Why You Should Never have a 50-50 Business with a Partner
After working with small businesses for over 15 years, I have to answer this question with a NO.
I always try to persuade any client who I work with not to ever have a 50-50 ownership business. This is always a tough conversation to have because in most instances, the new business venture sounds exciting and two people are very committed and ready to move forward with a jointly owned venture and they have dreams of having this super positive mutually rewarding business relationship and making all this money.
The last thing I ever want to do is to get in the way of building a successful business. But this advice I give is meant to protect the business that these two people will be working so hard to create. Why am I so against 50-50 businesses?
Well, at the beginning of a business, no one is thinking or even wants to think about the things that can go wrong or that will cause challenges in business building. But, I can state with 100% that nothing ever goes according to plan and that with any successful business, there will be challenges, difficult choices, and disagreements. Do not worry about this- it is a necessary part of building a great and profitable business. Instead, understand this and plan for it.
Based on the statistics, there is an over 88% chance that these two business owners will at some point face some significant conflicts and stand stills when it comes to a major business decision or transaction. When a business is set up as a true 50-50 structure, both the business and the legal dynamics create an impasse environment. There is nothing to help. Each person will make himself or herself go crazy. So, what happens in the typical situation is that the business is the victim to this. The business dies as the owners fight over control and what should be done. With the owners focused on the dispute, no one is minding the store, taking care of customers and sustaining the business. All the assets both business and personal go to the lawyers they hire. It is really a sad outcome that I and many lawyers see all the time.
I am a business lawyer but I have business litigation and dispute lawyers who make a very good living just mediating or litigating business divorces among 50-50 partners. As a planning lawyer, the best way to deal with this is to not have a 50-50 business structure to begin with. Between two owners, one should have the ultimate decision making power in the event of a dispute.
There are specific ways to get each one to receive the same economic deal as a 50-50 but when it comes to business decision making which is the necessary process to build a business, there should be one who trumps at the end of the day. Now. there are some advanced planning methods used by business lawyers to allocate the trump decision among the two owners if it makes sense. So it does not have to be 100% one way. The point here is that the business should come first as this is the best way to preserve the value that the two owners will be working so hard to create.
If two owners insist on a 50-50 structure, then the next best answer is to have some prenuptial business planning in a shareholders agreement. The most common technique is what is known as a buy sell arrangement. This is an automatic process which kicks in if there is a stand still that cannot be resolved and it results in one owner buying the other one out (usually after an auction process for price).
Short URL: http://www.intelligentbizplanning.com/?p=63
Posted by Amyli McDaniel
on Dec 11 2008. Filed under Business Planning.
You can follow any responses to this entry through the RSS 2.0.
Both comments and pings are currently closed.