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 percent of my LLC upfront, or should I give him a small percentage of the LLC now and let him work his way up to 50 percent 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 them, but the 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. The outside partner handles the marketing and other activities involved in getting, keeping and satisfying customers. 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 micromanage the inside partner’s work), the result can be a truly dynamic and successful partnership.
If you bring this individual on as a 50 percent partner, you will have to share half of the profits 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 to support you right now, you may have to cut back your lifestyle until you land some bigger customers that can support the both of you. Also, if this person turns out to be a total idiot, you and he will be deadlocked, and the LLC may need to be shut down.
Since you don’t really know this person, I would recommend that you start by subcontracting him on your next couple of jobs so you can see how he performs under pressure. Your client would pay you, and you would pay him an agreed-upon percentage of the net proceeds from the job.
If this person insists on getting equity in your business upfront — a red flag, if ever there were one — I wouldn’t give him more than 5 percent to 10 percent of your LLC. His equity should be nonvoting, meaning he gets a piece of your profits but he can’t tell you how to run the business. If your business has any significant value (your accountant should be able to tell you if it does or not, although he or she may be reluctant to calculate the value), his equity should be in the form of a profits interest, where he participates only in the future growth of your business. That’s important for tax reasons.
Lastly, your attorney should draft an operating agreement (similar to a partnership agreement) between the two of you with a provision saying you can vote him off the island at any time and buy his equity in the LLC back for a nominal amount (usually $1). You want this relationship to be snap-on, snap-off until you know for sure he will add lasting value to your business without driving you crazy.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
COPYRIGHT 2019 CLIFFORD R. ENNICO
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