Bringing a new partner into the business

Discussion in 'Growing and Managing a Business' started by namenerb, Aug 23, 2011.

  1. namenerb

    namenerb
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    Hello, new member here,
    I have a small machine shop and currently have just one employee working. I have been talking to him about bringing him in as a partner.

    A quick background; The business is a U.S. S Corp, started 3 years ago, has about $30K asset value, current gross revenue under $100K/year. I am purchasing a newer machine for $45K and it will enable 30% higher volume and I can take higher paying work with the newer machine. Our plans would be to expand with more machines over time, I would like to have borrowed money on only one machine at a time.

    My questions are: I would plan to form a new S Corp with a new generic name (the current Corp has my name in it).

    Would it be best to phase him in over a two or three year period just to make sure that he is really committed to the business? With the S Corp, should this be done with stock sales?

    My contribution would be the existing and newly purchased equipment. He will have no monetary contribution. I assume that my contribution would be paid back to me over the next few years?

    I would like a third voting partner; should I just give a couple percent of the shares to a dis-interested party such as a friend who also owns another machine shop and understands the business? Does a person have to hold stock to have a vote in company direction, or can we just agree on a person and put that in our corporate meeting notes?

    If we do a buyout rule for the stock shares, should it be first offered equally to other stockholders, given 90 days for a commitment to purchase, then up to a year to come up with the funds? If the other stockholders are not interested, then the stock could be offered to anyone?

    I appreciate any thoughts on these questions.
     
  2. Stephen Ryan

    Stephen Ryan
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    Hi, Why do you need a partner?

    Is it because you are scaling up and cannot handle the expansion plan on your own?

    Perhaps your partner is much younger than you and you want him to takeover the business eventually.

    I don't really have sufficient information to give advice.

    Please supply more background?

    Stephen
     
  3. namenerb

    namenerb
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    Hey Stephen,
    More background; I have always tried to do small businesses by myself. Some paid the bills, many ended up a sideline that just never took off. I'm close to 60 yrs old, but plan to keep working forever; just not long hours like many of my occupations have required.

    The prospective partner is mid 30s, very sharp, hard-working, great work ethics, and a degree which included business courses. One of my downfalls is that adult A.D.D. keeps me dreaming of bigger and better things instead of plodding ahead one step at a time. One or two partners would help to keep my focus on the business at hand. My hopes, along with the prospective partner, are to develop a midsized business and sell it after there is enough equity to roll into the next endeavor.


    I occasionally get called to work on film productions, etc., and having a partner would enable me to keep the shop going without slowing deliveries to my clients. At present, I am a partner in a camera car used in film production, I build and sell specialized press brakes for signage manufacturing, recently finished an electric motorcycle which runs 75 mph and has a 60 mile range, etc. I hope that as the machine shop expands it will financially help develop more projects as well as having the equipment to design and build custom products.
     
  4. ArcSine

    ArcSine
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    Namenerb, it does sound as though it might be conducive to your objectives to bring a co-owner or two into the mix. But as with matrimony, a business partnership is a union not to be entered into lightly, so proceed wisely and with eyes wide open at every step.

    It's good that you're looking ahead to a particular "grow and exit" strategy. You do seem to enjoy spreading your attention across multiple activities, and having a partner who's 100% focused on growing the machine shop may pay off well for you when you sell. Remember that if a biz sells for X times earnings, then every additional dollar of earnings you can bring to the bottom line (via growth) jacks up the selling price by X dollars.

    It's also good that you indicate a lot of confidence in your employee's capabilities. Make sure he's got the chops, the personality, and the drive to bring the kind of growth to the machine shop you'll need for an attractive sale price.

    Take steps to avoid an impression that your business depends largely on you for its success. Giving the S Corp a generic name is a step in that direction. You want the buyer to see that you've built a largely self-sustaining earnings-generating machine that won't miss a beat after you've cashed his check and gone fishing.

    Unless you have other reasons for wanting to start fresh with a newly-formed entity, you could maybe just change the name of the existing S corp? Liquidating one corp and transferring assets and debts to another would impose some accounting, administrative, and legal time and costs.

    If you're going to stick with the S Corp arrangement (versus, say, an LLC) be careful with the terms of the outstanding shares. Generally all outstanding shares must be identical with respect to dividend and distribution rights, or you risk an inadvertent termination of your "S" status. Differences in voting rights are OK, though. Be sure your tax advisor guides you through the details on this one.

    You mention wanting to play it cautious until you've seen a serious two- or three-year demonstration of commitment from the employee to the biz. One approach you might want to consider is placing forfeiture / vesting restrictions on his shares. During the restricted period, he's the valid owner of the shares, entitled to his % of profits, etc., but (a) he can't sell the shares, and (b) if he decides to walk he's required to sell the shares back to the company for some defined price. An attorney with experience in these arrangements can explain the variations on this theme, and then help you draw it up properly.

    Best of luck with it, Namenerb!
     
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  5. Stephen Ryan

    Stephen Ryan
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    Thanks for the update.

    Yes, I would phase him in over 2 to 3 years. I would also look at his personal financial motivation.

    I remember talking to a friend who owned a carpet business and he was looking to hand the business over to his young protege, again over an extended period of time.

    So the idea was that as my friend rolled out his young worker would roll into his shoes.

    All seemed well, until the business was hit by recession. It was at that time my friend saw the young man in his true colours.

    Unlike my friend, the young man had a council house. He had no significant financial responsibility, which became obvious in the young man's motivation.

    In short, the young man had very little to lose from losing the business and his job, so when difficulties came, he reacted inappropriately, or not at all.

    Much to the fury of my friend, who had always had a mortgage and spent 30 years building a business in order to pay of his debts and work responsibly.

    So sometimes, what appears a natural decision, turns out to be the opposite.

    Good luck anyway

    Stephen
     
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  6. daytrader

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    Nice thread.
    Arcsine pointed something to think about. And i mean he should have something to share and lose in times of recission to make him strive hard. Else, what you've worked over years will be gone.

     
  7. namenerb

    namenerb
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    Thanks for all the replies and thoughts. I will try to follow up and put them into practice. I will write up an outline of details as time permits and post it when I can to get more feedback. Thanks...
     
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  8. parkersharon32

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    You might want to run your plan by a business attorney. An attorney can help you protect your business and investments while bringing in a new partner.
     
  9. mark111

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    Superb!
    Nice thread.
    Arcsine something to think about. And I mean it must have something to share and to lose in the event of termination to work hard. Otherwise, they have worked for years is gone.
     
  10. Ayen Mahinay

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    I agree with this that is very well opportunity with partnership. between partner understanding is very well to business boosting. I like partner with new opening.
     
  11. Matt Damon

    Matt Damon
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    pointing something to think about. And I think it must have something to share and to lose in case of rescission for him to strive hard. Otherwise, what would you have worked over the years have disappeared.

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