This article might be titled “Pros and Cons of a 50/50 Equity Partnership,” but its cons far outweigh the advantages. Once the partnership is formed, obvious concerns will be addressed. How do the skills and experience of each partner complement the other? How much will each partner contribute to start the business? How long will they grow the business until they consider selling it? Is it right? … just enough.
Once a business starts, it is certain that economic and industrial variables change, which affects business operations. The perception of each partner about the direction of the business is also changing. There are ongoing decisions about combinations of products and services… decisions to move into or out of a different line of business. Should focus on business model with higher volume, lower profit margin or vice versa? What about switching to a more capital-intensive model? If the business turns out to be successful, it often happens that potential investors come in, be it angel investors or venture capitalists. Both partners must agree on the investment proposal.
What if one of the partners acquires an asset for the company, be it land, buildings, small data centers, thousands of servers, or more complex the problem brings some type of intellectual property. When the business is about to be sold, what is the value of the partner's contributed assets? Who rates it? This can become an insurmountable obstacle. Most buyers know not to value any coin close to its own value.
At the time of the sale of the business, the financial position of each partner has certainly changed since the establishment of the business. The consideration for the company can be all cash, stock, or a combination of cash and stock. The tax implications of each of the three cases are different for each partner. Too many times I have watched the process of selling a business go up in smoke because the partners disagreed on the proposed deal. They spent years building the business and then completely disagreed on when to sell, to whom, and/or how much to sell.
Business is about return on equity, not "all for one and one for all". My suggestion... a ship, a captain.