How Sharing Your Business Can Make You More Money
People start businesses for many reasons. They could have a passion to pursue or a mission that they feel strongly about, but ultimately, the goal for many businesses is to turn a profit. Profits allow a company to stay in business and continue doing whatever it is built to do. Today, I'm going to walk you through an example of how sharing a business with someone else can be a benefit and examine the pros and cons of doing so.
First, think about this question:
Would you rather have a 10% return on one asset, or 20% return on another one?
There isn't enough information to have the right answer here because you don't know how much these assets are worth. I would much rather have a 10% return on a $1,000,000 than 20% on $400,000 because the resulting $100,000 (10% return on $1,000,000) is more than $80,000 (20% return on $400,000). A similar question is present when you are considering sharing your business with someone else. Would you rather own your own company 100% or let others work with you and split the profits? From a pure profit perspective, this is a similar question to the one above and depends on the numbers. Let’s take this example:
In this scenario, we assume that working alone on your business will provide net profits for the business of $50,000. Since you would be the only owner, you would take 100% of those profits for yourself. But with a single business partner contributing as well, the Company could do much better. In fact, the Company’s profits would triple to $150,000, and be split $75,000 each with a 50-50 ownership. Adding another partner adds even more profits but dilutes the ownership percentage even more. In this case, this year of operations would net $200,000 with three partners, giving each partner a $66,666.67 payout, which is less than the $75,000 with two partners. There are just as many reasons to keep a business closely held as there are to expand with more partners and ultimately, the decision will be different for everyone. These numbers are simply a demonstration of how taking a lower percentage of the profits can be beneficial, if the business does well enough.
While making more money is great in the short term, there can be other impacts of splitting ownership and responsibility. A key thing to remember is that not every business is meant to be shared by too many people. I can think of several organizations that would rather maintain their authenticity and their ownership instead of partnering with someone else to make more money. If your goal is to maintain an authentic family restaurant experience, then there likely isn’t many people you’d consider partnering with to grow the business because the significant growth and costs could impact the business’ ability to provide that experience. If you are thinking of partnering with someone for a business, start by considering this short pros and cons. These are certainly not all the considerations needed, but it is a great place to start.
Pros
You gain a business partner with skin in the game, and the pressure and responsibility for the business’ success doesn't just fall on you.
You increase the pool of skills available to start business initiatives from the inside (which is generally cheaper than paying someone else if you have the right skill sets)
Cons
You give up ownership. This means you must consider your partner's input when making decisions.
You're getting a smaller piece of the pie. Giving up ownership generally means that you also must split profits.
These pros and cons will hold different weight in different scenarios because different things are important to different people. At the end of the day, it is a very large qualitative and quantitative cost benefit analysis. If you are okay with giving up some control, ownership, and a portion of the resulting profits of your business, then bringing on business partners could be a great idea for you to make more money and be more successful.