It can be a lot of work to run a business. There are often long hours that must be worked, admin issues that must be resolved, and new customers to find and this happens every day. Not everyone is in a position to make that happen. What do you do if you have money on-hand to start a business, but don’t have the 100% time commitment that is required? This is where a partial ownership in business can become a valid option.
The pros and cons of a partial ownership in business show that this isn’t going to be for everyone. Could it be for you? Here are the key points to consider.
The Pros of Partial Ownership
1. It gives the business the cash flow it may need while you get equity in return.
Businesses always need to have cash flowing through them. Cash to a business is like blood to a human body. Without it, death happens and it happens pretty quickly. When you take on a partial ownership role, you can provide a business with the cash flow it needs right now. In return, you get equity that can grow your investment over time.
2. It minimizes your personal responsibilities to the business.
Most partial ownership opportunities occur in the form of stock purchases, silent partnerships, or other arrangements where personal responsibility to the business is limited. Instead of being required to be involved with the day-to-day operations of the business, you can simply provide counsel as needed or assume a role with which you are comfortable.
3. It minimizes the amount of risk that is faced.
When multiple people are able to share the same risks equally, it lessens the overall amount of individual risk that each owner faces. Let’s say there are 3 owners in place and you join them in a partial ownership agreement. The risk profile drops from 33% to 25%. This gives you a better chance to experience a return on your investment into the business… or at least not losing as much money as you might if you had 100% of the risk.
4. More owners means more support.
People support each other in the business environment. This is foundation of every successful experience. When you get involved as a partial owner, you receive support for your investment. You’re providing support to the existing group or owner because you’re getting involved. This gives people confidence to move another step forward on their business journey.
5. This type of relationship allows more people to get involved.
Someone might not be able to invest $100k into an ownership relationship. They could provide $25k. Lower costs mean more opportunities for people to get involved because there is a lower investment threshold.
The Cons of Partial Ownership
1. You may be liable for the activities of the business.
Because you’re in a partial ownership of the business, this means you are, in fact, an owner. You have joint liability with other owners for the activities in the business unless your agreement specifically states otherwise. This is why stock ownership is generally the preferred method of partial ownership because one becomes a stakeholder instead of an owner. No one likes being stuck with a bunch of debt.
2. You don’t usually have a full say in what is going on.
You can always lend your counsel, but your status as a partial owner doesn’t mean that everyone is going to listen. You have input because you have money and time invested, but it may not be regarded at the same level as someone with a full ownership stake.
3. It can change personal relationships.
It is always better to have friendships created because of business than to have businesses started because of friendship. Money always ends up being the final answer to everything and if a partial owner is seen as not fulfilling their duties when the latter has happened, then those affected take the actions personally. Although any relationship can be affected by the stresses of the business world, existing relationships that get into business have the most difficulty.
4. What happens when there is a falling out?
Because decisions are shared, especially with a partial ownership arrangement, then there is a good chance that a different owner will want to buy your portion out if there is a disagreement. Without a firm exit strategy should this happen, an investment can tank very quickly.
5. Profits are also partial.
Let’s face it: if you don’t own the entire business, you don’t get all of the profits.
The pros and cons of a partial ownership in business usually show a positive outcome can be achieved, but only when risks are carefully considered. Keep these key points in mind before making your next investment.