff, and best buildings, and try to figure out everything that would work so that we would continue to make a profit. Jacob was much more interested in the actual work involved in building Rocky Mountain Bicycles, and the quality of the bike, and how to source the parts from suppliers, and then how to put those into a bike, and build that particular bike.

So I thought we had a great partnership, but it wasn’t shared so much on values and principles, it was shared on the project. And what happened when he came to me with this shotgun clause, he was saying, “You’re not interested in running this thing. You’re just interested in the business. And I want to take this whole thing on.”

So i looked at the whole thing, and looked at potentially a new partner, that would come in as a silent investor in Rocky. And I thought, “I think there’s more value than just the book value here. so I want to buy it from you.” And I simply turned the shotgun from pointing at me to pointing at him and saying, “Well, I’m going to pay you $5,000 more than you want to pay me at your share value and your percentage shares, and I’m going to buy you out.”

Well, that just shocked him. He was very angry and not at all thinking I would ever do that, because then I’d have to be the managing director of Rocky Mountain Bicycles and how and on earth was I going to learn all that?

It went through. He ended up with the two-year non-compete, which was part of our shareholder agreement, where he couldn’t stay in the manufacturing and wholesale business for two years. And then he started Kona Bicycles.

That’s unfortunately a story that hasn’t got a good ending. 35 years later and the mountain bike is famous around the world (Rocky Mountain Bicycles), and our relationship is non-existent. and I’ve found a lot of founding partners that have the same issue. They really build the company based on the project and the quality and the skills they have, but don’t really look much at the value of what they carry inside, or what the principles of the company are and how they share that. And so, in a sense, what really matters, the genetic code, I would say, of the individuals and the company, are ignored.

The other story though is much nicer. It’s a story from George’s Cycle. When I went up to Edmonton and started working in a shop that was 19,000 square feet of bicycles and sports – this guy, when I went up and started managing it and then bringing supply from Vancouver, and doing a bunch of renovations – this guy named Ron, who was a manager of a small local motorcycle bicycle shop, would come over and talk to the staff.

And he knew Edmonton really well. For me, it was a strange town to me. And he knew the shop, he knew who was in, the customers even would come in, and he’d greet the customers in my shop. And I thought, “This is weird, you know, my competitor coming in and always comparing things. What was going on?”

So I just thought, “I’m just got to tell him to stay out.” And then as I was thinking about it, I thought, “I’m going to take him out for lunch instead and ask him to run the shop.” Because I didn’t want to stay for more than about four or five years in Edmonton.

He agreed to stay and run the shop, as long as he could get a profit share, which I was fine with. Over the coming roughly four years, he ended up not only being a profit sharer in the company, but he actually ended up buying shares. And he did that by me arranging what’s called a funded buyout. Basically I would fix the price I had, in terms of every year, I would say, “This is the profit I want, and no more, based on a percentage of my equity.” And he would take any excess profit and then pay it to me, so that he could buy my shares out of the trust that I put my shares in. And he became the effective owner, even though he was a minority shareholder, he was also the CEO.

And we had a great relationship, as I went back to Vancouver after four years. Unfortunately, he died an untimely death from complications with cystic fibrosis. But his family remains in warm relationships with myself and my wife. And his daughter especially is really close.

What do I say about these two relationships? Well, I think what it’s proven to me over the years is, yes, you can find people with great skill and acumen. But if you’re not also building a company based on the values and principles that you share together, as well as in the company, it’s not going to work long term. You’ll end up with fragmented relationships and tough times. So let’s talk at some point – I’d love to hear your comments on this video, and I’d love to engage in a dialogue with you.

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