Partnership / Collaboration

Discussion in 'Growing and Managing a Business' started by lincoln, Apr 20, 2013.

  1. lincoln

    lincoln
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    I'm looking for some hopefully seasoned and experienced advice on this.

    My business is currently a sole-propriatership. In starting the business I had a very good friend who was also starting his own business help me with some design and web stuff that was beyond my capabilities and understanding. His web design company caught on pretty much right away and he's done quite well for himself. My business which is much more of a niche marktet, has taken about a year to really gain any traction of it's own.
    My friend and I have talked very candidly about combining the two sole-propriatership businesses, or having some agreement where I have a stake in his and he in mine. There are not very many friends I would want to enter into this sort of relationship with but with him I would.

    I'm looking for any thoughts on two aspects of this:

    1. What is the proper way to do this? What are the terms - if we go 49/51% so that each guy still 'owns' his each company, is that how all profits are split up? What percentage should the company keep of profits in order to grow?

    2. My business required investment into equipment to provide our services. So the business currently has about $14,000 in debt right now. I make a small living off of the business right now and am trying to pay that debt off as quickly as I can as it is tied to my personal finances because of the business being a sole-propriatership. So in bringing a partner into the picture, do I:
    • Wait until debt is paid off? The thinking being that without anyone else to pay - it allows larger payments to the debt, it goes away faster, also saves money on interest.
    • Bring him in right away and although the dept takes longer to pay off, and part of the profits go to someone other than me, the business gains his expertise and abilities. It would also be important to note that he helps me out quite a bit on little things here and there but it's only when he has free time and it's last on his list (as it should be) and sometimes that holds up the development of new services that I can offer to our clients. Also taking into account that I contract his services for the majority of our jobs anyways, it's just not quite as much as if he was getting paid as an 'owner'.


    I think my company would benefit from having him be a part of it more so than his company benefiting from me. But I am struggling with giving away part of the business as I wanted to do it by myself - even though I'm finding that I actually need him in order to have good products and services support and development. But I also don't want to give up the money because I want to get my personal finances in order first, which is finally a possibility now that the business is actually rolling on it's own after a number of years of my wife and I living with a VERY low income level.

    Anyways, hopefully that gives you enough of a background and info to weigh in on this. Any thoughts or opinions are extremely appreciated on this as I want to make a wise decision on this, and I don't really have any business mentor's in my life.
    Thanks!
     
  2. Fergal

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  3. StarBC

    StarBC
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    Hi Lincoln!
    Do you really want to create a partnership with your friend? With a partnership of any kind you will need to share your company and your earnings from business. If you want 100% of ownership the only way is to be on your own. May be it will be easier to create an agreement with your friend about using his company as a third party service provider.
     
  4. lynxus

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    Bringing a partner in is always going to be a very hard thing to do.

    As mentioned, Giving money away is the main problem.

    Do you REALLY! need him?

    Also if you have 14k of debt.. Surly if you bring him in he will take on just under 7k of that?
    If you were to pay it all off and still give him 49% then what will he bring to the table to cover that? I mean, if you offer him 1/2 of the company, he will essentially of costed you 7k + whatever else... Will he bring more than that in business? will having him on board bring 12k? 24k? or more in the first year?

    I'm not a big fan of "sharing" when it comes to business and it can get very ugly very quickly.

    Just my 2cents..

    You really need to weigh up the risks 'v' the positives.
     
  5. lincoln

    lincoln
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    Thanks lynxus StarBC and Fergal for your replies.

    You've all adressed my initial concerns.
    I suppose there is some emotional tie there with me that I'm having a hard time to separate because he's my buddy and I do like the emotional backup of having a team when dealing with large clients and stuff.
    He did do a bunch of work for me just to help a buddy when I was getting off the ground. If I were to hire someone to do what he did for me it was probably about $5000 or so?

    I'm not sure if he would directly start bringing in additional revenue because of his involvement, but I pretty much pay him out of every job already, and he has no vested interest other than it's a paid job. But it may allow me to go after additional jobs because some of the weight is off my shoulders. So not necessarily because of HIS involvement, but someone's involvement.
    Is there another option? perhaps a different percentage than half? Perhaps some per job agreement? Does anyone have any previous experience making those sort of arrangements with someone?

    Thanks for all your input!
     
  6. Ted

    Ted
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    Lincoln,

    I have seen this done here in the US before (New York State). Here is how it was done.

    A new business entity was created (S-corporation).

    Ownership of the new business entity was split unequally between the two partners according to their equity investment (which was equal to the value of each of their individual companies).

    The new business entity purchased both separate businesses from each owner.

    Now both owners were fully vested in the future of both of those separate companies. Plus there was a liability buffer in place because of the corporation.

    I would not recommend taking on a partner as a sole-proprietorship here in the US. I would recommend you form a new business entity with some legal separation in place.

    If you don't do that, then if the other person ever gets involved in a lawsuit (from something like a car accident or anything really) then your personal assets could be exposed and lost. The USA is full of lawsuit happy people. Always have some kind of protection in place to shield your personal assets. If you don't think you are likely to ever be involved in a lawsuit, then you are wrong. It will happen if you are in business long enough.
     
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  7. lincoln

    lincoln
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    Ted,

    Thank you for posting this. THIS is extremely helpful in organizing my thoughts around this whole thing.
    When in a legal corporation with unequally split equity, how does the pay structure work between the two owners? Are both salaried a certain amount and the company keeps whatever extra at the end of each month to use as company growth and investment or hiring? Sorry for the school-yard basic questions here - again, I don't have the experience or anyone I know here that I can ask these dumb questions too lol.

    Thank you for your time on this!
     
  8. Ted

    Ted
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    Your salaries would be based on your job duties and job titles. Or you could decide to have the company pay equal salaries to each managing partner.

    The only way the person with more equity would necessarily make more money would be if the company earns a profit and that profit is passed to shareholders. If one owner owns 60% and the other earns 40% then obviously the majority partner earns 50% more of the company "profits".

    I suppose you could arrange payments according to whatever the two of you agree to. There is no rule on how to pay income. It is a business agreement decided when the new entity is formed.
     

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