The old cliche’ is you should never go into business with a friend, but millions of people do it. In taking the leap of faith, friends almost always split ownership equally. So, is 50/50 shared ownership a good idea?
The 50/50 shared ownership concept seems like such a lovely idea like beautiful butterflies. 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 primary reason small businesses collapse. An example can show why.
Mike and Bob start a business selling stun gun breathalyzers in bars. Yes, stun guns. The device attaches to your arm and takes a blood sample every few hours. If you test higher than the legal limit for alcohol, the device gives you a loving zap.
The business starts to take off. Mike and Bob each own 50 percent of the company. They want to expand quickly but need a significant cash infusion.
Unfortunately, finding a lender proves to be difficult. The only potential loan source is “Lenny”, who works out of a local drinking establishment. Bob believes they should take the money and run. Mike keeps looking at the large men standing close to Lenny, and wonders if doing so is such a good idea.
Ultimately, Mike and Bob can’t agree. They have a stalemate. Now what?
Semi-humorous example aside, this is a significant problem with 50/50 ownership splits in a business. You are going to disagree on an important issue sooner or later. If push comes to shove, there is no automatic solution to the stalemate. Either one party will 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 a poison to the relationship. A party that backs down tends to be bitter. 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 stalemates at the outset of the business. One party should take a majority ownership position, which should equate to a majority voting right. The particular method for accomplishing this outcome depends on the specific business scenario.
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.