The Drawbacks of a 50/50 Equity Business Partnership

“The Benefits and Drawbacks of a 50/50 Equity Partnership,”

“The Benefits and Drawbacks of a 50/50 Equity Partnership,” but the disadvantages far outweigh the benefits. The obvious concerns are addressed when partnerships are formed. How do the skills and experiences of each partner complement one another? How much will each partner contribute to get the company off the ground? How long will they continue to grow the company before considering selling it? Is that all there is to it? … hardly.

Once the business is up and running, economic and industry variables will undoubtedly change, affecting the business. Each partner’s perception of the business’s future direction shifts as well. There are constant decisions to be made regarding the mix of product and service offerings… the decision to enter another line of business or exit one. Should a higher volume, lower profit margin business model be prioritized, or vice versa? What about transitioning to a more capital-intensive model? If the business is a success, potential investors, whether angel investors or venture capitalists, will often come in. The investment proposal must be approved by both partners.

What if one of the partners acquires a business asset, such as land, a building, a small data center, or a thousand servers, or, to complicate matters even further, contributes an intellectual asset of some kind? What is the value of the partner’s contributed asset when the company is sold? Who is supposed to appreciate it? This can quickly become an insurmountable obstacle. Most buyers understand that no single piece is worth more than it is worth on its own.

When the time comes to sell the company, each partner’s financial situation has undoubtedly changed since the company was founded. The company’s consideration could be all cash, all stock, or a combination of cash and stock. Each of the three scenarios has different tax implications for each partner. Too many times, I’ve seen the process of divesting a company fail because the partners couldn’t agree on the proposed deal. They spent years building the company and then couldn’t agree on when to sell, who to sell to, and/or how much to sell it for.

Return on equity is important in business, not “all for one and one for all.” One ship, one captain, is my suggestion.

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