Doing business with a friend: Why are 50/50 partnerships a bad idea?

There are many pros of having a business partnership with a long-time friend: both benefit from an open exchange of ideas, mutual support and motivation, and similar views on doing business and personnel management. However, businesses, like friendships, can suffer a lot of setbacks when it comes to sharing in investment and profit. Alexei Khakhin, founder of CHM Group, and Andrei Polikarpov, co-owner of the CHM Lions children’s hockey club, offer three tips for structuring your business partnership that should help avoid conflicts.

Tip 1: Get the terms straight

The owners’ shares in a business are determined by the respective investments that partners make; the profit they make is split by the same ratio. The size of each owner’s share reflects the amount of financial and human resources they have invested in the business.

Over time, the shares can be redistributed – for example, if one of the partners believes that their contribution has been undervalued. Although both partners may have made equal monetary investments in their business development, in practice, one of them has bought equipment, and the other has paid for setting up the manufacturing facility and related management processes. Or, the founders could have initially agreed on a 70%-30% arrangement, but over time, one of them has developed unique sales strategies and led the company to market leadership. If their contributions have been uneven, their partnership terms might need to be revised. This may happen at any stage of business development, but many conflicts can be avoided with a responsible upfront approach to setting up your partnership.

Tip 2: Equal business partnerships are best avoided

Most partners tend to choose 50/50 confounder relationships when starting a business. However, this approach may not be the best one. Over time, the founders’ concepts of doing business may diverge, of they may have a personal conflict, which may lead to significant losses. Deadlocks and disputes can arise when the founders, being each 50% owners of the company, can’t agree on a decision. Here are a few problems that equal partners may face:

  • One of the partners insists the company needs a new CEO, but the other one disagrees. The only way to break this deadlock is for one of them to approve the other’s decision, but while the owners are talking this through, the CEO remains effectively suspended, which is bad for the business.
  • The company has been made a major offer, worth 25% or more of its total assets’ book value, but the partners fail to agree whether the deal is good or too risky. This also leads to a deadlock, because all decisions in a 50/50 business arrangement must be made unanimously.

In cases where the parties still insist on having a completely equal ownership and control arrangement as a matter of principle, making a thorough and clear founder agreement is critical. Founder or partnership agreements spell out mechanisms and solutions that can help the co-owners avoid or break deadlocks. The options may include:

  • holding a repeat vote;
  • bringing in a third party with voting rights;
  • including a partner buyout mechanism.

Tip 3: Clearly define each partner’s responsibilities

An important aspect in planning your partnership arrangement is to establish clear, distinct areas of responsibility and roles. For example, in our arrangement, Alexei is an expert in building facilities, and Andrei is a finance professional, so the shares are distributed accordingly.

An objective assessment of the resources invested by each of the partners helps decide on a fairer arrangement. There are several types of valuable resources that ensure effective operation of a busimess:

  • human resources – business competencies, expertise, work experience;
  • social resources – customer bases, well-established relationships with trusted suppliers, connections;
  • economic resources – financial resources, property, intellectual property.

Evaluating the resources invested makes it easier to decide on the best business arrangement. The percentage difference between the partners’ shares can be 3-5%, if only to avoid the dreaded deadlock or extended deliberations. Avoid taking too long to make a clear arrangement of shares or sweeping under the rug any resentment if one of the partners is not happy with their role in decision-making – this will lead to conflicts in the future.

Key takeaways

  • A 50/50 business partnership (two equal cofounders) is prone to deadlocks (disputes where the two founders fail to agree on a decision).
  • If the partners adamantly insist on an equal partnership, a founder agreement is essential.
  • Establish distinct areas of expertise and responsibility.
  • Objectively evaluate the resources invested by each of the partners.
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