Fair Partnership Equity

In our culture, most companies run on hierarchies. It is expected that people will fight strategically for what they want and that a dominant leader will emerge.

In contrast, the core notion of partnership is cooperation. Small businesses formed as partnerships often include friends and family. The lines between money, love, friendship, and other values can become blurred. The fact that you both serve as owners and employees adds additional complexity to the relationship.

The phrasing of the question reflects underlying conventions about “equality” and the inherent value of one activity versus another. In the end, this point of view will lead to fights over a seemingly limited pie. It is impossible for both of you to work “equally” because you each have different gifts, skills, values, and personalities. A great business relationship is one in which each person is committed to the other doing what they love and getting what they really want.

Our society teaches us to be strategic and coy about what we want. It’s not considered “appropriate” to publicly say “I want to have a $120K annual income and only show up at the office whenever I feel like it.” But there are people who are clear they want that, and some of them get that.

To attempt a resolution, I would have each partner write down what they really want to do and have in life without the threat of being criticized by the other for being honest. Unfortunately, sometimes relationships become too strained to have an honest conversation like this. Being honest and unafraid to say what you want is an art. Being accepting and non-critical of another’s wants can also take some practice.

If you can have this kind of safe and open conversation with your partner, then the question is no longer “What is fair” but instead becomes a deeper exploration about “How can each of our personal wants be met in whole or in part inside the operation of this business?” and “How might we change the business so that both of us are more free to pursue our desires?”

If everyone is getting what they want, or at least openly pursuing what they want in life, then you have a great business model. This type of arrangement has been used successfully by at least one large business and is described in “The Seven Day Weekend” by Ricardo Semler.< Regarding one partner buying out the other, regardless of who did what, somewhere there is an agreement on who owns what percentage of the enterprise. The buyout value of the partner's share is simply this percentage times the current valuation of the company as an asset. You may feel that since you've put in more hours that you should own more, but unless that arrangement was clearly spelled out at the beginning, you will simplify this transition if you stick with the conventional notions of valuation and percentage share ownership.

You can get a conservative estimate of the current cash value of your business by applying for a bank loan to buy out the other partner's percentage of ownership. If your business is not "bankable" and is primarily valued based on its growth potential, you may be able to find private investors who would be willing to purchase your partner's share of the company as part of an overall growth-motivated investment.

An experienced private investor or business broker may be able to help you come up with a current valuation of the company, but without an actual lender or investor this valuation is only a target, not the "real" value.

I would advise against being your own banker or equity investor unless you have sufficient cash flow or cash reserves to do that and still grow the firm. Similarly, I also would advise against getting unsophisticated investors such as friends and family to facilitate this transaction. Additional information on business valuation can be found in my free Capital Mastery training program.