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 skills-set
and experience complement each other? How much will each partner contribute to
get the business going? How long will they grow the business until they entertain
selling it? Is that it? … hardly.
Once the business gets going no doubt economic and industry variables change which
affect the business. Each partner’s perception of the direction the business
should go changes as well. There are constant decisions with regards to the mixture
of product and service offerings … the decision to get into another line
of business or get out of one. Should the focus be on a higher volume, lower profit
margin business model or vice versa? What about a shift to a more capital intensive
model. If the business becomes a success, many times potential investors creep
in, whether an angel investor or venture capitalist. Both partners need to agree
on the investment proposal.
What if one of the partners acquires an asset for the business whether it’s
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 partner’s contributed asset? Who is
supposed to value it? This can become an insurmountable hurdle. Most buyers know
not to value any one piece near what it’s worth by itself.
When it’s time to sell the company, the financial situation of each partner
has no doubt changed since the company was founded. The consideration for the
company 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
have seen the process of divesting a company go up in smoke too many times because
the partners didn’t agree on the proposed deal. They spent years growing
the business then totally disagree about when to sell, who to sell to, and/or
how much to sell it for.
Business is about return on equity, not “all for one and one for all”.
My suggestion … one ship, one captain.