The BusinessMakers Radio Show

Episode #450: Daniel Krohn

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Russ: Welcome back to The BusinessMakers Show. It's featured guest time and I'm very pleased to have with me Daniel Krohn, Attorney at Law and Philosopher. Daniel, welcome to The BusinessMakers Show.

Daniel: Thank you, delighted to be here.

Russ: You bet. Well tell us about your practice.

Daniel: Well, my practice at this point is a matter of prevention of disputes. For about 20 years I did commercial litigation and then decided a lot of it could be prevented, so I work with young, growing businesses to keep them out of trouble.

Russ: Fantastic, preventive. Preventive medicine's a big thing right now too so we're learning how to get in - ahead of the problems, that's really cool.

Daniel: Well, I stole from medicine a bit in that I describe myself sometimes as a Primary Care Attorney for Entrepreneurs.

Russ: All right, really cool. Well, as you well know our audience, uh, is your target audience too and it seems like you might have based that practice on the fact that you represented many of them that had problems that could've been prevented.

Daniel: Very true, very true. A lot of problems that could've been prevented starting with - and I can talk for hours on this so tell me where you want me to go - but starting with disputes among co-owners of a business. Yes, if there's more than one owner of a business, there are a lot of things that should be thought of in advance and written down because one cannot anticipate everything that fate might bring.

Russ: Wow, okay, okay. So you must be suggesting right up front if there's more than one owner, that you definitely need a partnership agreement - partnership type agreement.

Daniel: Partnership agreement or could do an agreement among shareholders if it's stock or with an LLC among the members, but definitely there should be an agreement that covers a lot of things but certainly what I call the four Ds of disaster.

Russ: Four Ds of disaster, okay.

Daniel: Yeah, somebody mentioned that to me long ago the four Ds of disaster being Death, Disability, Divorce and Disagreement.

Russ: Okay. That's interesting, the first three, Death, Disability, Divorce are obviously huge problems but the fourth one, Disagreement, that just means wow, you know, doesn't have anything to do with outside forces at all, right?

Daniel: No, that's when it gets to a this company ain't big enough for the both of us sort of disagreement. We'll always have disagreements from time to time, but if there gets to be a really big one it's nice to put in a mechanism so that can be resolved without necessarily killing off the company.

Russ: All right. So, I want to talk about Disagreement more but first, the first three, I mean it seems like they're just logical requirements these days, so you still find that divorces and deaths that are not addressed at all and turn into major disputes amongst partners?

Daniel: Oh certainly because what happens with the first three is there - the odds are there are new owners that were not initially anticipated so, taking death for example if you've gone into business with someone, do you know whether or not you want to be business partners with whoever inherits from them, and you might not even know who they are. And that can cause problems so it's nice to set up in advance a mechanism where you could buy out their interest at a fair price so no one's ripped off, but the business doesn't killed by disagreement among a flock of new owners.

Russ: Right, and so I would see how a divorce could cause those kinds problems too and those are obvious and you're highly recommending that - particularly startup businesses we're talking about - address those up front. So, but how do you recommend that they handle just disagreements?

Daniel: Well hopefully they can discuss things until they agree on most things, but if it gets to be a really like I say, this company ain't big enough for the two of us, then most typically we will put into an agreement that both will sign off on, uh, what some people call a Russian Roulette clause or what have you, uh, where, uh, say we were partners - I would send you an offer and say $500,000, you can either buy me out for $500,000 or I'll buy you out for $500,000 and then you get your choice. But, in any event that keeps the - that keeps me from making an offer, hey I'll but you out for 10 bucks. That keeps me honest in the amount I set, but it also provides that if you have more than one person as owners of the business, be it, uh, partnership or corporation or LLC, that there's a mechanism that if they can't get along anymore or have different visions they can in a fair way split and go down the road.

Russ: Okay, okay, makes sense. It seems to me from experience I've had that one might - I might make an offer to you, I'll tell you what I'll do I'm going to buy you out Daniel for $50,000 but I will also agree to share, you know, 15% of profitability far into the future. Which, you know, is sort of a customized version of what you said and I would think that you'd try to avoid that kind of flexibility in the very beginning. Is that right?

Daniel: In the very beginning yes, like to keep it simple. But that could be done and you could still have a clause that that flips either way to keep you honest in the offer that you make.

Russ: Okay, okay, really cool, all right. So, the four Ds, that is what you think is the most common, problems that need to be avoided up front?

Daniel: Well, those are the most obvious, but there are other things that I encourage people to talk about, uh, when they're starting a business together to make sure they're one the same, uh, same page. Why are they - for one, what is their goal? Why are they in business? You can have I can imagine 3 business partners all with legitimate goals who are heading for problems if one say wants - is a serial entrepreneur; wants to get this business, new technology, whatever, build it for 3, 5 years, sell it and go to the next project. Another one wants a place where he or she can work for the rest of their career doing what they enjoy and having some control so they're looking a 20, 30 year span. And then you could have yet another one who is trying to shoot the moon; who wants to do a Steve Jobs or a Bill Gates and build this business until they can sell it for a ton going public. And all 3 of those are legitimate goals but they certainly differ in how a business moves forward, so it's best to have that discussion early.

Russ: Right. And so do you ever get involved in a situation like that where you listen to 3 different alternatives and you make suggestions about maybe there's some commonality if you approach it this way, or do you just sort of back up and say you guys go figure it out and then I'll try to write it up?

Daniel: More the latter but there have been occasions where I've kept people from going into business together not - not even knowing it at first; I've spoken on this topic a few times at the Houston Technology Center as part of their admission program and otherwise and I've been told that there had been people who after listening to my talk had the conversation and decided they should not be partners.

Russ: Which is good, right?

Daniel: Oh it saves them a fortune and a lot of agony.

Russ: Yeah, absolutely, absolutely. Well I really appreciate you sharing this with us. You mentioned a while ago LLC and it sparked a memory from a prior attorney that we had on the show too, uh, this had to be at least 5 years ago, maybe 6 years ago and back in that era the debate was whether or not a startup company should be an S corporation or a C corporation. Today we have LLCs and LLPs, are there still even S corporations starting from the beginning?

Daniel: Yes. There are some and LLCs have just added more choice to the situation. Often it's driven - and I won't claim to be a tax expert, but when starting a company people should have a tax adviser because much of it is, much of the decision is tax driven. Then with LLCs one can also be quite creative in how they're managed, how they're set up; they're like a partnership in that regard, but they have the limited liability of a corporation.

Russ: Okay, so some people are staring a new company they need a guy like you and they probably also need an Accountant and that would help them come up with the right structure for their company.

Daniel: Exactly, exactly...

Russ: Well Daniel, I really appreciate you sharing your perspective and some time with us, but before I let you go, uh, as our audience knows, I introduced you as Attorney at Law and Philosopher; where did the Philosopher, uh, part come to your description.

Daniel: Well, some 20 years ago or so I was involved in a business group of where we got together Breakfast once a week and helped each other out and discussed things and learned and one morning they made me the agenda - Dan doesn't seem like a lawyer, what does he seem like? And, uh, apparently I'm - I was more pleasant than their image of attorneys for some reason, uh, and they concluded that I was a philosopher. Someone tossed that out and everybody just jumped in - yes, that's what you are. To the stent I am, it's digging deeper in that, what do the clients really want and trying to help the clients be happy. A lawyer typically doesn't work that issue.

Russ: Doesn't worry at all about happiness, right?

Daniel: Right, but when I'm a consulting philosopher that is the issue because bottom line, everyone wants to be happy, people define that differently and how might I assist them in getting there.

Russ: Well Daniel I really appreciate you sharing your business perspective with us and our audience here today.

Daniel: Russ, I really appreciate the opportunity to do so.

Russ: All right, and that wraps up my discussion with Daniel Krohn, Attorney at Law and Philosopher, and that wraps up this interview at TheBusinessMakers.com.