I see this issue very frequently on both ends of the spectrum, both before there is a problem and after. Two friends enter into a business agreement and decide to share ownership and decision making 50/50 and here in lies the foundation of a problem.
Most of the time, the potential pitfalls of such a decision are not even considered, it is just believed that 50-50 is the fair way to go without seeing the trap this creates for the unwary. Further, even if there are internal feelings regarding who should have more, its easier as it seems fairer to resolve these issues with little or no confrontation by settling on an even split.
Who can say 50/50 is not fair, we all think, and this decision avoids difficult discussions.
No two partners can ever agree on everything especially important issues. I urge you to therefore design a more sophisticated organizational format which will satisfy every-ones needs and allow for reasonable problem solving and decision making when the time comes.
First of all this issue should only occur regarding material decisions, the sell, buy, borrow, merge, close, issues. Issues that truly effect the value and mission of the business. The real important matters, those that should be resolved at the highest level, the Board of Directors level. All operational matters which should be broken up into departments and decided at that level and should not be included in this discussion.This issue is regarding the make or break issues which cause law suits or liquidation. Thus it may be easier to resolve this matter if each partner recognized he is responsible for and thus in control of his department area on an operational basis. This is typically an adequate allocation of power to reduce the larger issue to an easy agreement.
I understand the respect demonstrated and ease of entering into a 50/50 ownership and decision making relationship. It seems like the right thing to do, mutual hard work and respect, doing it together, sharing the good the bad and the ugly equally. Its a great concept but its the stuff movies are made of. It seldom works well as it is unrealistic to expect that every important business decision will be agreed on.
Marriages are 50/50 and look how difficult it is to keep one going. Partnerships share this same quality, certainly there are different issues involved but there is something to be learned through observation, that a business needs to have a clear decision making procedure, there needs to be a tie breaker concept and a final word when disagreement exists, or nothing will ever get done, especially large important decisions that really matter.
Frequently there is a disproportionate investment of time, capital, credit, assets or skill by the partners into the business. No relationship is ever exactly 50/50. Most often its the cash that is respected the most and the one that brings the most cash into the business is typically given the control of the final decision making the 51% with the remaining partner enjoying the 49% share.
Thus when push come to shove regarding important material decisions, decisions that both partners should have input into, one partner, the money partner can vote his extra 2%, the controlling factor presumably affording him an opportunity to protect his investment and the issue is resolved. This path respects the importance of the cash investment, which without no business entity would ever be launched.I understand the value and power of sweat equity, but in the end in today’s business environment, cash is king.
Thus point one, 50-50 business ownership relationships should be avoided, as they result in disaster. Someone must have the ultimate final word, control…tie breaker status.
In fact the law has terms and procedures for resolving this situation as follows: In a 50/50 relationship of ownership interests, when the partners disagree on material issues, if the business is incapable of moving forward because of this material disagreement, its considered trapped in a bottle neck and is therefore at an impasse and in such situations, the court decision will be an orderly liquidation of the assets for the benefit of the share holders.
This is always a disaster for everyone, the worse possible conclusion and to be avoided at all costs, but this can become inevitable if there is a 50-50 shared power and authority and no agreement to important matters, as the business can no longer be effectively run. Now there is a disaster for certain.What about fairness and equity I hear?
One of the advantages of organizing under the laws and operating agreement of an LLC is that profit and loss as well as capital gains can be shared differently then decision making. You could have a 50-50 profit split but a 51-49 decision making split. Or you could have an even profit split but one partner can hold two thirds of the decision making authority, it an be done in may different ways but the effect and result is that one person has final control and gets to say there will be no impasse, there will be no deadlocks as there will always be a tie breaker. While not a complete answer for the frequently implemented 50-50 deal, sharing profit equally and decision making unequally is the best compromise one can make.Is it to late to change if your in such a plan? No, but its far more difficult now.
If logic is to prevail, it should be resolved privately previous to a judge ordering a sale of assets.
(see “more about structuring a 50/50 partnership” successfully, a more recent blog entry )
Call me for help 413-549-2966
Donald Todrin
Ace,
It is impossible to tell you what to do, but I will say this, negotiation is about compromising so everyone gets what they need.
If you need to be vice chairman then that is ne of your terms and you should state it as so and demand your due. Everything else is secondary.
Demand what you need, get what you need or the deal is no good.
Brett
Don -
I am currently in a 60/40 business partnership, I am the 40 percent in an engineering firm. Have been in business almost 3 years. Unfortunately it has come to a point where I want out. The company is an LLC. What are my options as the lower percentage within the partnership? Does he have to buy me out? If so, how do we go about it? Do we look at all profits, equipment, etc, or just the profits? Any help would be much appreciated!!
Donald Todrin
Brett,
Tough question to answer without a whole lot of additional information, but basically, he does not have to buy you out, you really cannot make him, easily, there are many things you may be able to do based on operating agreement, read it. Yes equipment, inventory, receivables, profit all figure into the worth of the company and thus the buy out. It is difficult to comment further without more information. Who is managing director and where does decision making authority rest, with the managing director or with the member, an important question. He can buy you out with a long term payment plan…lots to consider.
Brian T.
hows it goin i am stuck in a 50/50 llc towing company in new jersey. I had some issues that i lost my drivers license for 6 months an me and my so called business partner made an agreement between each other that i was gonna do the office work, advertising, etc. . Everything goes great for a few months (2). He had some family issues an things went south for us , i was getting called the low life business partner . He is hiring people with out me involved, i am not collecting a pay check from the company, the bank accounts have 0 money in them, i am locked out of the company email, so i want out. So i emailed him cause phone calls aren’t getting answered that i just want 2500 dollars to sign the papers, thats like 7-8% of my 50%, thought i was being nice an not going for my full 50%, an send me paperwork so i can leave company cause i don’t want to be responsible for things i am not participating in. He emailed me back an told me -
“I will have to give you a break down on your half an the amount you need to put out for your share of taxes. As for you I’ll keep. your name it works in my favor I need to see all the receipts of equipment purchased within the amount of time you did contribute till now. Correction the state will check so do I just give them your address . The wrecker YOU bought I’m sure will be a great asset to the company. When you choose to reevaluate your thought plan I will waive the tax fees an just be the better adult and pay for a deadbeat so-called partner. I can be reached at this email address or ***-***-**** which is an will still be active. Ps good luck with your new towing company. Have a enjoyable holiday”
i started another company an i bought a truck so i can start over again, i don’t know why my new truck is gonna be a good asset to him cause it has nothing to do with our company we started together. I dont know what to do here, should i jus sign an go an make it a loss, or go back after him ?? If you could help it would be appreciated
Thank You,
-Brian
Donald Todrin
I need much more information to give you any real advice, however, it appears you are getting booted out and without consideration of your ownership interests, he simply cannot do what it appears he is doing, I would get a lawyer and challenge him. Don
John
Donald, I’m a high volume restaurant/bar/nightclub executive that is going out on my own. I have a financial partner that is willing to finance portions of the venues I will be purchasing. He wants to be a partner. I said fine. I told him we could become partners as long as he put the money needed down (40-50%) before owner financing or loans that will buy the rest. I will negotiate all deals and leases. I will manage all operations. I was thinking of giving him 50 percent of all profits and 10 percent in decision making. He is a great negotiator and I can always use his help during those processes. I will carry a salary from the company llc and each business and its llc will pay the corporate llc a management fee monthly to cover those expenses. As partners we agreed to keep all earnings in the company after paying my salary and any normal expenses. Does this sound too good for me the “sweat equity” guy and should I expect him to ask for more ownership before we sign the agreement next month or does this seem fair?
Donald Todrin
I like it. The only issue I see is the 10% decision making percentage for the money investor. He may want to control over 50% of that to protect his money and he would not be wrong.
Brian
Donald- I am in a General Partnership as a side business (computer service oriented). Both my partner and I have other full time jobs. However I may be retiring in the next 3-4 years but my partner cannot retire for at least 17 years. If I retire in 3-4 years I would like to do our business full time (and my partner would still remain part time). On another note, the distribution of work is not equal and the amount of business generated is not equal either. I do about 70% of the work and have brought in about 90% of the business. Given those facts, I was wondering what your thoughts were on how to fairly distribute profits/losses. We are about to sit down and form either an LLC or S-Corp.
Derek Rhode
Hey Don,
Your article was very informative, thank you. I have a person I was wanting to have a 50/50 business partnership and he said he wanted to have 51% and I have 49%. He also said he wanted to put me under officers as a vice president in a LLC but I am a little weary to agree to this. Is there anyway that down the road he could get greedy and boot me out with the 51/49 partnership and me as a vice president? Also should I pick another director position such as a co-founder? All I want to do is make sure that i can stay in the partnership securely as the person with 49% of the company. Is there also a way that i can insure my votes toward decisions are more considered heavily before being disregarded? Thanks Don!
Luis
Hi Donald, I am in a three even split partnership where two of the principals have active working roles in the company as managers and sales. Profits are evely split monthly amongst the three partners with no additinal compensation to the working partners. Should the working partners receive additional compensation such as salary, commission or both? if so, is there a general rule or formula for this scenario where there is a profit split plus salary and commission?
49er
Hi Don,
I am the 49% shareholder in a land surveying PLLC and the 51% owner took a job in September of 09 as he wasn’t willing to go without pay due to the economy. I have effectively run the business alone for all of this year and my “partner”, is still working for this company. He actually enjoyed a company truck, phone and gas card for almost 6 months while working for this company. He recently turned in his card and phone and we are going to distribute his truck as part of the buyout.
Neither of us is really the “money” partner, the 51/49 was on suggestion of our attorney. He paid $51 and I $49. We started our business with loans to the company, I actually bought a truck personally for field use and was paid mileage and subsequently sold the truck to the company. Not sure if that makes me the money person but that was really the only personal expense besides pretty equal loan guarantees.
We have gone round and round on valuations and I have recently agreed to my partners buyout numbers but am having difficulty now getting him to the table. He put a buyout number out there and refused to negotiate so I accepted his number. The buyout agreement has been drafted by our atty and he has already come back to me twice with changes to negotiate up!?!?!?
Our operating agreement is pretty generic, I can provide. Questions….
Can the 51% owner force dissolution and how would that unfold?
What rights do I have as a minority interest and the one who has been running the business for the last eight months?
Thanks for your time!
Dell McDonald
Hello Don,
I have offered 50% ownership to build out a business into a franchise. I would focus on the business development while the other focuses on the product. Thoughts?
Dell McDonald
Hi Donald,
How would YOU structure a 50/50 partnership which includes the 51% decision making provision? That is what other provisions/terms would you include to ensure a successful “marriage”? Succession/cessation planning? Rights of first refusal? What about if an investor wants to purchase business, is there a set price or percentage over a particular multiple you would include?
Don Todrin
Use an LLC and you can design as you chose with a different ration of ownership and decision making…
mary
I have a business in partnership with my sister and brother.
We all contribute equally. We clean vacant properties.
it started like this… Mmm -Bbb- Sss PAY FOR STARTUP COSTS EQUALLY.
mmm-myself &HUBBY – have the idea, the name
bbb-brother-follow through
sss-sis &HUBBY-follow through (she takes all the phone calls and deals with customers) she decided to do this on her own. we did not nominate her.
this means 33.3%
my sister then tells me..WE NEED A BABYSITTER… I THOUGHT AT THE MOMENT, YES WE DO. SHE SAID..My husband can take care of them. I SAID, GREAT.
about 3 days later by brother in law says were gonna split everything in half. meaning mmm25% bbb25% and ssss25% and hubby25%
this was not said in a meeting or anything ..just a quick chat. bbb was not even there. i didnt see a problem with it since we were starting up and needed to buy all the cleaning material. its been about 3 months now.
weve had several properties that only 3 of us participate in cleaning the 4th person, meaning sister or hubby stay home and take care of “their” kids. Not mine.
mmm and bbb were on vacation and were unable to participate in cleaning 3 properties… we still got paid. this time (sss & hubby participated for the first time in cleaning togehter) split equally.
today we will be cleaning an office…. sss will stay home and meet up with one of her clients (other business- we are not involved) and and hubby will work with mmm and bbb
yes brother in law passes out the flyers and all with the help of bbb and sometimes mmms husband. about 3 hours a week if that… it has not happened in about 1 month or so.
I just want to hear it from someone else
should we be splitting it differently
like sss&hubby 36% bbb32% and mmm32%
help help.
iam in a rush. i hope it makes sense… a little confusing.i think.
Peter
Hi Don,
Thanks for this post. It’s been helpful, but I’m still left concerned about entering into a partnership in which I would have the minority interest. In short, I have a concept (sort of a food concept) that works very well with an existing small chain. The owners (whom I have known for several years) very much like the idea and wish to expand their “brand” using my concept. We would continue using their name and branding, so I understand their desire for majority interest (control). HOWEVER, it’s my concept still, and I have many ideas to develop it. I also expect I’ll have more ideas as it progresses. If I’m a minority partner, it seems my “vision” could only be taken under consideration at best. I would have to subordinate my role to their own vision, an this does not appeal to me. Also, this concept, especially when married with a complimentary brand as theirs, has great potential. How can I be sure I don’t get kicked to the curb at some point? Thanks!
Don Todrin
There is a way….I explored it in one of my posts, but it goes like this, if you are using an LLC you have the opportunity to share profits differently then how management decision making is controlled. In other words you can have a minority of profits and a majority of decision making control, this will satisfy both sides, profit vs. control.