By M. Eric Furlow
February 6, 2006 — (WEB HOST INDUSTRY REVIEW) — While this article could have been titled “The Pros and Cons of a 50/50 Equity Partnership,” the truth is the cons far outweigh the pros.
When partnerships are formed, the obvious concerns are addressed, and questions asked. How does each partner’s skill set and experience complement the other? How much will each partner contribute to get the business going? How long will the founders build the business until they are willing to entertain the notion of selling it?
And this is by no means the end of the list of considerations.
After the business gets going, economic and industry variables will inevitably change over time, and those changes will, of course, affect the business. Each partner’s perception of the direction the business should take may change as well, and not always in the same way.
There are always decisions to be made regarding the mix of products and services to provide; whether to get into a new line of business, or get out of an under-performing one. Should the focus be on a higher-volume, lower-profit-margin business model, or vice-versa?
And if a business becomes successful, potential investors will often arrive in the form of angel investors or venture capitalists. Both sides of a pre-existing partnership will also have to reach an agreement about involving any new investment.
If one of the partners contributes an asset to the business, be it land, a building, a small data center, a thousand servers or, to complicate things further, an intellectual asset of some kind, a value will have to be assigned to that contributed asset in the event of a sale of the company. And valuing such an asset can become an insurmountable hurdle. Who assigns its value? Most buyers know not to value any one piece near what it’s worth by itself.
When it comes time to sell the company, the financial situation of each partner will likely have changed since the company was founded. The consideration for the company 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 process of divesting a company go up in smoke too many times because the partners didn’t agree on the proposed deal. They spent years growing the business then totally disagreed on when to sell, whom to sell to and how much to sell for.
Business is about return on equity, not “all for one and one for all.” My suggestion – one ship, one captain.
M. Eric Furlow is president of Furlow Consulting (furlowconsulting.com), which helps individuals and corporations merge, acquire, divest and value telecommunication and Internet companies.
