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October 27, 2021

Risk and Benefit of Equity Partnerships

An equity partnership differs from a general or limited liability partnership in the sense that you have to buy into the business. Now this means that your share of the income will be derived from whatever profits that business makes. Also, the income you receive will typically be a certain percentage of your salary – you could also say it’s an incentivized bonus.

The Benefits of Forming an Equity Partnership

Diversified Expertise and Experience

If you’re looking for someone to buy into your business and help expand it, equity partnerships can be an effective strategy for you. Why? Well, by joining heads with an individual who is financially vested in your company, you’ll be able to access a diverse range of multi-faceted expertise for different aspects of your business.

A well-experienced and educated equity partner will also bring knowledge to your company and help identify potential gaps in various critical facets of your operations and help mitigate risks. For example, you may excel at presenting lucrative business ideas but don’t have any real-world experience in converting those ideas into practical and lucrative opportunities. Similarly, you may be a tech guru but don’t really know how to forge long-term business relationships. A new partner can help overcome many of these possible issues.

Enhanced Liquidity

This is perhaps one of the best advantages of equity partnerships – the fact that you’ll have access to more working capital. Moreover, it’s possible that your new partner may have great strategic networking, which means they may be able to attract potential investors and increase your capital.

Similarly, a good equity partner can also increase your chances of acquiring additional funding from banks to further propel your business.

Mitigate Costs

Going into an equity partnership or onboarding an equity partner can help allocate various expenses and lighten the financial burden pertaining to capital expenditure, fixed costs, and variable costs required to keep the business going. Having one or multiple partners can help mitigate costs – which is certainly more beneficial then facing everything alone.

The Incentive and Motivation to Explore New Business Opportunities

Another powerful advantage is allocating different tasks to your partner. By splitting operations between yourselves, you will quickly notice how productive your daily business operations become. But perhaps the best part about this partnership is the fact that you’ll have the time and energy to pursue other lucrative opportunities. Moreover, this could also potentially help you take quick advantage of opportunity costs.

Opportunity costs can be advantages that businesses are compelled to forgo in pursuit of other opportunities – it’s likely that you can’t explore just about every business opportunity. But by having an equity partner, you’ll have the flexibility and the funding necessary to consider other business avenues.  

This Risks of Equity Partnerships

Tolerating Losses and Other Business Liabilities

While the prospect of expanding the businesses and raking in profit sounds great – in equity partnerships, you’re expected to share all the losses incurred. And not just businesses losses, you’ll also be accountable for sharing debts – even if it isn’t you who caused a debt.

So, if the business is taking a lot of hits and doesn’t show any signs of consistent growth and racking up losses, your personal finances will come under fire. And no matter what decisions your partner takes for the business, you’ll be equally responsible for the outcome.

Shared Control of Business

It’s a powerful feeling being in control of every aspect of your business. You’re the one who makes decisions – even the tough ones. However, in a partnership, you have to keep in mind that your partner also has a vested interest – they bought into the business after all. And this means you’re going to have to share control of your business – so no more autonomy.

Emotional Complications

There are a myriad of other problems that can happen, which can equally make it harder for you to work with an equity partner. For instance, if your partner doesn’t have the ability to compromise or take effective decisions – or worse, offer conflicting opinions, you’ll have more frequent disagreements. Similarly, your partner may slack off or blame you for something they did wrong or vice versa – the point is, disagreements and sour relationships between partners can be devastating for any business.

Final Words

You have to think of an equity partnership as another form of marriage – this relationship is also about compromise, positive mind sets, and a drive to grow and prosper. That’s why it’s frightfully important weigh-in the pros and cons of an equity partnership and see whether you can collaborate with someone who can truly bring value to your business.

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