How to Handle Problems in a 50/50 Business Partnership
Should You Ever Form a 50/50 Business Partnership? YES
Recently, I was somewhat shocked to find so many business articles saying you should never form a 50/50 partnership. If we all followed that advice, there wouldn’t be many partnerships. Say we both put $50,000 into starting a new business. Are you going to accept a 49% stake and let me have 51%? I doubt it. Will you accept that split if I put in $51,000 and you put in $49,000? Why would you? You would be surrendering control of your $49,000.
It’s easy to tell people to never join a 50/50 partnership but that’s impractical. Many businesses are formed every day that are 50/50 split partnerships. You might be in one. Let’s talk about how we can fix the problems of a 50/50 partnership.
Start by Selecting a Partner You Know Well and Trust
Might as well start at the beginning. It is amazing to me how many people are in troubled partnerships with someone they barely knew when forming the business. I hear stories about how people met over dinner, talked about a business idea, and jumped into a formal partnership immediately.
It takes time to get to know someone’s temperament. You can’t possibly understand how you’re going to work with someone after a couple of lunch meetings. I once helped dissolve an acrimonious partnership that was formed after a single dinner. Within 2 years, these guys were ready to kill each other.
I understand that the usual motivation to get a partner is that the other guy is bringing money to the party. We tend to see the money and not the personality that we’ll be dealing with for our financial future. If you are really excited to start your business and you meet somebody who can toss $100,000 into the pot, you will probably seize the opportunity.
Before starting a formal, legally binding partnership, why not try working together for 2-3 months? If 2 people work on a business plan together, their differences are sure to come up. Just make sure you’re working on a plan and not an idea. A plan contains specifics. What about budgets? How will the startup money be spent? How much money from profits will the partners take? How will work be allocated? Dealing with these issues together will teach you both a lot about each other.
ALWAYS Have an Operating Agreement and a Partnership Agreement
Good grief! Most partnerships with issues have no formal documents in place. I have worked with law firms and other businesses formed by lawyers that had no Operating or Partnership Agreements! There’s no other way to say it. That’s beyond dumb. If you are not a lawyer, you’re forgiven.
Make sure that your Partnership Agreement contains a very thorough Buy/Sell section. That section MUST include terms under which a partner may choose to leave the business.
We never think we will want to walk away. I assure you, I deal with this every day. And look, there is no point in saying that you ‘just want your money back” because a business will not have the means to pay you in the first 5 years.
Have a clause that sets a sliding value over the first 5 years. It might look like a vesting schedule. For example, if a partner wants out in year 2, they get 25% of their investment paid back over 5 years with an interest rate of 6%. There isn’t a lot of incentive to bail under those terms! But, if someone wants out bad enough, the exit plan is defined. That will save a very ugly fight.
Already in a 50/50 Partnership
So far, I’ve covered the basics of how to get into a 50/50 partnership. What if you are already in one and things are getting rough? Relax. Your partnership can be fixed. In a way, it’s a good thing that each party has equal ‘power’. That means we can fix things if we find solutions that are agreeable. Agreement is better glue than a contract at keeping partners together. We can get very creative when building agreements where contracts are impossible to draft. When you finish reading this, look at my partnership problems assessment tool here.
I Start with Definition
All my clients know this. I bring definition to tense situations. When partners say, “he is always taking more money from the business than we can afford,” I ask for definition of the problem and its terms.
What is “always”? The last time I heard an accusation like that, it was based on 2 incidents in a 5 year span. Hardly “always”. What are the rules around owner draws? What is too much? What can the business afford? Getting the emotional piece out of the problem so we can focus on the mechanics usually opens a fairly easy path to resolution. I’ll talk the partners through a discussion about pay. We can define a set amount and we can define a process by which a partner can take a little extra when an emergency comes up. Most new businesses can’t pay partners what they deserve so it’s important to have a way to get some money when the stove breaks or the kid needs braces. We also need to place limits on what any one partner can take without the other partner’s permission. This is very important!
Face it, no one likes to ask permission to take $500 from their own business. You need processes and rules around issues that carry an emotional punch. That’s what I mean by definition. This works beautifully to diffuse the tensions around money. Whenever we identify a friction point between partners, we work to bring definition to the problem and the solution. It works.
Open the Curtains!
The other thing to do in a 50/50 partnership is to get transparent. That means we open up to review any areas where mistrust is starting to bloom. In the example above about partner pay, I would have the partner who oversees the books produce a weekly report showing cash on hand and big bills coming up. Sometimes a partner thinks the business is in better shape than it is. Having more information helps close the differences. When a partner finds out that a big payment is due in a week, it tends raise the level of responsibility.
Open the Window!
It sounds cliche but opening communication always helps with partnership tension. In addition to definition, I ask partners to have weekly meetings to discuss areas where tension has flared. This always works if people do it! You must have face-to-face sit-down meetings with a set agenda. In most cases where a partnership is failing, people have stopped talking.
Remember how it was when you first started? You were practically living with your business partner! Now you communicate by email or text. I normally will moderate a couple meetings. Once partners are talking again, the positive juices start flowing and things get better fast. It sounds funny but having a weekly meeting with just the partners is very therapeutic.
Working out partnership problems is complex. In an equal partnership, it’s not more difficult because working things out always comes down to whether there is a willingness to cooperate enough to fix the issues. If there is enough desire to make things better, adding definition and processes works wonders to make work fun again. And, having regular meetings can help avoid problems from coming back. Not addressing the constant stress of partnership problems invariably leads to burnout.
Once things are better, it’s very important to get your Operating and Partnership Agreements in place with solid Buy/Sell provisions including one for the voluntary exit from the business. Sometimes people just want out.
I’ve guided many clients through the process of adding definition to their partnerships, and, while some are easier than others, they have all worked out. In one case, a partner wanted to leave (burnout) and we worked that out without serious complications. That business is thriving and the partner who left is happy with his decision.
The real key to making it through the process is to start before the tension gets too high. Partnership tension is like cancer. The sooner you deal with it, the easier treatment and more successful the outcome. Wait too long and it becomes terminal. If it kills the business, nobody wins. Dealt with early, the business doesn’t just survive, it will do better than ever.
Chris Reich, Business Moderator