Growing Apart
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Things at Sharon Alt's company began to unravel after she and her 50-50 partner began having fundamental disagreements about the business' future direction. With no exit strategy, it took nearly a year of tense negotiations and the help of a mediator before the partnership was dissolved.
Nearly a year after Sharon Alt unwound a 50-50 partnership to take control of her company, she cautions business owners not to fall into the trap of trusting that partners' goals will always remain in sync.
In 1996, the entrepreneur formed a benefits consulting company with a friend. For years, the 50-50 split worked. But then, much as spouses sometimes grow apart, Alt and her partner's views began to diverge.
Alt wanted to grow the company, but her partner wanted to keep the business an on even keel. Because of the 50-50 structure, unwinding the business's ownership became a nightmare.
"It was a stalemate," she says.
Based on her experience, Alt who has owned Alt Benefits Consultants outright since last summer, advises others who are forming partnerships to get outside help in setting up the company's structure.
Besides bringing in legal help, she also advises that partners never split things 50-50, and that they develop a long-term game plan for the ultimate growth of the business. Alt also recommends that partners meet regularly to discuss what's working, what's not working -- and whether both parties are happy with the way things are developing. Relying on outside board members to help foster communications and evaluate progress also is important, she says.
"We went into it naive, thinking we both have the same goals; it will all be perfect and we'll be millionaires," she said. "It didn't work out that way. Unfortunately, a lot of people get themselves into this situation because when you're starting a company you don't have the revenue to invest in an attorney or CPA."
But, she says, the front-end investment is worth it, even if you have to borrow money to get help from professional advisers.
David Croson, associate professor in strategy and entrepreneurship at the Southern Methodist University Cox School of Business, said that "50-50 partnerships are basically two dirty words in startup formation."
Setting up an evenly split partnership without contingency plans can spell disaster for a business, which is why it's important to at least determine in advance how any impasses between partners will be resolved, he said.
Those plans could include identifying a mediator to help handle disputes or set up processes where one partner can make an offer for half the business and the other one would then either have to sell their share or buy the other person out.
Another option would be to each have 49% and give the remaining 2% of the business to an investor or someone unrelated to the business.
To solve her problem, Alt brought in a mediator who did a valuation of the company. She offered to pay her partner 50% of that value. The partner felt the company was worth more, and declined the offer. After about a year of tense co-existence, the partner agreed to the original terms.
Because an exit strategy wasn't spelled out in the beginning, it turned Alt's split into a painful, drawn-out affair.
"We went into it the wrong way and once those hard feelings were there, it's not just you and your partner who suffer, it's your clients and your employees," Alt said.
Her company works with insurance agents as a third-party administrator, primarily offering consumer-driven plans, such as health savings accounts and health reimbursement accounts.
Now that everyone can focus solely on the operations of the company, Alt said her business is thriving. She has added two employees in recent months and projects that revenue will double in 2008 to $2 million.
Her own 11 employees have insurance through the high-deductible plan they advise clients on, so they are able to see firsthand how it works.
The company's biggest challenge is finding agents open to shifting customers to the consumer-driven plans,
which can generate less commission and more work for the insurance agents. Alt also has had to work to convince agents that the troubles that arose during the company's split have been resolved.
"To regain that trust from the agents you work with," she says, "you've just got to prove yourself one agent at a time." |
