They say you should never go into business with a friend, but millions of people do it anyway. In taking the leap of faith, nearly all of these people split ownership in the business equally. So, is 50/50 shared ownership a good idea?
The 50/50 shared ownership concept seems like such a lovely idea. Each owner contributes the same investment in the business and works equally hard to make it a success. You can almost hear a Disney movie soundtrack playing in the background as butterflies flap gracefully around the office of the business. Okay, office/garage.
Well, let me throw some slasher horror flick into your fluffy little scenario. Splitting ownership equally is a terrible idea. It also happens to be one of the major reason small businesses collapse. An example can show why.
Mike and Bob start a business selling stun gun breathalyzers in bars. The idea is you have to buy the device after your fourth drink. It attaches to your arm. To sit down, you must first blow into the device to test your blood alcohol level. If you blow higher than the legal amount, the gun stuns you automatically. Since you can’t sit down, you can’t drive. [No, I don’t want to talk about motorcycles. It’s an example. Work with me here.]
The business starts to take off. Mike and Bob each own an equal number of shares in the corporation, which equates to a 50 percent ownership interest. Mike and Bob are confronted with an interesting problem. They want to expand quickly, but the need a major cash infusion to make it happen.
Unfortunately, finding a lender proves to be difficult. The only potential loan source is senior investment analyst “Lenny” who has an office in the alley behind Goldman Sachs. Bob thinks they should take the money and run. Mike keeps looking up at the Goldman Sachs sign, thinking about all those Greeks in the streets rioting and wonders if doing so is such a good idea.
Ultimately, Mike and Bob can’t agree on whether to take the money or not. They have a stalemate. Now what?
Semi-humorous example aside, this is the big problem with 50/50 ownership splits in business. You are going to disagree sooner or later with sooner being the likely choice. If push comes to shove, there is no automatic solution to the stalemate. Either one party will have to back down or the matter will end up in court where a judge will try to come up with some “equitable” solution before his tee time hits. Neither of the owners is likely to be happy with the results.
Ah, but one party will just back down, right? Yes, but this introduces poison to the relationship. A party who backs down tends to be a bitter party. Picture an unhappy spouse and you get the idea. A slow burn starts to develop. The next time there is a stalemate, there is usually much less chance one party or the other will back down.
How can you avoid stalemates? The parties need to sit down and negotiate a process for dealing with them at the outset of the business. One party is going to need to be given a majority ownership position, which should equate to a majority voting right. How this is done depends on the particular business scenario, but the point is it should be done.
Trying to plan the ownership position for a business? Feel free to contact me today to learn more about your options.
Richard A. Chapo, Esq.