How To Structure (or Restructure) a 50/50 Partnership

QUESTION FROM: Jillian in PA

“Hopefully I can get some advice here. A little background my mother has owned her restaurant for 20 years this year. She is ready to sell with equal parts going to myself and to the GM of the restaurant. The GM and I have known each other since we were young. She is like a sister. We are both currently salaried employees, have both worked there on and off for the past 20 years. We both bring things to the table and we get along well. She has a culinary degree and I have been doing the accounting and business side of it as well as running the FOH. Is this a disaster waiting to happen? Has anyone successfully had a split partnership work out? If so what are some suggestions you can offer so we can make this work and continue to run a successful restaurant. What are some of the things we need to discuss before we do this? I have started making a list but I don't want to miss something.”



HH ANSWER:

There’s a very important part of the story that’s missing here...And two questions that really should be answered prior to offering an opinion on this scenario:

First: Why has your mother decided to offer a 50/50 split to you and this other woman?

(i.e., Is it because both of you, at one time or another, have attempted to purchase the business independently? Is it because you and she are the most qualified buyers but can’t afford it independently? Or is it that she simply believes the business, in both of your hands, is the best way to ensure its survival?, etc...)

Secondly: How is it that she is the GM yet you handle FOH operations?

(Sounds like you have some work ahead of you in terms of defining roles, responsibility & hierarchy)

Although there’s a distinct advantage to having one majority partner (“inequality can be the key to satisfactory relationships”)...and about 6,000 other ways to structure the sale of a business to an employee (my favorite being a gradual transfer of ownership that involves methodically shifting employees from salary to equity) I have known a few exceptions to the rule of this being a big risk worth avoiding and have had their 50/50 partnerships stand the test of time - some through dumb luck, some because of an incredibly strong marriage and one because they went into it with their eyes (and minds) wide open and prepared for what, at the time, seemed almost impossible or borderline ridiculous.

The bottom line is this: If you can even only conceive of a situation potentially happening - discuss it now and write it into your agreement. I’m sure you realize that you don’t want to be busy (or frustrated) dealing with issues that can easily be averted now while handling the demands of this business.

Seeing that I’m unfamiliar with you and your business I will give you the benefit of the doubt that this is the smartest move for your particular situation but caution you in moving forward without some serious mutual conversations with a contract / business formation lawyer prior to entering into this arranged marriage:

To start, I would strongly advise putting together a comprehensive “Partners Handbook” that serves as an addendum to the Operating Agreement or as the Operating Agreement itself as the Articles of Incorporation will most likely necessitate.

You need to come to agreement on a multitude of issues, situations that may arise and even situations you can’t imagine ever arising but that mathematics and the law of entropy dictate happen at some point to some operators.

This Handbook should basically addresses every aspect of operations and serve as both your touchstone at decision making time and your “what to do in the event of an emergency guide”...include but do not limit the content to the following 32 principal topics:

General business Philosophies & Mission Statement

Code of Conduct (online and offline, in the four walls and outside of the four walls)

Intellectual Property (use, naming rights, spin-offs, private labeling, etc...)

Exclusivity / Non-Competes / Non-Disclosures

Advertising and Marketing plans / Budget %’s

1,3 & 5 Year Plans

10yr Plan

An unwinding / repositioning plan- [how to, when (i.e., what benchmarks) and who will handle all assets if things go south]

General health of both parties, who your individual successors will be if anyone

Job Descriptions / Chain of Command / Detailed Roles, Centers & Responsibilities

How the above may be amended if/when necessary

Budget Writing

Salaries

Withdrawals from / Reinvestments into the business

Attendance: hours, sick days, vacation time, early departures, notice, etc…
e.g., What happens if one of you simply decides to stop showing up for work - or falls ill and can no longer work.

How often the concept and facility gets refreshed

How expansion or sale opportunities are handled

Mediation plan for disagreements that go unsettled

Mutual assurance that accounting/tax filings are handled by an outside independent third-party but viewable at all times by both parties

Hardware / Software

Hiring & Training practices

New Hire Procedure (Development, Reviews/Evaluations and Terminations)

Vendor Agreements

Taking on additional debt, structuring existing debt and/or future debt / repositioning of assets

Use of Assets when not being utilized for explicit business purposes

Shared Liability / Coverage amounts

Potential for additional partners in this or other related impact ventures

Heirs and Assigns (e.g., Interest transferable/sellable terms?)

Rules governing Capital Investments & Expenditures

Any potentially grandfathered issues (from fire code to actual use) upon changing hands

Sources of funds, escrow and tracking of confirmed payments or all done via bank financing?

Whether or not some percentage is to be retained by the Seller or some other third-party?


There are so many other questions and issues you should take time to contemplate…and you’ll never think of them all but the points I mentioned above should be a good start. I would strongly suggest discussing all of the above points with your prospective partner and consider inviting an experienced consultant familiar with operational challenges and vagaries of economics to help navigate and moderate the discussions as these conversations can often become unintentionally contentious. A paid independent third party can often provide additional insight with the benefit of their outside unbiased perspective. 

Once you are both on the same page - a qualified business formation lawyer (that you both agree upon - and that does not have any potential for a conflict of interest) should be engaged to hammer out the final details and put it all in a legal binding contract.

Good Luck to you both,

Josh Sapienza

P.S. Remember - even the best marriages have their ups and downs. If this is the right partnership for you, hang in there through it all, enjoy the ride and never be afraid to be the first one to say I’m sorry.