The Cons of a 50/50 Equity Business Partnership
This article could have been titled “The Pros and Cons of a 50/50 Equity Partnership,” but the cons far outweigh the pros. When partnerships are formed, the obvious concerns are addressed. How do each partner’s skill set and experience complement each other? How much will each partner contribute to make the business run? How long will they grow the business until they get busy selling it? Is that so? … hardly.
Once the business is up and running, there is no question that economic and industry variables change and affect it. Each partner’s perception of the direction the business should take also changes. There are constant decisions regarding the combination 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 infiltrate, be it an angel investor or a venture capitalist. Both partners must agree to the investment proposal.
What if one of the partners acquires an asset for the company, be it a piece of land, a building, a small data center, a thousand servers, or to further complicate things, they bring an intellectual asset of some kind? When the company is to be sold, what is the value of the asset contributed by the partner? Who is supposed to value it? This can become an insurmountable obstacle. Most buyers know not to value a single piece close to what it is worth on its own.
When it comes time to sell the company, the financial situation of each partner has undoubtedly changed since the company was founded. The consideration to the business could be all cash, all shares, or a combination of cash and shares. The tax implications of each of the three scenarios are different for each partner. I have seen the divestment process of a company fizzled out too many times because the partners did not agree to the proposed deal. They spent years growing the business and then totally disagreed on when to sell, who to sell to, and / or how much to sell it to.
Business is based on return on equity, not “all for one and one for all.” My suggestion … a ship, a captain.