Partnership Contracts

[Pblais]

It's harder to find a good partner than a good agreement document. The right document usually is not the difference in how it ends up. Also note you can get into subtle differences from state to state and country to country. If those issues come up then you probably had a bad partner and are actually in deeper trouble anyway.

Ideally, with a good partner the agreement covers the things you both care most about. A reasonable partner can be held to their word if it is written down. You rely on clear language you both understand to avoid testing the contract in court. If I show you in clear language then you will have to admit it is clear if you are really a partner.

Stock agreements don't really deal with the things you may actually need to deal with since the issues are more about the partners than the boat. Boats are by the end of the contract just boats and are easily decided upon. People are all different and given two legs wander anyplace they are free to do so.

How you make the contract and it's details matters more than something iron clad. It won't make either partner better than they really are. The process of the contract should illustrate to both that they are undertaking commitments eyes wide open. It's not a sign here, here, and date here and you are partners.

[Sandero]

This topic interests me because I am thinking about selling an interest in my boat. The person that I am considering I have known for 40 years and he got me into sailing, but has been without a boat as he raised a family and has recently begun to sail with me and spoke about getting a yacht again. But he also is not thrilled with doing it all alone and he is not the young fella he was when he had his 40 le Comte.

I'd like to throw this open for discussion and I will begin with some of the basic concepts I thought about.

To establish the value of the boat I looked up the last 5 sister ships sold and averaged their cost and rounded up $2k because I have completely rebuilt the cockpit teak last year which he claims would have cost $5k if the yard had done the job.

Then I divide the value into 100 shares and can sell them as par value.

Shares can only be sold to the partner, ie me to him or him to me or conveyed to a rightful heir upon death who then takes over the responsiblilites of the shares.

All expenses are agreed to by voting in proportion to the shares held. If I sell 49 shares I get to ultimately control all the decisions... if I sell 50 then we have to agree or it doesn't happen.

The maintanence costs and use are directly proportional to the % of shares held. A tentative use schedule is worked out two months in advance but can be traded. If either gives up the dates, the other can use it.

Mooring location and winter storage decisions are voted by shares %.

No expense over X dollars may be incurred for discretionary purchases.

Each operator is 100% accountable for the costs attributable to their errors. If he drops a hammer through the table - he pays 100% to repair or replace.

The boat must be maintained in the condition at the time of closing and the partners share in either the cost and or sweat equity. That becomes a bit hard to do, but I can't see any way around it. Some people have dif skills and work faster than others.

The deal might work because it is easy for him... no looking, no brokerage, 1/2 of everything and he gets into a bristol boat in top condition and one he already knows quite well. We still can sail together which we enjoy and alone which we each enjoy too.

I get to pull out cash and for that give up 50% of my boat time and 50% boat work and 50% of my expenses. And I get help on projects that I sometimes have a hard time doing alone.

Neither may allow any other person to captain the boat.

Does this make sense? Can it work? What do we need to consider?

[Pblais]

All expenses are agreed to by voting in proportion to the shares held. If I sell 49 shares I get to ultimately control all the decisions... if I sell 50 then we have to agree or it doesn't happen.

At 49% anyone would be a fool to sign on when 1% gets them equal status. Unless there is equal risk there is no sense of cooperation. It is the need to cooperate that in the end will turn the tide more often than not. You might give just a little and they might give just the same and suddenly there is agreement. When 49% means accepting the choice (yours) you don't get to gain support when you might have given a small fraction and had full backing. It's far easier to screw over the senior partner - they carry more risk. It's not so hard to take a lump knowing the other guy got it worse.

The contract won't solve the problems because when a partner fails to perform obligations there is a problem that costs you more to collect than it was worth in the first place. They know it too. Contracts that foster cooperation can make up more gaps than those that require force to meet the terms.

[Sandero]

I understand the seeming advantage that the 51/49 share distribution represents. However in this case I am taking this advantage because of the 25 years of blood, sweat, tears and money that I have put in the boat to make it what it is. My knowledge of this particular boat can make no partner coming in as ever being "equal". Bringing half of some "computed value" ignores all the intangibles that I, as the owner bring to this arrangement.

Now if we were thinking of purchasing another boat as partners these intangibles would not apply or have to be considered.

How do you propose that the intangible's value be represented?

Perhaps a clause which states that if one partner is negligent in operation, or incurs expenses and refuses to pay etc. he forfeits shares at 2 x the value of his actions???

[Pblais]

How do you propose that the intangible's value be represented?

Don't get a partner represents the concept perfectly.

You have to give to get. What kind of person agrees to pay fundementally half of everything the other partner demands with no ability to control the costs or veto? Probably not the type of person you want for a partner.

You might do better with an agreement that basically charters the boat to the other partner on a useage cost basis. You are then chartering the boat and retaining full ownership and control. It means you are also responsible for the insurance as well. This places the partner on an even situation since there is a known cost per unit of useage. They have the ability to use or not use as they desire up to the limit of how much you would charter. It would allow you to add as many partners as you need. This is how the big companies do it.

[Sandero]

I don't think that this makes sense in my case and in the case of my friend who would was considering buying a boat. When he takes into consideration all the costs and responsibilities it does not make sense.

So this basically get him half the time and half of everything, and since we are close friends and he respects everything I have done with the boat so far why would he feel that I am going to vote against his wishes?

He keeps saying if he wins the lotto he'll buy a yacht and have me run it for him! hahaha. I don't think he wants to pay me to charter the boat because he's invited to sail with me lots of times... and that feels like charging a friend a fee to borrow my car.

He gets to have the use of a well found yacht - not some "charter" hotel room with no personal touches or charm. heck he's sailed on this boat for thousands of miles coastal and offshore. I really don't see the downside for him... and in the sketch agreement I sent he found no issues with it, but needs to see if he has the money in a few months or not.

[Ex-Calif]

Originally Posted by defjef

I understand the seeming advantage that the 51/49 share distribution represents. However in this case I am taking this advantage because of the 25 years of blood, sweat, tears and money that I have put in the boat to make it what it is.

I may be reading between the lines here but you might want to think carefully about whether you want a partner. You clearly and rightfully have a lot of emotion invested in the boat.

Your friend may also have a lot of time on the boat but your desire to have a controlling interest may become a barrier, particularly at a share ratio close to 49/51. You may always feel like the "owner" and the partner may quickly feel that he can't make the boat "his own" with his own personal touches or have the right to suggest upgrades and changes.

One idea would be to offer him no more than 25% - representing one weekend a month of use. This gets him back into boating and clearly defines you as the controlling partner.

I am in a partnership. It worked well for 2+ years but is falling apart. I can't go into details obviously but having a bulletproof partnership agreement is helping a lot. What made it successful was a true 50/50 sharing of a boat neither of us owned in the past. There was never a problem deciding use of the boat, upgrades, maintenance etc. I can say the fall out is pretty much financial.

I considered joining a 100% owner in his race boat. We actually did the money part of the deal but had not transferred title. In further discussions I realized that our goals didn't match up completely on how to manage the boat and the team. I realized that even at 50/50 he would be the "senior" partner and so I sat with him and had a heart to heart. We agreed to back out the deal. He campaigns the boat with middle of the road success and I just woudn't have been happy spending race money and coming in 3rd and 4th. We are still pretty god friends.

My Dad had two airplane partnerships that lasted 40 years. He and his partner were like brothers and were both so easy going that they agreed on everything 100%. Pretty amazing.

[sanssouci]

Originally Posted by Sea Otter

My wife and I used to say the same, "never share our home on the water with anyone".
But lately we have started to re-think that statement. We have just bought a nice home mainly to use when we cannot sail anymore due to lack of fitness, interest or whatever.
Maybe a co-owner or two could free us from the boat at times to spend more time on land and with that prolong our active sailing life, instead of living on board all the time as we do now and have done for almost 5 years.
Thoughts about this please.
Chris and Béa

Dear Chris and Bea,
So what are you doing about it? Have you found any possible co-owners? We have similar adjustments to make and are wondering how you are doing? We are now living in our house and the boat is drydocked.
Norman and Elaine

[Sandero]

Ex C

In fact in this boat it would be hard for a partner to come in and personalize much bit I am open to "technical" upgrades. And I don't think he wants to "decorate" the boat, as much as use it as it is.

But I would consider his input say about re doing the salon table which is something I would like to do as a woodworker and something he would not because he doesn't have those skills. Yet he might support ME doing it and make suggestions about the design, materials and so forth.

As for sailing issues and technical matters I consider him an equal partner as he is a naval architect graduate, but he has not practiced this. He's a brilliant engineer so there is a overlapping interests and skills.

But you are right he sees it as my boat and this would be a way to buy half the time and half the work and something which is find with me.

[Sea Otter]

Originally Posted by sanssouci

Dear Chris and Bea,
So what are you doing about it? Have you found any possible co-owners? We have similar adjustments to make and are wondering how you are doing? We are now living in our house and the boat is drydocked.
Norman and Elaine

Hi, at the moment we are checking the market for co-ownership and also a slow introduction on the market for Sea Otter. We do not want to sell her now as we have a few years more to do in the Caribbean and the East Pacific. But if people start to know that the boat is for sale, maybe a first step would be to go into co-ownership and then take over the whole boat later. Right now we have no idea what can come out of it all, but we are doing research in the issue together with all our contacts around the world.

The other thing is if we find a co-owner who is interested, would we have the same thoughts about keeping the boat in a good shape, keep it clean and tidy and maintain the boat like we are doing today. How would one know beforehand? All difficult questions. However, it is good to discuss here, it gives other sides of the issue, that we might not have thought of.

Cheers, Bea and Chris

[sanssouci]

Hi, at the moment we are checking the market for co-ownership and also a slow introduction on the market for Sea Otter. We do not want to sell her now as we have a few years more to do in the Caribbean and the East Pacific. But if people start to know that the boat is for sale, maybe a first step would be to go into co-ownership and then take over the whole boat later. Right now we have no idea what can come out of it all, but we are doing research in the issue together with all our contacts around the world.

The other thing is if we find a co-owner who is interested, would we have the same thoughts about keeping the boat in a good shape, keep it clean and tidy and maintain the boat like we are doing today. How would one know beforehand? All difficult questions. However, it is good to discuss here, it gives other sides of the issue, that we might not have thought of.


Hello Bea and Chris;
We seem to be on a similar course, similar destination and similar interests and needs.
How long have you been cruising and how many years can you continue? Where in E.Pacific are you interested?
I have a plan (brainfart) on how a partnership may work for us.
I have been fishing and have a couple nibbles.

(my email address is: norman2004@sprynet.com
Norman and Elaine

[CBarry]

Hey Ex-Calif. Sorry to plague you with multiple requests for a copy of your agreement. But I would appreciate a copy as well
Chris AT SailToLive DOT com

[Sandero]

Below is a proposal to sell equity in a fully owned yacht for the purposes of getting cash out without taking an "equity" type mortgage (if they are even available for older yachts). Please comment. The numbers are just examples.



Terms & Conditons

1. This proposal is for the establishment of a partnership in sailboat sloop, Mfg 36s hull #123456 to be named Sailing Vessel Share Partnership (SVSP)

2. The yacht My Boat and its accessories, owned free and clear by John Doe are valued at $100,000 based on average selling price of 5 most recent sales of the identical hull of the same vintage.

3. The SVSP partnership will consist of 100 shares, 75 common - no dividend and 25 preferred - pays dividend, with a par value of $1,000 each share value equity of $100,000. SVSP Shares represent ownership of equity only.

4. John Doe agrees to sell 25 SVSP preferred shares at par value.

5. SVSP Shareholders do not contribute to the repair, maintenance including mooring, storage and insurance of the vessel and its accessories.

6. The partnership shall lease 100% of the assets to John Doe at $1 per year and he shall pay all dividends on preferred shares.

7. All repair and maintenance including mooring, storage and insurance are the responsibility of the leasee of the SVSP assets.

8. Holders of preferred shares receive full par value for their preferred shares from the insurance settlement in the case of total loss. Insured value is $85,000

9. The leasee agrees to maintain the SVSP assets in the same or better condition as they are at the time of establishment of the SVSP subject to normal aging of components.

10. The sale of 25 preferred shares of SVSP to partner A as follows:

Equity Interest at closing (25 shares) 25% $25,000

11. Computation of partner A SVSP Equity Dividend Earnings

Annual Equity Dividend ($25,000) ~12% $3,000
Monthly Dividend on total equity (25 shares) $250

How it works

John Doe establishes a the SVSP partnership and offers no risk dividend paying preferred shares to partner A giving a 25% interest in sv My Boat

Partner A receives a monthly dividend of $10 per preferred share ($250 total) per month on her 25% equity in the SVSP partnership as long as he holds preferred shares in the SVSP partnership.

If the majority SVSP shareholder (John Doe) chooses to sell the sv My Boat, at the closing of the sale, he will purchase all preferred shares owned by Partner A at full par value ($1,000 each) plus pay any equity dividends due at the time of closing. Preferred shares remain at par value regardless of the change in value of the assets. (All risk is held by the common shareholders)

The share distribution of the SVSP Partnership is as follows:
John Doe 51 common
Jane Doe 24 common
partner A 25 preferred


Total shares 100

John Doe may at any time purchase partner A’s shares at par value ($1,000 e/o) and reduce the dividend payment by $10 per share purchased.

Why it Works – Mutual Shareholder Benefits

Partner A – Preferred Shares

• earns interests 12% ROI (~2x) from SVSP partnership equity shares as opposed to <~6% ROI from typical unsecured investment portfolio
• SVSP share Investment is secured by an asset – $100,000 yacht.
• receives guaranteed fixed $250 per month dividend earning on SVSP shares
• Is not responsible for any costs associated with the repair or maintenance, including mooring, storage and insurance of the assets

John Doe – Common Shares

• Turns part of his equity in his boat into cash – continues with full control of sv My Boat
• Small Dividend is paid (no principal) until such time as SVSP shares are purchased back

[rls]

Ex-Calif
Add another to the growing list requesting copies of your agreement. rrllsell at hotmail.com

Thanks

[wggreen6]

Hi Dan/Ex-Calif: Can you please send me a copy of your now well-worn partnership agreement? (I can see that you have sent it to many folks who inquired).

Thanks,

Bill Green