Help! I think I am in over my head!

[vcatherine]

I have just entered a partnership with 4 women and I think I may have gotten in over my head. It is a complicated situation so I will try my best to explain my situation. There was an exisiting clothing store that is owned by one person- she then has partnered with three other women (me being one of them) and we sell furniture and home accessories in the store. The initial owner has always done interior design services from her store but has never sold
furniture off the floor. Because the intitial owner has opened up the majoirty of the furniture accounts (ones that she had to have enough $ to open but
has already been paid commssions on) she is asking that our new enity pay her 10% of every furniture sale that was one of her opened accounts until she makes back her $120k initial buildout for her retail space. Should we be responsible for any of her build-out cost? She opened the store 2 months prior to our partnership....She is also one part of this furniture business too so it almost seems like she is dounle-dipping. I have soo many questions about how we should manage this but I guess this one is the best place to start. Any advice would be wonderful. I am also wondering if our part of the business is considered 50% of the business when the four of us are not splitting everything 50/50 b/c she would get that 10% and she also is keeping her exisiting interir dsign clients.......

[SnellExperts]

Your best bet is to speak with an attorney who specializes in small business matters. Each state operates under a different set of laws, so if you want accurate and relevant advice for your situation, that would be my suggestion. Good luck, sounds like you do have your hands full.

[greenoak]

good luck..... thats a lot of people to deal with....what kind of agreement did you make before joining up together?

[vcatherine]

This opportunity really just fell in my lap and I think we put the horse before the cart because of timing issues. We do have an attorney whom created our LLC and we are in the process of completing our operating agreement. All of the pints I mentioned in my previous points were discussed at the meeting with him but he did not comment on them. Our operating agreement has not be signed or completed and that is why I think I keep have second thoughts bc as we continue on this path it is becoming apparent to me that we are not equal.

[SC93]

When something good happens, that is what it usually means when someone says it fell in their lap. Be sure to let us know in 2 years if it fell in your lap or you accidently stepped in it.

I have my bread & butter business that I own myself and would never have a partner in. For FUN I would go in to partners with someone on a business... if it made money great and if it failed... life goes on. But I would never go in partners with something that is paying my bills. I hope this one is just for fun with you.

[huggytree]

id get out of the deal if you can...no way 4 people will ever agree on anything......i think its rare for 2 man partnerships to succeed....but FOUR man???? no way....too many variables and it sounds like its barely started and you already have issues....

all these issues should have been defined before you signed...you needed to sit down and think/learn about all existing issues and get them worked out ahead of time....now the issues are showing up and you are being bossed around...

id get out of the whole deal and start your own business(your way)

why do you owe a partner anything???

[vcatherine]

Thank you all for your advice! I truly appreciate it! As for the issue of making money to pay my bills or doing it for fun- I do not want to lose money but this is in no way meant to pay my bills. The comment that really hit home was "why do you ow your partner anything"- this is where I am struggling. Becuse this individual already had the store nad the furniture accounts she feels that she should make more than the others. We have not signed ANYTHING! An LLC has been created but no operational agreement has been signed bc we have not agreed on the terms. If I was to get out it would be now and that is where I think I am headed. Thank you all!

[SC93]

Good. Great to hear this isn't your money maker. Yeah, it sucks to lose money but it happens. I think it best you get out and QUICK! A partner in business can be fun but more than 1 partner means it will almost always end on a bad note. I have an idea I want to try right now but I haven't found anyone that I trust good enough to try it with. Like mine, if you want to go in to a business, just sit back and wait... if the right person crosses your path, great. But if you never find the right person, don't put yourself in a bad postion with the wrong person. Good luck on your next venture.

[ArcSine]

Many partnerships are formed with the pre-conceived notion of "equality"; 2 partners should split things 50/50, 3 partners would allocate things 1/3 each, and so on. Truth is, allocations of profit should (ideally) be based on the relative values of each partner's input. In that sense, then, the mere fact of an unequal sharing of the pie doesn't imply that something's amiss; indeed, it'd be the rarest of coincidences when a pie should be divvied up equally (i.e., implying that the value contributed by each partner is precisely equal to that of each other partner).

That's the easy part. The tough part is figuring out just what each partner's allocation should be, based on what he/she brings to the table. At this point it boils down to pure negotiation. If a partner feels the percentage split is within reason, she's in. If the split just makes no sense to a partner, she should walk (only after, of course, giving it all a critical analysis with pencil and paper to support or refute the intuition).

Random thoughts that might or might not help in figuring out if you want to ante in or fold...

It might not be unreasonable for the founding partner to receive some additional cut "off the top" w.r.t. furniture accounts she landed on her own, while the income from accounts opened "post-partnership" are allocated evenly. That would be a step towards recognizing the differing levels of personal effort embodied in pre- vs. post-partnership accounts.

If the founding partner does receive her desired additional cut, there's something in it for you. Right now she's got 120K of personal funds invested in those buildout costs. Unless the other partners have similarly ponied up 120K, the negotiations of how the profit should be split will certainly take into account the fact that the founding partner has placed a substantial amount of personal funds at risk. Assuming all else equal for the moment, that means she'll be getting a disproportionate chunk of the profits. However, once she's had her capital investment returned, the playing field has been leveled and there's no longer a valid argument for her to receive more of the cream than anyone else.

Kinda related to the previous, you and the other 'new' partners might negotiate for the profit split to morph to something more favorable to you, if certain goals are achieved. Pick a yardstick---revenue, net profit, # of customers, whatever---and have a provision in the op'g agreement that reassigns the profits a little more favorably in your direction if and when specified milestones are hit. That's a common way of resolving a situation in which a founding partner has some uncertainty about whether or not a new partner is going to deliver, but is happy to promote the new partner to "full and equal" status when and if the hard proof is in.

In your play-or-walk analysis, it might be helpful to compare your positions on a with-or-without basis. Surely there were days when Mr. Smith wondered why he had to share his profits with Mr. Wesson, and Wesson likely had similar thoughts. But I'll give ya dollars to doughnuts that they each made a boatload more money from their partnership than they each could have made separately. It's also true that for every Smith & Wesson success story that are a few partnerships that never should have made it to the altar. Point is, evaluate the opportunities that are available to you elsewhere, and compare them to reasonable expectations from this proposed partnership arrangement. I'd rather be a partner getting 15% of $2M than a sole proprietor getting 100% of $150K. But running the numbers on a different set of facts might show the sole prop route having the economic advantage.

Keep in mind that the proper and equitable structuring of a partnership agreement almost always requires a consideration of numerous details. Before you sign off on a final deal, it'd be a great idea to run it by an accountant, someone close by who could look at all the important details under a bright light, and then advise you with your own best interest as his sole responsibility.

It sounds like you're leaning toward passing on this deal, and your instincts may indeed be giving you good advice. In any event, maybe some of the preceding thoughts-at-large could help you crystallize your thinking a bit. And whichever way you go with it, best of success to ya!

[vcatherine]

Thank you for your responses. I am struggling with equality only because I feel as though the "split" is slightly underhanded. To "land" these furniture accounts you purchase furniture for either clients and/or yourself to amount to the desired
Vendors open - some are 30k-20k but most are generally under 10k. I am not under valuing what it takes to open all of these accounts but please take into account that these purchases are all generally making you money because you are selling all 30k worth of furniture for 40-50% over the purchased amount. Yes, she had to get that clientel to buy enough to open the account but that is also a lot of money that was made on that transaction. I can see the other 3 partners paying her 10% for each order on that particular account if she was not part of our business and we were just leasing space from her-but not when she is part of the business. There is no way to gage who is putting in more or less time to our side of the business. The initial owner is the only one who came to the table with something so it leads me to believe that we will always be owed something.

[ArcSine]

My apologies in advance if I'm missing the picture, but it sounds like there are two fundamental differences between the "original" partner and the three "incoming" partners:

Original has invested 120K of personal capital in the buildout costs (perhaps more, but that in particular was mentioned).
Original is putting certain pre-existing furniture accounts into the business, ones which she created "pre-partnership".



If those contributions by Original to the business (buildout costs; pre-existing contracts) have no or minimal value to the potential success of the enterprise, then the Incomings shouldn't dole out any 'extra' profit to Original for these low-value assets. They should instead start the biz from scratch elsewhere, since they'd be just as successful without them, but without having to pay for unnecessary assets.

Also, if Original is getting an unfairly sweet deal by (1) getting a commission upon landing a contract; and then (2) getting recognition for the value of those same contracts in terms of the profit split, then the Incomings could quite easily avail themselves of the same sweet deal just be replicating what Original has done: go out and independently land contracts of equivalent size, collect the commissions, and then contribute those contracts to the partnership.

But on a more practical level, it's usually the case that when certain partner(s) in a partnership are contributing more in the way of pre-existing assets, then the other partner(s) will 'equalize' the profit split by contributing more in the form of specialized expertise, labor hours, etc. Have the profit-split negotiations to this point taken into account the fact that the Incomings will be contributing more expertise and/or hours than Original, to balance out the capital investment by Original? If the contribution differentials have been nearly equalized in such manner, then Original probably shouldn't be entitled to any 'extra' cut of the pie.

[greenoak]

goood points above....and the money the first person put in has to mean a lot...i assume..
i would get out before signing anything.......
.but to even have chance of working together you really need to be on the same page with all the partners and sincerely satisfied with whatever your agreement is to be...
one more thought, in a financial crisis the bank will look at the most solvent partner...
and get a good exit plan on paper...

[glenneena]

Lawyers and doctors only make more money when there are problems, more problems. If you don't have an attorney you know, done business with and trust 100%, try your absolute best to resolve it yourself. You might be fueling an endless pit plus paying a third party. I have 30 years experience in business and used my share of attorneys. Most with no results I could not have accomplished. Some, yes, money well spent but plenty of it. Any attorney worth anything that will handle it with agressive passion will most likely cost you in excess of $5,000.00, from my experience. Good luck, glen.

[Reflo Ltd]

I am at a loss with understanding this situation.

Is the original owner selling each of the new 3 a part of the existing business? If so, how much does each need to invest?

I would assume that if 3 new members come on board and want equal equity/payout, then they should have to pay an equivalent portion of the value of the business.

[SnellExperts]

Yikes! The fairness thing is almost always a problem when multiple people are working together like that. I'm in a business with 4 other people though and it works pretty well. One of the things that we do is split up all of the jobs that need to be done and then asign each person certain sections until everyone is relatively close to the amount of work that they are putting in. If someone gets away from it we just pull them back in and keep going. Bi-weekly to monthly meetings are a must though to make sure that everyone is still on the same page.