Need advice on compensation/owner agreement

Discussion in 'Growing and Managing a Business' started by Ogre, Dec 13, 2011.

  1. Ogre

    Ogre
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    Greetings!

    I joined this forum just to post this as I'm desperate for advice. I've kept this as short as possible (I'm partner 3 if you can't tell) -

    Four partners each own 25% in a retail business started in 1998 with an initial investment of 5k each. Business is a 'hobby' industry that all partners actively participate in. This seems small, but was a big deal to us back then, especially as we had to put liens on our houses as well to secure suppliers.

    Partners 1 & 2 have worked in the industry all their lives and work at the store full time. Each make a base salary of 35k.

    Partner 3 - works full-time elsewhere. Does all bookkeeping/accounting duties except year-end corporate return and K1 return for the partners. Earns 5k per year.

    Parner 4 - owns his own business. He supports this business's website and acts as our liason with related area organizations. Also has used his business as overflow warehouse storage for our business. Earns 2.5k per year.

    Partners 3 & 4 also assist with some other duties, such as trade shows, physical inventory, etc.

    After base salaries, all profits are split equally. When we opened, we had an agreement that Partners 1 & 2 earned 18k per year, and we bumped them 2k per year until they reached 30k. Two years ago we increased their base to 35k.

    The business has always done well and exceeded our expectations. After 3 years, we increased from 1,500 sq ft to 3,000 sq ft. This will be our seventh year with over $1M in sales and during those times have always had over 100k to pay out in profits to the partners above the base salaries. 10 other employees work here, two full-time. All of those get what is probably typical for retail wages.

    This year we'll get over 1.3M in sales, and profits are about 160k, so partners 1 & 2 will earn about 75k, partner 3 gets 45k, and partner 4 gets about 42k. Partners 1 & 2 work about 40 hrs per week, partner 3 works about 4 hours per week, partner 4 a little less. In the early days and times of expansion, everyone put in sweat equity, but workloads have been reasonable for several years now.

    But partners 1 & 2 are now very unhappy. They say 3 & 4 are sitting on the sidelines and unfairly getting compensated where 1 & 2 deserve all the credit and put in so much more effort. They feel that if they have had more business savvy, this would have been accounted for in the original shareholder agreement to give them a higher proportion of compensation. Since they are working 10 times the hours 3 & 4 are, they should be earning ten times as much.

    Partners 3 & 4 have reluctance to agree. In their view, 1 & 2 have always run the business as they have seen fit and do not take any direction from 3 & 4. For example, 3 & 4 have documented job descriptions using two different methods for everyone which were never implemented. Brought in a minor partner at 10% to help with managerial duties which didn't work, and had to buy him out. Created a service manager position with additional compensation which didn't work out. 1 & 2 are great with running the day to day aspects of the business, but have no strategic vision. No planning or projects take place during the off season. They do the same work as everyone else at the business, although they do it much better and do have the most expertise. My biggest complaint - they continuously let people walk out the door without paying in full. In short, 3 & 4 feel the business is run well below it's potential.

    I think they're thinking along the lines that we should get 10k per year and be happy. (I guess that would better line up with the fact that they put in 10 times the hours we do). Then we could get in a shouting match over 3 & 4's compensation - I think I've been vastly underpaid for my professional services, and we have never paid partner 4 for the use of his warehouse.

    I do think 1 & 2 deserve more. The easiest is more base, but I've also been advised to try to do it through incentives. I'm reluctant to do it strictly on sales either because they'll let margins erode, and it doesn't address our accounts payable/bad debt, or any other issues we have. I've always felt that the best payouts for overall compensation should be based on EBITDA.

    Do you think each partner is being compensated fairly? If there's 100k in profits, how should that be split up? What if it's 160k? Am I being a scrooge?

    By the way, both people I've talked to said we should buy out 1 & 2. I'd like to, but I don't see that happening.

    Thank you for reading through this!
     
  2. Ogre

    Ogre
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    Bump to get this back up!

    29 views and no one will respond? (or read the whole thing?)
     

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