This article could have been titled “The Pros and Cons of a 50/50 Equity Partnership,” but the disadvantages far outweigh the pros. When partnerships are formed, obvious concerns are addressed. How do each partner’s skills and experience complement each other? How much does each partner contribute to the continuation of the business? How long will they grow the business so they can enjoy selling it? Is this it? … hardly.
Once the business starts, there is no doubt that economic and industrial variables are changing which affects the business. Each partner’s perception of the direction the business should go is also changing. There are ongoing decisions regarding the mix of product and service offerings… the decision to enter or exit another line of business. Should the focus be on a larger volume, a business model with a lower profit margin, or vice versa? How about switching to a more capital intensive model. If the business becomes successful, potential investors often sneak in, whether they are an angel investor or a venture capitalist. Both partners need to agree on the investment proposal.
What if a partner acquires an asset to operate whether it is land, a building, a small data center, a thousand servers or to complicate matters further, contributing to an intellectual asset of some kind. When the company is sold, what is the value of the assets contributed by the partner? He’s supposed to appreciate it? This can become an insurmountable obstacle. Most buyers know not to rate any one item near its value per se.
When the time comes to sell the company, there is no doubt that the financial position of each partner has changed since the founding of the company. The consideration for the company can be 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’ve seen a company’s divestment increase many times over because the partners didn’t agree on the proposed deal. They’ve spent years growing the business, and then completely disagree about when to sell, who to sell, and/or how much to sell.
The business is about return on equity, not “all for one and one for all.” My suggestion…one ship and one captain.