“Daddy thought if I was a business partner with my brother, it would keep us close. But glory be, just the opposite has happened. Let’s just say I have no plans to go to his house for Thanksgiving.”
Wanda (not her real name) was mad and hurt. Just before her Dad passed away in 2014, he willed 50/50 interest in his successful business to her and her brother, Max (not his real name). Wanda had worked in the business since graduating from SMU in 2003. She knew the business backward and forward because her Dad had taken the time to mentor her in every phase of business ownership. But her Dad did one thing that, to this day, is still perplexing to her. Instead of selling her the business, which is what she wanted to happen, he gave 50 percent to her and 50 percent to Max, though Max knew nothing about the business. For the previous nine years, he had been a high school football coach in southern Tennessee.
So when Dad died, Max suddenly found himself 50 percent owner of a business. When he learned how successful the business was, he quit coaching and came in to help Wanda, even though there wasn’t a role for him. But as a 50 percent owner, he had every right to do that. Wanda said it didn’t take long for Max’s help to become a distraction, which led to frustration, which led to disagreements, which led to problems in the business, which led to a breakdown in the relationship.
Wanda retained me to help her determine a value that would motivate her brother to sell his 50 percent interest. She was worried the business could fall apart if this ownership structure didn’t change. But notice I didn’t say I was retained to help her determine the company’s “market value.” You see, market value of a business is irrelevant when 50/50 partners are negotiating a buyout. The question is, what number will motivate the other partner to sell his/her interest in the company?
Determining the buyout value of a business is just one of the many complicated issues that pop up when resolving disputes between equal business partners. What happens when one partner wants to invest in capital equipment and the other doesn’t? What happens when one partner wants to hire a new employee and the other doesn’t? What happens when one partner wants to open a new line of products, and the other doesn’t?
I could go on, but you get the point. 50/50 partnerships are a bad idea. No, let me rephrase that: 50/50 partnerships are a terrible idea. One person has to be in charge; one person has to be able to say yes or no. Let’s face it, business is hard on a good day. Why make it harder with an ownership structure that breeds the potential for a stalemate?
Wanda and Max’s dad was trying to do a good thing, keep his kids close after he was gone. I respect that, but his good intentions have completely backfired. I don’t know where their mother was when this decision was made, but if I could roll the clock back, I’d tell her to listen to the popular Willie Nelson song but change the words a bit, “Momma, don’t let your babies grow up to be 50/50 partners.”
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The story above is true, but the names and fact patterns above have been changed to preserve the parties’ identities.
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