When Two Can Grow a Business More Successfully Than One – by Cliff Ennico (31 Jul 11)
WHEN TWO CAN GROW A BUSINESS MORE SUCCESSFULLY THAN ONE
By Cliff Ennico
“I currently own a one-person information technology consulting firm, which operates as a limited liability company (LLC).
I have a number of small clients. I go out and get the business, but I am also the person who has to do the work to keep the client satisfied. I am making enough money to support myself and my family, but there is not much left over to pay anyone else.
I believe I could market this service to larger clients. This would bring in much more revenue, but there is no way I could do all the work a larger client will require. I don’t want to hire employees because it’s too expensive, and independent contractors are not reliable enough to perform the work on the demanding schedule these clients will require.
I recently met an individual who is working for a large IT firm in a nearby city. We are both the same age – 55. He is sick and tired of commuting every day, and is looking for the chance to be part-owner of a business.
This individual is almost the perfect complement to me. He does not understand marketing at all, and is not comfortable selling clients or performing customer relations activities. He is, however, a genius at the IT services my company performs. He is the type of person who will work throughout the day and evening to finish a project on time, with as little human contact as possible.
I am thinking of bringing him on board as a 50/50 partner in my LLC. I would give him my existing projects to work on, which would enable me to devote all of my time to attracting and soliciting business from larger clients. If I am successful in generating one or two larger clients within the next six to 12 months, we should be able to generate enough income to pay ourselves a ‘living wage’.
My question is this: am I being too generous giving him 50% of my LLC up front, or should I give him a small percentage of the LLC now and let him ‘work his way’ up to 50% ownership? I really want to work with this person, but I want to be sure I am being fair to myself as well.”
What you have described here is almost the perfect business partnership.
People often go into partnership with people who are similar to themselves, but he best partnerships are between people with different skills who complement each other.
The best partnerships I have seen in 30 years of working with entrepreneurs are “inside-outside” partnerships such as the one you want to create. One partner (the “outside” partner) handles the marketing and other activities involved in getting, keeping and satisfying customers. The other partner (the “inside” partner) has more of a “project management” mentality and delights in getting each client job done on time and under budget.
If the “outside” and “inside” partners communicate well with each other, and respect each other’s sphere of influence (the “inside” partner doesn’t interfere with the “outside” partner’s customer relationships, and the “outside” partner doesn’t micro-manage the “inside” partner’s work), the result can be a truly dynamic and successful partnership.
There is a problem, however: if you bring this individual on as a 50% partner, you will have to share some of the “net revenue” from each project with him from day one, unless he is independently wealthy and can wait to be compensated until the business ramps up. Since your business is only generating enough income right now to support you, you may have to cut back your lifestyle until such time as you land some bigger customers that can support the both of you.
The key question here is: are both you and this individual willing to take an entrepreneurial risk? For that is what you both are doing. He is taking a “leap of faith” in quitting his day job and joining your firm without assurance he will receive decent compensation, and you are taking a “leap of faith” that you truly can market successfully to larger clients. It seems to me the risks are about the same for both of you, so I see no reason why you shouldn’t be 50/50 owners of the business from day one.
It sounds like the primary assets of your business are “client files” that do not generate a steady or reliable income stream. If that’s correct, then most accountants would not view your business as having any significant value, and you will be able to give this individual a 50% interest in your LLC for a small amount of money he can easily afford.
Just be sure your lawyer drafts an “Operating Agreement” (similar to a partnership agreement) for the two of you which clearly spells out how you will break up if the business doesn’t grow the way both of you anticipate.