Partnership %

Discussion in 'Growing and Managing a Business' started by oolalach, Jul 26, 2010.

  1. oolalach

    oolalach
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    Hi - new here :) and need a little advice...

    So I have wanted to start a bakery business in my neighborhood but I wanted to start with a friend so that I have someone willing to work unlimited hrs (like me) w/o worrying about paying overtime or a huge salary. So I approached my good friend and she is going to do the bakery program at our community college with me (3quarter program) and do a partnership with me. Here comes the sticky part...

    My friend has absolutely no capital to invest in the business. All $$ will come from my savings and a business loan (her credit is not great but I have gold brick credit). Plus, I am supported by my husband, but she is single and will need to make a salary for her living expense. I suggested that she receives a salary for the first year and then switch to receiving a part of the profit (if the business if profitable by then)So now I need to "value" her sweat equity in terms of ownsership %. She has thrown out 51/49 so I have the majority of ownership, but with me being the only one with financial liability on the line, I think my % should be more than 51%. Can anyone tell me what you think a fair share would be?
     
  2. Mountain Man

    Mountain Man
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    Welcome Oolalach. I wish all the best with your new business.
    A PARTNERSHIP IS difficult at the best of times. throw in a good friendship that you don't want to ruin, and a new business with no history and you have a difficult situation. As for a % I really have no idea how you can determine that.
    Perhaps you could give her a line of credit which she would pay off with her share of the profits (half to her half to pay off debt) but keep a 50/50 partnership. So if you invest $10,000 of your own money in the bakery $5,000 would be her portion that would be subtracted from her half of the profits.
    Or she could work the first year at a hourly wage with an agreement that she can buy into the business after the first year. After a year you could start taking a percentage of her share of the profit to pay for her investment since she may not have the money to buy in.
    What ever you do I strongly recommend sitting down together and making an agreement on paper, both sign it. Try to think of everything. What if one of you wants out? What if you need more capital investment but one can't pay? One of you may end up working longer hours, then what?
    You won't be able to think of everything and you don't even need to stick to the agreement down the road if you can both agree, but it gives you a chance to think about different scenarios and how you might handle them.
    You may also want to look on line for partnership ideas, to give you somewhere to start.
    Good luck, and all the best.
     
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  3. oolalach

    oolalach
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    Thanks for the reply mountain man! I hadn't thought of having her repay a % the capital I put in (based off of her % of ownership) after the first year. Seems like the fairest route. I guess I am just nervous since I understand that a business does not tend to make any $$ the first year or two and yet I'll be paying her a steady salary! :eek:
     
  4. Fergal

    Fergal
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    Welcome to Business Advice Forum oolalach, thanks for joining and posting your business questions. Mountain Man has given you some excellent advice and I would agree with him fully on the importance of writing and signing a partnership agreement. The partnership agreement should cover items such as;

    • Who is responsible for what duties and tasks in the business
    • How accounts and figures, such as sales and profits are to be recorded and reported
    • Meetings between the partners
    • Percentage ownership of the business
    • Wages and salaries
    • Proportioning profits
    • Dealing with loses (hopefully you won't have any, but you should be ready to deal with them)
    • Dealing with a situation where one partner wants to leave the business
    • Selling the business.

    It's difficult to give an opinion as to what percentage of the business each of you would get, without knowing the full facts. However, based on what you say regarding your input into the business, I would tend to agree that you should be looking for more than 51%. Have you got an accountant? Would you consider speaking to an accountant to get their professional advice on percentage ownership?
     
  5. oolalach

    oolalach
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    I do have an accountant I could use, but in the interest in saving money I would like to use him as little as possible. I am not trying to put any money into my pocket the first year, and any money I make I would put back into the business because I really want it to succeed. I'm hoping a little reassurance of what's fair so that it wont seem to her like I'm being greedy. I get that it's hard to give me reassurance to someone when you're so far removed from the situation!!! hahahaha!! So, I know you're probably right about using an accountant - then we have a professional's idea of what's just and hopefully no one's feelings are hurt :) I just want to be so frugal the first couple years (especially)- my biggest fear is failure!! That's why I've waited so long to finally go for this!! Thanks again for your input!!! I value all the knowledge I can absorb right now!! :worry:
     
  6. Fergal

    Fergal
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    oolalach you are absolutely right to be very conscious of costs when starting your business. Taking on overheads that are too high, can cripple a business before it can get up and running profitably. However, it could still be worth while having a chat with your accountant, just be careful to ensure that you don't run up any high bills. A good accountant will often cover their fees by what they can save you in other costs, when setting up the business. Plus, it's obviously very important to ensure that you are both happy with the partnership agreement and the share that your partner receives.

    I hear your concerns regarding business knowledge. People who have not been in business or who have not worked at managerial level often don't have a good understanding of how businesses operate and how they run financially. For example, they will often look at profit in terms of selling price less buying price without considering overheads like insurance, rent, etc.

    Would your friend be interested in being paid a wage and a share of the profits, without getting a share of the business ownership?
     
  7. oolalach

    oolalach
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    Fergal - Thanks, & you're right - consulting a CPA will be worth the while. As far as her taking wages and part profit, I don't think she would be willing because she has as much passion and excitement for the business as I do! We will be getting together soon to hash out who will be responsible for what, maybe we can decide how much her "sweat equity" is worth when that is determined. Thanks again for your reply! It helps us both to get outside ideas :)
     
  8. Fergal

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    Thanks oolalach, please do update us, once you have had a sit down with your friend, I look forward to hearing how it goes. Good luck with everything.
     

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