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ARTICLES
Business Week "Small Business" December 5, 2000 Smart Answers by Karen E. Klein Weighing the Risks of Partnership An equity-partner position can be professionally rewarding and financially lucrative, but don't sign the papers without considering some very real risks Q: The firm where I work has asked me to take an equity-partnership position. Before I take the leap into ownership, I'd like to know more details about the risks and benefits. Where can I go, and from whom can I seek counsel, to assist my due diligence? ---- Joseph M. Patick, Philadelphia A: Congratulations on being offered a partnership. Obviously, the current owners not only want to share the pie but they also trust you enough to include you in the firm's inner circle, where you'll be privy to all kinds of information shielded from others. Be aware, however, that extricating yourself from that ownership loop can be a potentially complex undertaking. The primary benefit, of course, is that you'll be allocated a share of the company's profits. As a new partner, your share will probably not be equal to those who have held shares longer than you. "Partners are not equal," says Peter Cowen, an investment banker and financier whose firm, Peter Cowen & Associates, is based in Westwood, Calif. "Presumably, if you are with a growing firm and it does well, your company's total payout will grow, as well as your proportional [ownership] piece." Not only is there a financial benefit in your situation but you will also get a voice in the overall direction of the firm: personnel matters, alliances, new areas to explore, associates to work with and mentor, etc. GOING GLOBAL. There are also some potential downsides to this potential partnership. First, you will probably have to make an equity investment to buy into the company. Second, your payout will be variable -- as opposed to your current salary as an employee. Usually, you get a draw against your expected partnership payout and possibly a reduced salary. Also, in bad times, you may suffer paycuts or lose some of your equity. Cowen lists the following factors to consider in making your decision about the offer: * Do you believe in the future of the firm and the current partners? * Do you plan to stay with the firm for the indefinite future? * How fair, and how potentially lucrative, is the structure and compensation agreement that is being offered? You'll need to consult an attorney with expertise in this area in order to answer the last question, and to advise you on negotiating the partnership agreement, Cowen says. And that's a necessary step before deciding whether or not to tie your future with your company's. |
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