Clearing the Confusion with 50/50 Partnerships
Hi, I’m Brett Cenkus, a business lawyer and a business consultant. This is another video in our series about partner-proofing your partnership or mastering business partnerships.
Now, last time we talked about accountability. One of the most, if not the most, important thing you can bring, trait you can bring to your business partnerships and other partnerships in life. I told you that this time we would jump into some decidedly nuts and bolts structure kind of stuff so we’re going to get right into it.
We’re going to talk about something that, if you’re in a partnership, you almost certainly had to talk about at one point. And, if you’re not yet in a business partnership, it’s probably on your mind. That question is “what percentage do we each own in this partnership? Are we 50/50? Are we 51/49? Are we 48/42 or something else, like how do we split up the equity?” We’re not going to talk today about the financial implications. That’s pretty obvious, right? If you own 51% and I own 49% of a partnership, you make 2% more than I do in terms of the distributions.
We’re going to talk about control. Are 50/50 partnerships a good thing? That’s today’s topic. Just about any business lawyer you’ve talked to, any corporate lawyer – people who do what I do – are going to tell you “don’t do a 50/50 partnership.” They’re going to say that it’s a terrible, terrible idea.
Now, the reason they say that is because of the possibility of stalemates. It’s because there exists the possibility that the two parties can’t decide and that they don’t know what to do. They’ve got to go fight things out in court, find some other way to resolve their disputes. So, when you do what I do you spend time thinking “I want to make sure this works, I want to do a great job for these clients, and I want to make sure that what I gave them – the solution – makes sense.” You burn a lot of calories on that kind of thinking, so I understand the idea that you don’t want to walk them right into a stalemate or a problem, where the two of them each own 50% and can’t make a decision. That’s a real risk.
Another risk is the economic one that I said we won’t talk a lot about. But financially, in a 50/50 structure, you’ve got to share more of the business. Now, 51/49 isn’t a big tweak but 80/20 or something, that clearly is. So, there’s the sharing of profits to consider.
Then there’s also the issue, fundamentally, not among you and your partner, but among the employees and the vendors and the like, of who’s in control of this thing? Right, so there’s that issue which is a real-world issue. There’s sort of nothing less successful, it would appear in the world of M&A (and I do a lot of that) than the “merger of equals”, or the deal where it would appear that they couldn’t decide who was going to be the CEO so they’re going to be two CEOs or co-CEOs. Far and away, there’s a lot more blood in the streets from those structures that I’ve seen than have been successful. That’s kind of a unique thing.
There is a very real vulnerability to your business and your partnership if you don’t work out who will wear the CEO hat. Who do people think the buck stops with? What’s my scope of authority? What’s yours? These questions have to be considered and addressed or can be very real issues. But you can overcome that in a 50/50 world and we can talk about that. One way to do so is to just agree that you’re 50/50 on decisions in the closed office, but out there one of you is in charge of operations the other is in charge of the customer facing, the vendors, etcetera. I’m in charge of finance, you’re in charge of marketing. There are ways to divvy up the world that make it clear.
Those are three big problems, right. So, one is economic, one is the piece about who’s really in control and the third is stalemates.
Let me tell you the best thing about 50/50 and why you should consider 50/50. Now you should never consider 50/50 when what’s in your mind is “mmm this should be 75/25”. Right, you’re thinking “I brought more of this, I’m going to give more to this, I’m the more natural person to lead this”.
Like, if that’s where you’re at, you don’t want to settle for 50/50. It’s critical that you’re honest with yourself and each other. We talked about accountability and acknowledgement and understanding what’s true last time, and just being like brutally honest about the situation and with your partner. If you really think that you’re the one to lead this, then you should take the extra equity. And, it’s probably not 51/49, it’s probably 60/40, 70/30, whatever it is, right. Do that. That’s the right fit for that world.
Where 50/50 is a great fit is where you really think you’re pretty equal. And, someone, some business lawyer convinced you, one of you has to be 51/49.
Let me tell you the risk here, right. Your biggest problem if you’re 51/49 and you’re on majority decision governance standard (which means when there’s a vote you need 51%), meaning the person with the 51% can decide everything, and that person is you: the risk is that that’s what you do. The vulnerability is that you take control, and you make decisions, and that the 49% person feels railroaded, not involved, not respected. Over time, if they felt like they were your peer, but then gave this little concession just to make the deal happen. You could have an extra 2%, but it’s a massive 2%. It’s huge. The economics of it aren’t huge. The control of it can be huge and if you’ve got other shareholders and things, it may not be as big. But, if there’s two of you and it’s 51/49 and the decisions are going to be made on a majority standard, its enormous and you run a real risk of the other side thinking “I don’t have any say here”. And, they expected to be close to your equal and now they’re as far away from it as could be.
So, the risk is that your partner’s going to be unhappy. The risk is that you don’t recognize – and I hope you do, but you might not recognize – what you’re doing to them and making decisions without them.
Between two equal people 50/50 works great if they can make decisions together. Now how do you know that going into it? If you just met this person at a meet-up, launching a 50/50 business is probably an enormous risk. If this is a person you grew up with and you’ve worked with or you’ve got history with, if it works well, the best partnerships, they’re deciding everything together anyway.
Like, my marriage with my wife, we’re not always perfectly aligned, but in the end we come to a decision and we’re good with it. And, if we aren’t, like if we worked on 51/49 and I just said “well I made that decision”, there could be a lot of resentment, and that’s not good, and maybe building a structure where I’m required by vote to be 50/50 is the better thing. It’s more work, no question. It can be more frustrating. If I could have gotten a 51/49 set up where I could have just said “I decided” and that was that, that might require less compromise on my part. But there’s a certain relationship, and marriage is one of them, where (not everyone believes this but I do) you have to get good with every decision anyway.
Figure it out. Why would I set up a structure where I had the ability to make the final decision? Like, that’s not good for this relationship and partnership. So again, there’s no simple answer and the easiest thing in the world is to criticize, to poke holes in something that exists.
50/50 is not perfect, but do not listen to somebody who tells you, “you should never, ever do it.” If you and your partner have trust and you believe this is someone you can figure things out and that you really ought to both be equals then 50/50 makes a lot more sense than 51/49. At a point in another video we’ll talk a little bit about 49/49/2, which is way of having someone else cast a deciding vote.
The other thing to think about is if you do a 50/50 and you do set up the possibility of stalemates, you absolutely have to decide upfront about resolutions of conflicts and we can talk about those in another video – some of the more nuts and bolts stuff. And, you also have to think about buy/sells so that’s all for a future day.
For today know you should not let a business lawyer or consult talk you out of thinking about 50/50, but you have to make some serious considerations, know yourself and be honest. The accountability stuff we talked about earlier in the series is right for this situation, because it absolutely is right for a lot of issues in business partnerships.
So, if you agree, I want to hear from you. If you disagree, I also want to hear from you. Reach out! Contact Me Here. Appreciate you stopping by today.