Business Partnership

 
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Old 11-11-2017, 01:04 PM   #1
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Business Partnership


So my foreman has approached me about his desire to either start his own business or take an ownership position in my current business. He has been a trusted and highly skilled employee for almost 20 years and has helped me build this business to where it is today.

In the future, we would both like to simplify this business and move away from general contracting and dealing with the erratic nature of clients under construction, unreliable subcontractors, and other such problems related to being a general contractor, and transition into a single trade, particularly electrical contracting. Our focus in the past has been on general contracting and we have not specifically focused on building up the electrical business, other than self-performing the electrical work on our own projects.

That said, we are going to keep the general contracting business alive for now to help fund the electrical contracting business. I am considering offering a buy in of the assets only, since he has been crucial in helping to build this business through his hard work and loyalty. These assets are transferable to the new electrical contracting business (ie, vans, tools, ladders, etc...).

We are planning on then forming another corporation under a different brand to offer only electrical services. I will be handling the back office including accounting, sales/marketing, estimating, design, client relations and high level project management, as well as jumping into the field when necessary. My partner will be in charge of production and most of his time will be spent working in the field and overseeing all field employees.

I understand the pros and cons of partnerships and understand they often times don't go well. I am hoping that based on our maturity levels and the amount of time we have known each other that we are able to overcome those obstacles and use it to enhance our business and personal lives. We plan on having an operating agreement in place before moving ahead.

I am seriously considering making him a partner for a couple of reasons; 1) It is near impossible to find an employee of his caliber given the labor shortage in the trades 2) Having a partner I can trust would take some weight off of my shoulders, as far as operations are concerned, and will allow for a better overall quality of life for us both. 3) I would like to share not only the profits, but given the volatility of the construction industry, I would also like to share in any future losses. For instance, when there aren't enough funds to keep up with payroll and overhead expenses, it would be nice to have a partner who is willing to keep working until things turn around again without being paid. Rather than laying off an employee and trying to find another quality employee in the future (which is near impossible in the trades).

My questions for those of you involved in a successful partnership:

What does your operating agreement look like? What happens if one of you dies or wants out of the partnership?

What is the best compensation scheme for us as partners so neither of us feel taken advantage of?

Any other input or advice is greatly appreciated.

Thank you in advance.
NJ
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Old 11-12-2017, 01:27 AM   #2
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Re: Business Partnership


You need a rock solid partnership agreement.That means entry and exit plans, survivorship, profit sharing and reinvestment and many many other issues. Once you have a partnership you ARE JOINT AND SEVERALLY LIABLE FOR ALL DEBTS EITHER PARTY CREATES IN THE NAME OF THE BUSINESS.

If you think that guy is going to work harder and for free to keep you afloat when things get thin, think again. That guy is only going to work harder if there is money coming in and the more he works the more he gets.

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Old 11-12-2017, 02:22 AM   #3
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Re: Business Partnership


Hi,
Thatís a though call. By bringing him on as a partner he really has to be bringing something with him to the management side, or you have to be wanting to reward him. maybe potentially looking at leaving him the business in the future. Hard to say without knowing your current ages and future plans.

If you are thinking about bringing on a partner I would think the last thing you would want to do is close down your current business and start up as subcontractor unless you are not doing very well. I would think the move would be to expand your G.C. Business. Again not sure of the size of company but you will have to increase your volume of work by a large degree. You could offer him a management position, benefits, a truck, and a substantial raise and still come out a head of the partnership.

I know it sounds nice to have a partner sharing the burden, but really in my thinking unless you are trying to move up to a volume of work of say 7mill and need some bonding or development money then it prob wonít make financial sense.
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Old 11-13-2017, 07:39 AM   #4
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Re: Business Partnership


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You need a rock solid partnership agreement.That means entry and exit plans, survivorship, profit sharing and reinvestment and many many other issues. Once you have a partnership you ARE JOINT AND SEVERALLY LIABLE FOR ALL DEBTS EITHER PARTY CREATES IN THE NAME OF THE BUSINESS.
Agreed, we will sit down with our advisors and develop an operating agreement. And it will be a corporation or LLC and not a partnership legally.

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If you think that guy is going to work harder and for free to keep you afloat when things get thin, think again. That guy is only going to work harder if there is money coming in and the more he works the more he gets.
I disagree, I think he will work harder knowing that he will be sharing in any profits the company brings in. And I will feel better knowing that when there is a downturn in the business cycle he will not disappear (Risk vs. Reward). It is very difficult, if not impossible for me to find someone of his caliber. I have been looking for over 5 years and have gone through several new hires.
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Old 11-13-2017, 07:48 AM   #5
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Re: Business Partnership


The most successful partnerships I've seen are the ones where there are clearly defined roles for day-to-day operations (for continuity, as well as management) but with the understanding that at any point either could be called upon to cover the others roles...

But the most important part is the end game... that has a huge role in defining everything leading up to it...
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Old 11-13-2017, 08:00 AM   #6
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Re: Business Partnership


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Hi, Thatís a though call. By bringing him on as a partner he really has to be bringing something with him to the management side, or you have to be wanting to reward him. maybe potentially looking at leaving him the business in the future. Hard to say without knowing your current ages and future plans.
He is bringing a very high level of multi trade skill sets to the table and has been a trusted employee for almost 20 years. I have better business acumen and we would complement each other without interfering in each others roles. And after searching for another employee like him for 5 years, it is to the point where he is near irreplaceable. I have been through several new hires who promised me the world and could not deliver.

We are both in our early 40's and I do not plan on having any children so there will be no-one for me to leave the business to anyway, and it seems like it will be a very hard sell come retirement time. I plan on working for as long as I still find enjoyment in it and I am able to stand upright.

Quote:
If you are thinking about bringing on a partner I would think the last thing you would want to do is close down your current business and start up as subcontractor unless you are not doing very well. I would think the move would be to expand your G.C. Business. Again not sure of the size of company but you will have to increase your volume of work by a large degree. You could offer him a management position, benefits, a truck, and a substantial raise and still come out a head of the partnership.
We are both tired of dealing with subcontractors and the customization of each and every project and feel like it would be easier to grow a single trade business where we have more control over the people actually installing our work. It's not to say there won't be problems, but I think there will be less problems than dealing with an erratic client for 6 months and unreliable, undereducated subcontractors, as well as aggressive competition due to the low barriers to entry into the remodeling biz. At least with electrical there is an education and apprenticeship requirement, as well as a test and licensing with continuing education requirements. Unlike the home improvement license in NJ, which is an absolute joke.

As far as management position, he is already my onsite project manager and has a great salary and fringe benefits. He has expressed that he either wants to form a partnership or will form his own company. I actually would prefer that he share in the risk of this business and have some skin in the game. And when times are slow he will not leave to join a competitor but we will institute a cost cutting strategy which may include lowering of our salaries, or whatever is necessary to keep the business afloat until things turnaround.

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I know it sounds nice to have a partner sharing the burden, but really in my thinking unless you are trying to move up to a volume of work of say 7mill and need some bonding or development money then it prob wonít make financial sense.
I disagree, I think it would be nice to have a partner to share in the risks and rewards of the business. And as I age, it would be nice to be able to go on vacation and not have to worry so much about what is going on back at home. We both are modest people and are not looking to be multimillionaires but want to earn enough to take care of our families and more importantly have a good quality of life both at work and at home.
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Old 11-13-2017, 08:16 AM   #7
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Re: Business Partnership


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The most successful partnerships I've seen are the ones where there are clearly defined roles for day-to-day operations (for continuity, as well as management) but with the understanding that at any point either could be called upon to cover the others roles...
That would be the plan, although he is a better tradesmen than me and I am a better business and salesman than he, so we would have some limitations given a long term event.

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But the most important part is the end game... that has a huge role in defining everything leading up to it...
The end game is to make enough money to take care of our families, enjoy our work/home lives and be able to save some money for when we no longer want to work. If the business can be sold in the future then that would be a bonus.
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Old 11-13-2017, 10:17 PM   #8
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Re: Business Partnership


Let me get this straight... Your plan is to make this employee a partner in a new business while getting out of your old one?
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Old 11-14-2017, 06:43 AM   #9
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Re: Business Partnership


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Let me get this straight... Your plan is to make this employee a partner in a new business while getting out of your old one?
In a nutshell, yes. Just spitballing ideas that if I were to decide to exit the remodeling business, I would offer a buy in of the assets of the existing business which would be used in the new electrical contracting business.

I am currently in burnout mode. I plan on taking most of December off to travel with my wife, clear my head and give it some more thought.

Thanks for the input everyone, there are many options.
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Old 11-14-2017, 07:47 AM   #10
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Re: Business Partnership


I wouldn't listen to solidly to any feedback if it isnt qualified. Does the person with positve or negative have DIRECT experience in a partnership? Worked for one? Also qualify partnership. A legally set up partnership with clear defined roles, ownership stakes, survivorship, exit strategy in case one wants out what protocol is, business plan, operating capital, and probably market position and property. That could be two tradesman working out of their pickups but i havent personally seen that but once work sucessfully.

You hear all kinds of negative feedback about Partnerships, and as a business owner involved in the community, Chamber boards, County and City committees, Builders Association boards at the local and state level, Etc I run into a lot of people who have "heard" bad stuff that has happened to a friend or aqquaintiance or some guy who was a good Tradesman but a terrible business person who combined with another good Tradesmen who was a terrible business person and failed in the partnership because it was not clearly defined. Or you hear of very faulty and unrealistic Partnerships formed out of want instead of necessity. Or just crooked people period.

I am not saying that most Partnerships are good, probably 95% of them are not good, but it's because they do not have what I stated above. That's all there is to it, other than whether or not the two people can work together.

What I have also found is most people are very ignorant when it comes to making statements about whether or not two people will be able to work together, often it is their own shortcomings in business and in themselves that they are placing on the perspective partners. I know because it is an instinct for me to do the same thing when I am making a judgement on something of that nature, and I see it all the time. The difference between someone who is astute at business and someone who is not is the person who is able to recognize that about themselves and make changes. At least in my opinion. Many people don't seem to mind making ignorant statements or assumptions...

In my experience having a partner who takes up part of the business that you do not want to do but have the grasp to cover, and hopefully cover well, works very well as long as you are willing to grow the business and understands the size business you need to have both Partners making a comfortable living. Both Partners need to understand what the other partners understanding of a comfortable living is. Mine and one of my partner's are different, but we found a happy medium that works well. I will also say that I feel like we make a better living working together then 90% of the residential contractors that I am personally involved with. More importantly we are able to live the way we want to live and save for retirement or atleast grow our holdings and future residual income.

And we do not do everything ourselves, we have a staff, we use attorneys and CPAs and financial advisors where necessary. We do not take the advice of anyone wholeheartedly, including those processionals, we judge it at face value by its merit in our minds and amongst ourseleves.

I can name at least a dozen times in my short nine-year career as a general contractor that if I had listened to the advice of 90% of the people that where around me I would have lost out on opportunities that have changed my life and my family's and have us in the position that I am not having to work 70 hours a week to make a comfortable living or market in anyway other than the Parade of Homes to stay busy with projects that we want and are good at.

So it can be successful. I know several contractors formed in Partnership some of them in the twenties and 30 million-dollar range who have no relations to one another, they formed a partnership because one was good at operations and the other at sales, or any number of things. It is done and all kinds of businesses other than construction successfully all the time, look at law firms and many medical practices. The problem with construction is that many of us are not educated, self or otherwise, on business and quality business practices. Some realize they need to learn and work their butt off at it and others just complain about the lack of professionalism within the industry.

My only point in this long-ass post is you are an experienced businessman New Jersey, you have worked with your lead guy for many years and you know each other well enough to make these decisions on your own. I would be happy to share my limited advice via email or phone conversation within setting up a partnership that has clear buyouts and survivorship and exit strategy. Mine is very simply set up, and business keeping it simple is Paramount in my opinion.
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Old 11-14-2017, 07:53 AM   #11
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Re: Business Partnership


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Let me get this straight... Your plan is to make this employee a partner in a new business while getting out of your old one?

Any experience in these matters lawn? Ever been in a true partnership like I stated above? Been around 1?

If we dissolved today and I wanted to form a partnership with a master electrician, with no prior electrical experience myself I am confident with some self-funding we would be a successful electrical operation within one year.

For that matter I feel like I would be able to do the same thing with an electrician who wanted to work with me in my general contracting firm assuming that they have experience in construction operations other than just twisting wires.

My asst. Super is from a primarily electrical background, which does me no good other than from a supervising or troubleshooting roll as he does not have a license. But it did not take him long at all to learn how to effectively manage carpenters and painters from a supervisory role, both running punch lists and also he understands very well why we sent who to what jobs and how many to what jobs. Because he has been in construction and understands labor management to an extent that is more than suitable for his age and experience.

Business is business.
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Old 11-14-2017, 08:23 AM   #12
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Re: Business Partnership


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That would be the plan, although he is a better tradesmen than me and I am a better business and salesman than he, so we would have some limitations given a long term event.



The end game is to make enough money to take care of our families, enjoy our work/home lives and be able to save some money for when we no longer want to work. If the business can be sold in the future then that would be a bonus.
While obviously operating on a different level, the above had echo's of a recent thread regarding another partnership with similar skillset breakdown and also with a focus on electrical/plumbing...

http://www.contractortalk.com/f16/am-i-calculating-correctly-369001/


Over the years, I've had a partner and partner(s), in separate businesses and for the most part, all of what Jaws says is true, but a clear defining line is the end game... you may have different versions of what that will be but even if you ambiguously share the same vision of what that will be at this point in time, it will help delineate your path more than you realize... the reason is because everything else that you must address will begin to crystallize and any misunderstandings or assumptions either of you have will out themselves the more detailed you get and it's better to find out before you sign on the dotted line...

While I can appreciate you're feeling burnt out, and your lead guy is looking to grow one thing I will encourage you to do is not jump into it after a months break... take 3-6 months and really hammer out the details before either of you make the commitment for your families... a partnership is much more than an asset buy-in and job role...

With your focus on the positive, we can hear in your "voice" all the reasons TO do it, but it also needs to be tempered with realism, and what's really the clincher would be the reasons NOT to do it... and that would be for the both of you, not just you... if you both can identify, mutually come to grips with and resolve as many of those issues upfront, you'll increase your chances for long-term success...

If neither one you can't think of reasons NOT to do it, that's all the more reason to dig deeper... From what you've posted you've had a successful career and he's been with you for the ride, but if things go south in a new venture, that could make the end of both your journeys a bumpy one...

Think of your planning and vetting of this partnership scenario/opportunity as a 3-6 month remodeling project... what's the end game and what do you need to do to get there... if you can't do that short-term, how do you expect it to happen long-term... you now have two families expectations to manage...

Last edited by KAP; 11-14-2017 at 08:33 AM.
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Old 11-14-2017, 09:13 AM   #13
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Re: Business Partnership


How old are you that you're burnt out ?


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Old 11-14-2017, 09:27 AM   #14
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Re: Business Partnership


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Any experience in these matters lawn? Ever been in a true partnership like I stated above? Been around 1?
Yes, it's called marriage and that's enough for me .

Seriously though, I've seen many partnerships be successful and fail over the years. Your advice about clearly defining roles in a partnership agreement is spot on.

As a business owner, I was questioning the OP's reason for wanting to start a new venture with a partner while "getting out" of his existing business. On the surface, it doesn't look like a great business decision IMO.
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Old 11-14-2017, 11:33 AM   #15
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Re: Business Partnership


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Yes, it's called marriage and that's enough for me .

Seriously though, I've seen many partnerships be successful and fail over the years. Your advice about clearly defining roles in a partnership agreement is spot on.

As a business owner, I was questioning the OP's reason for wanting to start a new venture with a partner while "getting out" of his existing business. On the surface, it doesn't look like a great business decision IMO.
I would agree with that if it is because he is just wanting a change, but it sounds like he feels like there would be a better business opportunity in the electrical side of things for him and his partner.

Also at some point many contractors probably would like to have somebody who can take the reins of the day-to-day operations so that they can enjoy their free time more and concentrate on the business side of things or vice versa and want someone to take the reins of the business side of things so they can handle operations.

My ex-boss is devastated that neither of his sons wanted in on his business, a very attractive one, and he has since changed the name of his company to make it more appealing to sell. He has also promoted his top guy to be his right-hand man and I believe some sort of informal partnership. He does not want to be the hmfic for everyone anymore

I would rather have my number too have a stake in things than just be a high salaried employee. I do not believe a high salary promotes efficiency, loyalty and productivity the same way ownership does. Or percentage of profit. No one is as loyal to their boss as they are to themselves and their own family. That's just how it is

So i can see his view point.
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Old 11-14-2017, 12:57 PM   #16
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Re: Business Partnership


Jaws and KAP,

Thanks for the well thought out replies. You've both given me a lot to chew on. I will give it some thought and figure out what I want to do by January and of course will not rush into it without the proper legal and tax guidance.

I think what may be driving my decision for a change is that it's been a rough year with a couple of crazy clients and the never ending search for quality employees/subcontractors, as well as the aggressive competition. They need to raise the barriers to entry into this business.
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Old 11-14-2017, 01:00 PM   #17
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How old are you that you're burnt out ?
45 next week, I have been in the trades since I was 15, been in business as a GC since I was 24. And my business is a lot more complex, stressful and risky than managing 2 men hanging gutters.

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Old 11-14-2017, 01:08 PM   #18
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Re: Business Partnership


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45 next week, I have been in the trades since I was 15, been a GC since I was 24. And my business is a lot more complex and stressful than managing 2 men hanging gutters.


Yea I'm 45 too. Similar story took over at 20 i get burnt from time to time too. . Your business is way more stressful than mine no doubt. Always been my goal. Keep it small and low stress.

I prefer to make 35% of $4700 (gross from yesterday and till 2pm today) than having 10 guys a big operation and possibly making tons of coin. Specializing is way to go for you with no partner. Just my .02


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Old 11-14-2017, 01:09 PM   #19
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Re: Business Partnership


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As a business owner, I was questioning the OP's reason for wanting to start a new venture with a partner while "getting out" of his existing business. On the surface, it doesn't look like a great business decision IMO.
My reason was clearly stated in the OP

In the future, we would both like to simplify this business and move away from general contracting and dealing with the erratic nature of clients under construction, unreliable subcontractors, and other such problems related to being a general contractor, and transition into a single trade, particularly electrical contracting. Our focus in the past has been on general contracting and we have not specifically focused on building up the electrical business, other than self-performing the electrical work on our own projects.
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Old 11-14-2017, 04:36 PM   #20
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Re: Business Partnership


I would think long and hard about personal character and what you really know about who you are considering working with. One major thing that is a big deal for many people including me about having a partner if they have character:

How many contractors are on here or anywhere know unequivocally that their business would run without a hitch or at least without a hitch that their business could not overcome if they were disabled or injured for 6 months or longer? Heart attack? Stroke? Fall off a ladder? Have a major catastrophe in your personal life or family? I would say maybe 5% of contractors especially in residential could say that, probably closer to 2% just on the sample of people I have met.

People who think that is just for family are not correct in that assumption. From personal experience, the guy who was president of the Builders Association when I was vice president is a partner in a very large luxury home company in Austin. At the age of 42 I believe, right after he took over as president, he had a grand mal seizure and almost died and had to have several surgeries to remove a tumor and was out for almost a year total, at least was not operational for a year. Not only did he still have his company and a job, he was paid the entire time he was down and he received 50% of the profit...

I know for me that helps me sleep easier at night. Definitely have to pick a fighter and a winner for a partner if you are looking for that caliber. Maybe 10% of people would be my high guess. Because it will not be easy for any small or medium-sized company to overcome the loss of half of its upper management and possibly primary Salesforce.

It is not for everyone for sure though, having to grow your company to a size to accommodate two owners and twice as much profit and twice the salary may not be what you are looking for. If you just want to bang Nails all day or run wires then it definitely is not going to be that beneficial in my opinion

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