How much ownership, in my business, should I give up?

Discussion in 'Growing and Managing a Business' started by EricG, May 8, 2011.

  1. EricG

    EricG
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    Hello,

    I have been fortunate enough to start a successful business 7 years ago. It has grown every year (even during this ongoing recession) and we expanded to a larger facility 2 years ago. The company had revenues of $ 1 Million and 20 employees last year. This year looks to be on track for $ 1.2 Million and about 24 employees. This year I will make about $ 250k off of it. We rely on local business as a service so our revenue is most likely going to top out somewhere between $ 1.3 - 1.5 Million so I can not expand much more at the current location or store configuration.

    A customer has come to me and said he realizes I am the original inventor and he appreciates that I really just like having the local business and community. He SAYS he would be willing to take over any/all expansion plans and that I would not have to sign any documents to put me on the financial or guarantor hook for future expansion. He says he will find the investors or money needed for any future expansion plans. He has had success doing this type of expansion in other industries in the past. He claims his goal is to grow the business, franchise it and eventually sell it off to make some serious cash.

    My question is what percentage of the business would or should I expect to get off of all the expansion? I would keep all revenues/profits from my current business so I am only talking about the future expansion and everything he brings to fruition. Is there any book I can read on this type of thing or any set norm/standard on what a business founder should expect when doing something such as this?

    I must say I do realize that this would involve more work by me = even though he says my work would be minimal, I think he would need to have me involved with helping other people open the other locations and the basic strategies of how to run the business successfully.

    One other thing = I do realize that if we had opened a bigger place with a different configuration we could easily be making a lot more revenue and profit....however every expansion comes with a new set of risks and either $$$ or personal guarantees on loan documents so we are happy with our current locations numbers given the low financial risks we have right now. But this says that if their was other locations via expansion they should see revenues in the $ 2-3 Million dollar range with owner profits in the $ 500-700k range per location (but also a lot more risk on loans and guarantees of course).

    Any thoughts?
     
  2. iverson

    iverson
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    stick to your principle
     
  3. Fergal

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    Welcome to Business Advice Forum EricG, well done and congratulations on having grown such a successful business, reaching that level of profitability and employing so many people is really a great achievement. Would you mind telling us what country the business is based in?

    One thing I would recommend is that you look closely at this person's background and their history of success. Look to see what they have achieved in similar situations with a view to forecasting the level of success they would have with your company. You say that he "has had success doing this type of expansion in other industries in the past" - what I'm recommending is that you research that closely to determine if he has had that level of success and to evaluate whether you feel it is something he can replicate in your business.

    As regards the percentages of the business that each of you would own, I would ask him how he worked with the previous businesses he was involved with and then take a view as to whether that is something you are comfortable with or if it is something you want to negotiate on. Another option would be to make contact franchising associations in your area / country and ask them if they have any guidelines that might be able to help you.

    If you do go ahead and expand your business an option you might consider is creating a new limited company for every new location. This would help to isolate your existing business from any potential damaging affects should you be in the unfortunate situation that one of the new locations experiences serious difficulties or losses.

    Good luck with it and please do keep us updated on your thoughts and progress.
     
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  4. EricG

    EricG
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    Other information

    Thanks guys for sharing your thoughts.

    We are a US based business located in Orlando Florida.

    I guess what I was wondering if anyone had ever heard of what percentage of the business does one relinquish if they give up control. If someone else takes over and finds the financing and if I do not have to sign any additional guarantor paperwork then I guess I become a partner?

    The person was throwing around 17% because he said if I owned much more then that then someone would expect me to be more involved (financially and legally).

    Remember this is the way for my business to expand without me or my family having to be involved with it. I know it might sound crazy for some to think that someone would not want to do it themselves but we are at a point in our lives where we would rather not deal with all the things (issues, stress, etc.) that come with turning this into a large scale business.

    Any thoughts?
     
  5. ArcSine

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    Eric, perhaps you could structure it more or less along these lines...

    You retain your core biz as is, while all new expansion is housed within new entity(ies) (corporations, LLCs) owned by your customer and his investors.

    • You and your core business assets are insulated from liability and financing risks resulting from the expansion, as long as you're not guaranteeing the expansion debt of the new entities. That shouldn't be a problem, since you're not to be a principal of the NewCos.
    • You retain ownership of the rights to the invention, process, etc., and license same to the expansion entities for royalties.
    • You could also have a limited partner interest in the expansion entities. The royalties and/or this ltd ptr interest provides you with a suitable share of the expansion profit pie.

    Whether or not this is feasible in your situation depends on the particulars thereof, but if so, it seems like it might be on track toward your stated objectives.

    Edit: Whoops...I see now that I've only restated something Fergal has already suggested....that's what I get for leaping before I look :)
     
    #5 ArcSine, May 9, 2011
    Last edited: May 9, 2011
  6. EricG

    EricG
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    Arcsine (and everyone).

    I am not sure what happened or why I forgot to check back in until now but I wanted to say Thanks a bunch. I am at the point where I want to move forward with this deal and your thoughts below have given me the idea(s) of how I will look to move forward with the partnership. Cross you fingers......this is about to get interesting!

     
  7. Shahrier

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    You did post this thread a long time ago. Can we get an update on your status? You have built up a successful business and congratulations on that.

    Make sure you choose the right amount of ownership to your partner or you might just be on the losing end. As the others said, be sure to look in to his history before confirming your deal!
     
  8. Navida

    Navida
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    EricG! I think you have to take critical view of investors and should try to grow with franchising your business. In franchising you have to collect reward of your brand name and goodwill. Investors of your franchise will invest it and also try to make it more profitable.
     
  9. EricG

    EricG
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    Hello to everyone. I wanted to try to share where we are at with our business. My wife and I decided about two weeks ago that we do in fact want to expand our business beyond 1 location. I do not want to do it alone. I also feel there are some important skill and personality traits that are needed in this next phase that we do not possess.

    Please keep in mind that our current location/revenue is and has always been off the table. This is ours and would not be shared.

    My thoughts are we do a thorough check of this potential partner. If that goes well then instead of simply giving him, lets say a 50/50% ownership in the bigger company we give him the rights to a territory around our current location. As he opens each location we give him a 10% ownership stake, up and until he opens the fifth location where it maxes at a 50/50% ownership stake and he/we in effect become 50/50 partners in the bigger company. We will also propose 6% of the gross revenue from each of these locations. This means that in addition to him getting the profits from each location he opens (minus the 6% he pays to us), he also builds up an ownership stake in the company, over time, as he proves he can do what he says he can do. Remember we do not have a franchise and this will not be a franchise set up yet. It will give us the ability to open several other locations and prove the concept. He will take full responsibility of signing any/all legal documents (eg lease and loan docs). We will give him 100% support and help as he reviews our current processes and fine tunes them to scale to other locations. I will also be there to help with any/all aspects of opening these other locations. Once we get to 5 locations in and around the area and we have a 50/50 ownership partnership then the choice can be made to franchise and/or stay with the company owned model (I favor franchising as does he – but he favors opening a few company owned location first….just to make sure we have everything wired and are primed for franchise success).

    Does this make sense to everyone? It is hard to convey all my thoughts in a condensed forum post but the above scenario is what I came up with.
     
  10. rjd1265

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    I think you are heading down a good road. the numbers seem right and fair for both sides. the only thing i suggest is that your new partner never gets more than 49% of the company. I had a bad experience with a 50/50 a few years ago on a company i started. I put my heart, sole blood, sweat and tears...and a marriage into the company only to find out 3 years after brining on the partner I could not control what I wanted. He has to sign off on it too and if he did not like my vision, tough **** for me.

    I later bought 1% of my company back for $25,000 because he blew all his money he earned so I got lucky...and control of my company back. Being 31 years old now I have learned so much OF WHAT NOT TO DO!!!!!
     
  11. ArcSine

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    Greetings, Eric; glad to hear that things are still on "go" for your plans.

    I like that you've made a "percentage off the top" piece a component of your early structuring thinking. Whether or not this eventually morphs into an actual franchise deal, it's definitely franchise-ish in its fundamental concept. Hence it'd be valuable to think like a franchisor from the start, and the 6%-of-top-line element of the deal is analogous to the royalty or franchise-fee component found in most franchise agreements.

    The idea is to reduce your exposure to the variability of the bottom line, which is heavily influenced by the decisions concerning operating and overhead expenses---decisions which presumably are more in your partner's court than yours (if he is to be more the day-to-day 'operating' partner for the new locations, while you remain focused on your home base, and limit your involvement in the expansion locations to that of a high-level oversight role). In such a situation, you typically want a bit more of your cut coming off the top line, while his share is keyed a little more to the bottom line. Just make sure you don't skew the incentives so much that he's obsessed with the bottom line, to the point of hurting the top line in a rabid pursuit of expense-cutting (such as suppressing necessary marketing expenditures).

    At the risk of stating the obvious, that segues into a general idea to keep in mind as you put the fine points on the plan: Incentives. Put yourself into his shoes, and make sure each element of the arrangement seeks to align his incentives with yours. For example, that incremental-10%-per-new-location provision might indeed be ideal for your particular situation, but make sure he doesn't then have an incentive to quickly open 5 small, minimally-profitable locations just to get himself immediately ramped up to his max ownership level, before then going after the lucrative, big-dollar expansions.

    And like a franchisor, of course, you want to maintain some level of control over the quality of the product. You might not be co-signed on the new debt, but it's still your product and reputation out there. Any damages thereto could come back against your home operation.

    Also remember that profit-split percentages and ownership percentages are not the same thing (and in fact, rarely should be). You could retain a majority ownership of the voting equity (and hence managerial control) even while having an arrangement that gives him some level of profits that's greater than his equity ownership. The point is that you might find you'll need to sweeten the pot for him in order to provide the necessary incentives for an optimal expansion program. You could do so while still retaining managerial control. Run the numbers, of course, but in general it's better to get (for example) 40% of the profits of 15 locations than 60% of 4 locations.

    Finally, consider your exit strategy. At some point you'll wanna pull back and enjoy the slow life, and this partner might be the best way for you to cash out down the road. Depending on your current timeline---whether you want to retire in 5 years or in 25 years---you might consider putting some buy-out options into your agreement.

    Best of success with it!
     

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