New business - silent partner split of equity

[Tceg]

I was approached by an acquaintance with a reasonable idea who I would trust as an honest partner

He is a store owner with ability to have contracts with companies for items to purchase wholesale. He also is able to somewhat protect the store as his specialty items cannot be sold from a store within the geographic region.

Looking to set up some variation of an online store.

He would like the idea completely funded by another, but will be doing most work involved at the same time as running his regular store with use of additional employees.

Initial investment over 6 months would likely be 100K.

Project should turn profitable around 8 months with ongoing profit around 20K per month (hopefully more),



I need some help in structuring the split



What should equity share be?


He asked for a 75-25 split in his favor after complete payment of money that was invested.



Is this fair? Other thoughts?

[Freelancier]

Project should turn profitable around 8 months with ongoing profit around 20K per month (hopefully more),Says who? Based on what?

Also note that he is protected from competitors for some of the items over a geographic area, but those contracts usually have a component dealing with online sales... either to restrict who he can sell to online OR to remove all restrictions for everyone online. Look into that.

What's the split pre-payback? Does that split include the ongoing costs for updating the site and keeping things "fresh"?

[Tceg]

All investment gets paid back before anything is paid out.

Split is post all expenses.

[Paul]

Impossible to say without much more detail.

Is his current business profit in the mix or is this exclusively about the “new” business? What risk is involved? Is the money needed for inventory or marketing or infrastructure?

In my opinion, if his current business is not in the mix then the split may be too much in his favor. You are essentially financing a startup (although perhaps with reduced risk).

Does he have an alternative way to finance this? If not, then obviously you can be more aggressive about negotiating the split.

There is so much more to consider it’s impossible to say much more. If you care to, please share more details.

[chrismarklee]

I would be extremely careful here. Very few partnerships work out. Mark sure you have control over the money. Both incoming and out coming, etc. You need to talk in person to someone.

[Tceg]

He would give me 50% of his current business. However, that doesn't mean much because he will take most of the money out of salary.

[Freelancier]

Never own 50% of a business. What happens is that no one has a majority, so when there's a point of contention, nothing can legally get done, which is bad for the business.

[alwaysinterested]

The split after your initial investment is paid out should be based on how much you will be contributing to the business. If your getting 25% and have to do nothing at all thats not to bad but if your doing half the work and funding the start up 75-25 his favor is insane.

I would say that you get your initial investment back before anybody gets paid especially since he already has a business going(he should cave to this if he really wants this business) plus a fee/interest, maybe 20k or so since you said the monthly income will be around 20k. Then set up a 60-40 split his favor if he is doing most of the work and then you can always renegotiate down the road, you can always go down but its hard to go back up if not impossible. Plus you may end up doing more work then you think but giving him a majority steak will make sure you can always say you should be doing more since your making more. A 50/50 would make you equally responsible in making it successful which it sounds like you may not want.

In the end I look at things with the mindset if im getting a solid income and not doing much at all who cares as long as im protected in the end for my share, also how much do I need this stream? can I afford to lose this stream of income?

[zdg]

Never own 50% of a business. What happens is that no one has a majority, so when there's a point of contention, nothing can legally get done, which is bad for the business.

I second this, from first-hand experience. If you're going into an even numbered equal-share partnership deal, make sure there is an independent tiebreaker (we used our corp attorney, which wasn't the cheapest method but it solved the problem). It's amazing how often something that seems like a no-brainer turns in to a contentious battle with your 50/50 partner.

[ActionMan]

As Paul said, more details might help us assess this "opportunity" better, on your behalf.

A few questions that I would ask are: What is the $100K being used for? Inventory, expenses, working capital, all of these? What guarantee can he give you that you won't lose all your money? (I'm guessing he can't provide any guarantee what-so-ever). What if he tells you in month 4 that he will require additional investments to make this work? While he can protect geographic territories when retailing from a B&M store, how will this be achieved for an online store?

Essentially, you are financing this venture. As such, you are the sole investor, however, you have no knowledge of the business (I presume) or the sources of inventory or even the customer base. Should this go south will you be in a position to salvage your investment?

As a rule, I would not venture into a business without knowledge of the industry domain and product line, and control over some key aspect of the business.

I don't mean to burst your bubble, but given what you've told us, I would be very wary if I were you. I wouldn't take this leap based on a rosy future probability. Think of all the things that could go wrong and figure out a plan B & C for these. He has nothing to lose while you have a lot to lose. Is there a possibility to do a trial run with minimal investments before you commit to $100K?