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The Cons of a 50/50 Capital Company

This article could have been titled “The Pros and Cons of a 50/50 Partnership,” but the cons far outweigh the pros. When partnerships are formed, obvious concerns are addressed. How do each partner’s skill set and experience complement each other? How much will each partner contribute to start the business? How long will they grow the business before they consider selling it? Is it so? … hardly.

Once the business gets going, the economic and industry variables that affect the business will undoubtedly change. Each partner’s perception of the direction the business should take also changes. There are constant decisions regarding the mix of product and service offerings…the decision to enter another line of business or exit one. Should you focus on a higher volume, lower profit margin business model or vice versa? How about a shift to a more capital intensive model? If the business becomes successful, many times potential investors jump in, be it an angel investor or a venture capitalist. Both partners must agree on the investment proposal.

What if one of the partners acquires a business asset, be it a piece of land, a building, a small data center, a thousand servers, or to make matters more complicated, brings an intellectual asset of some kind? When the business is to be sold, what is the value of the asset contributed by the partner? Who is supposed to value it? This can become an insurmountable obstacle. Most buyers know not to value any piece close to what it’s worth on its own.

When it comes time to sell the company, each partner’s financial situation has undoubtedly changed since the company was founded. The consideration by the business 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 sales process of a company go up in smoke too many times because the partners did not agree with the proposed deal. They spend years growing the business and then disagree on when to sell, who to sell to, and/or how much to sell it for.

Business is about return of equity, not all for one and one for all. My suggestion… one boat, one captain.

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