The cons of a 50/50 equity business partnership

This article could have been titled “The Pros and Cons of a 50/50 Partnership,” but the cons far outweigh the pros. When partnerships are formed, obvious concerns are addressed. How do each partner’s skill set and experience complement each other? How much will each partner contribute to start the business? How long will they grow the business before they consider selling it? Is it so? … hardly.

Once the business gets off the ground, the economic and industry variables that affect the business undoubtedly change. Each partner’s perception of the direction the business should take also changes. There are constant decisions regarding the mix of product and service offerings… the decision to enter another line of business or exit one. Should you focus on a higher volume, lower profit margin business model or vice versa? How about a switch to a more capital intensive model? If the business becomes a success, potential investors often jump in, whether it’s an angel investor or a venture capitalist. Both partners must agree on the investment proposal.

What if one of the partners acquires an asset for the business, be it a piece of land, a building, a small data center, a thousand servers, or to complicate things further, contributes an intellectual asset of some sort? When the company is going to be sold, what is the value of the asset contributed by the partner? Who is supposed to assess it? This can become an insurmountable obstacle. Most buyers know not to value any piece near its own value.

When it comes time to sell the business, each partner’s financial situation has undoubtedly changed since the business was founded. The consideration for the business could be all cash, all stock, or a combination of cash and stock. The tax implications of each of the three scenarios are different for each partner. I’ve seen the process of selling a company fizzle out too many times because the partners didn’t agree with the proposed deal. They’ve spent years growing the business and then disagree on when to sell, who to sell to, and/or how much to sell it for.

Business is about return of equity, not “all for one and one for all”. My suggestion… one ship, one captain.

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