The difficulties of selling a 50/50 equity partnership
When business partnerships are formed the obvious benefits and concerns are addressed.
- How do each partner’s strengths and weaknesses complement each other?
- How much capital will each partner contribute to get the business going, and to keep it going until it reaches cash flow break even?
- How long will they grow the business until they entertain selling it?
Is that it? … hardly.
As months and years pass, economic and industry variables will change which will affect the business. There are constant decisions with regards to the mixture of product and service offerings, and the decisions to get into other lines of business or get out of certain ones. There will be questions such as … should the new focus be on a higher volume, lower profit margin business model or vice versa? What about a shift to a more capital intensive model and less of a reseller model? On and on …
If the business becomes a success, often times more capital is needed. Both partners need to agree on the investment proposal which includes; who/where to get the capital from, how much capital to seek, how the capital infusion is structured and what to do with the capital.
And what if one of the partners wants to accept capital from a family member? This gives life to an entirely new set of concerns.
What if one of the partners personally 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 intellectual property of some sort. When the company is to be sold, what is the value of the partner’s contributed asset? Who is supposed to value it? These can become insurmountable hurdles.
Years later 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 both. The tax implications of each of these scenarios are probably different for each partner.
Moral of the story …
Partners spend years growing the business then totally disagree about when to sell, who to sell to, how much to sell it for, and what the terms will be.
My suggestion … one ship, one captain … because in a two equity partner business, one person has to be able to make these 100s of decisions without constant stalemates.
Don’t start the company with a 50/50 split and don’t let the equity division ever evolve into a 50/50 split.
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