R. Shawn McBride was recently interviewed by Tilde Guajardo on Womanars. In part 6 of that interview, Shawn talks about the risk involved in 50/50 partnerships.
Tilde: And you know, you and I talked offline before we started this interview. One thing that I want to touch on because we talked about you know, the disastrous partnerships. And I have been privy to too many of those with some really dear friends that just broke my heart. I want you to address it because this is a question that I have so many people go into a 50/50 partnership, right. And so what when should you and when should you not do that? Or is there a time when you should do that? And what all is entailed because I think it’s critical for people to realize what the 50/50 really means and what they’re giving up.
R. Shawn McBride: Yeah, 50/50 is dangerous. And there are some lawyers will absolutely tell you not to do it. I will often tell people to do it with some additional protections, which we can talk about here in a second.
The real risk with the 50/50 is typically the way it works is both owners have to agree to something happening. So if the company’s going to take any steps forward after formation, the true 50/50 partnership, they have to both agree. And the problem is in the real world that becomes a problem. There are just things you can’t anticipate. You don’t know whether you’re going to get a third offer to buy the company. There might be a major contract come along. Something’s going to happen where both owners aren’t going to agree; that is inevitable.
So a lot of people say, we just see so many of these die because we get these situations where neither owner can agree and then the company shuts down. If it gets to be a very big disagreement, you know, bills aren’t getting paid. You know, customers aren’t being serviced. It really can kill the business.
So, what we want to do is we want to be realistic about it so if we’ve got a true 50/50, neither owner is willing to take that secondary role of not being the decision maker and they want to inherit 50/50. We’ve got to build a path forward if we end up in a stalemate and we need to be adults and we need to be realistic about the fact that there could be a stalemate. And so that means building the agreement in light of the fact that a stalemate might happen. That means bringing in a third party decision maker, some kind of dispute resolution between the owners. In the most extreme case, one of the owners buys out the other. I tell my clients, I’d rather have somebody walk away with a check they don’t like than to spend all their time in litigation and get zero so.
Tilde: And I love the story that you told on Friday. About the brothers.
R. Shawn McBride: Yes the brothers–
Tilde: You know because it can be as easy as that. Well, I’m sure it wasn’t easy as the flipping of a coin, you know but you can actually put all those stipulations in a contract.
R. Shawn McBride: Right, you have a lot of freedom when you build your LLC agreement or even a corporation. The law basically allows you to form things the way you like as long as it doesn’t violate public policy or whatever. You’re referring to the brothers that owned the fighting franchise which became quite valuable.
A disagreement but they had a provision that if they had a disagreement they would have a cage match and it’s up for that, in my practice. But you know, it’s the type of thing you can do. A coin toss is something another lawyer has done. They wrote a long detail provision about how do we toss a coin if the two owners get into a disagreement. These are things we realistically can do and if you have that in there, you have that chance to saving the value of the business if we get into a disagreement situation. So it’s very simple to do on the front end. If you wait until the disagreement’s happening, you’re not going to hit an agreement on how you break that disagreement so. This is something that has to be done in the beginning if it’s going to have any value to it.
Tilde: Yeah. Well, I love what you said and Marsha did too. She says, advanced planning for flexibility, that’s good. And you know, because that also gives you the vision for actually prospering in the future. You know, so.
R. Shawn McBride: Right.
Tilde: It’s really helpful.
R. Shawn McBride: You know you’re going to prosper right. And I believe that. I think a lot of businesses have to make that decision. Are we really a business? Are we fully in? Are we going to make a profit? Or are we just testing the waters and dipping our toe?
At some point, you’ve got to make that real life decision. And if you really know that you’re going to build this, you’re going to put your heart and soul into it, you’re going to build it, you want to have this foundation for future profitability and you know that the business is going to evolve. You’re going to listen to your customers, the marketplace is going to change. And what you need to realize too is that may mean then that your ownership of your company evolves as well.
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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Andy Steel.
About the Author
R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment, gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can email R. Shawn McBride or (214) 418-0258.