Equitable partnership ideas

[C69]

Hello all,
My GF and I are pursuing the purchase of an existing and thriving business. She is 30, has a HS diploma and two years experience and workind knowledge with this business, I am 40, have a Master's degree in Exec Management and 20+years of military service. She currently manages the store and performs nearly all the day to day functions and works about 40 hrs a week, but lacks the behind the scenes business knowledge and ownership aspect of the business. That’s where I come in. I believe my education, and diverse military background fills in where she lacks. In a sense we complement each other fairly well in both our relationship and this potential business venture. I have about 10 months before I am able to retire and commit 100% of my time to the business (although I do devote a good amount of time to this venture while at my current place of employment) and feel I am the driving and motivating force behind this/us. I do currently pick up shifts during the week/weekends and (will) take care of ownership issues in the evenings (as will she) once we close and become THE owners. She and I have nearly identical FICOs, are contributing the same Capital for buying the business. We are looking to use a veteran loan program through the SBA and local lender. So in essence, nearly everything that has gone into the business as far as risk is equal. In lieu of physically working at the store as she is, I am conducting the research, attending various necessary meetings, writing the business plan, and doing the 'due diligence' to keep the ball rolling in the right direction; basically doing the 'back office' management stuff while she works her 40 hrs. Luckily my current work schedule affords me to do this.

So during a recent conversation about our prospective partnership, what we both bring to the table and what that's worth in terms of our paying ourselves and partnership percentages (i.e. 50/50 v 70/30), we've come to a bit of a disagreement in what is equitable as to what we both currently contribute. Basically what should the partnership % splits be and based off of what? So what is considered a fair partnership percentage to both of us? What is the value of what each of us contribute to the business? I'm not able to physically work 40 hrs IN THE STORE like her, therefore, she believes she should have a higher salary and percentage of ownership/returns. I on the other hand, disagree because I am still putting forth time/effort into the business, including taking time off of work to meet with various people and conduct preliminary business AND work a few nights a week to assist where needed. She additionally feels that my current income and the fewer amount of physical hours contributed to the store is a factor on what I should receive as a partner. Again, I disagree. If I had 3 small businesses and 50% partnership in each, I shouldn’t take less from one business just because I have an income from the other two completely separate businesses. If I'm wrong, someone please tell me. The question is: is what we both contribute equal or does one hold more weight than the other?

With it being an LLC, I'm still learning but a bit confused as to how we will ultimately pay ourselves back. Do we increase her salary? Do I get a salary? Do we both get end of year bonuses? Is one of us paid in dividends while the other is paid as an employee? Ultimately, I want to create a partnership that won't destroy our personal relationship and is something we BOTH feel is fair and equitable.

Any help or advice is greatly appreciated!
C

[Wozcreative]

So for what I understand:

SHE:
• Runs the business
• Deals with customers/clients
• Deals with the inventory
• Makes the sales
• Opens/closes
• Cleans/organizes
• Invoices/bills
• Puts forth 100% of her time

YOU:
• Come in when needed
• Do business for the business outside (bringing in customers/clients?)
• Anything else? That's really all I saw you note?

If you both put in the same amount and shes actually busting her butt full-time, I think she should get more of that business. You are not yet invested/cannot invest your time into the business yet. Also if you are making more salary wise from this business, this also needs to be taken into consideration.

[Paul]

I would suggest separating the financial investment from the work side. In other words because you both are contributing approximately the same capital then ownership should be 50/50. You have to look at this part as if you were both making a passive investment.

However, salary should be based on the work and hours. She should draw a manager’s salary and you should draw a salary commensurate with your wok/time. You could even be on a hourly or contract basis.

The work and salary may change but the initial investment will always be the same.

As an example if she no longer wants to work then she will still own 50% but will give up her salary and hire a manager.

[C69]

Thanks guys, im not getting defensive, rather trying to understand how to structure the partnership. Eventually, neither of us will physically work there and just manage it and check in as needed. My perception of the Business owner's dream is to have others working for you so you dont have to...so in that sense, our ownership will be a true 50/50 once that time comes. She does some/most of the bullets listed above, the rest is covered by the owners (and me), which yes WE will both be doing 100% of that once we become the owners.

In reality, she works 40 physical hours in the store, period, thats it, i wouldnt say 100% of her time (but to be fair, nor do i right right now). Ive recently started working in the store for close to 20 hours a week in the evening and weekends after my full time job to learn the ropes and because one employee is headed off to school, so i am invested in the business. As i said earlier, i additionally work on the business at my office and run around doing the start up stuff during the day(which i believe once we become owners will be running around meeting with clients and everything the current owners do now, they are in the store sporatically), in addition to what i can do at night at home. unfortunately it seems to me, that she thinks working 9-5 m-f is what its going to take to make a successful business, asking her to do anything after work is like pulling teeth. As a business owner/operator, your working hours are rarely if ever contained within the normal 9-5 day, correct?

She does draw a manager's salary. Although im not physically in the store 40 hrs, maybe closer to 20+ right now (paid as an employee) not to include what i am doing on the outside (which im not compesated for) that she can not, should be worth something, right? She may have 2 years of the store experience, but what is my background and education worth? I recall hearing everyone talk about the doors to higher paying jobs that will open once you finish a degree. I didnt go to school with that as my focus but isnt there or shouldnt there be some consideration for it?

Thanks for the discussion, i appreciate your knowledge and straightforward advice!

[Paul]

I suggest not trying to compare experience vs. education etc. Two equal financial partners are equal even if one is a drop out and one is a Phd or one has 10 yrs experience and the other none. It's really irrelevant on the equity side and neither education nor experience guarantee success.

It's the salary part you should focus on. If shes working 40 and your working 20 it should be easy to figure out. She gets 50,000, you get 25,000 and then you split the profits.

Somehow she should understand that there are two parts to this equation.

1) You are buying a business together with equal investment= 50/50 ownership.
2) Then you are hiring employees who just happen to be both of you. Think of it as if neither of you are going to work there and you are going to hire employees. Pay yourselvs what you would pay employees.

Just my opinion.

[C69]

Thank you Paul, that made more sense than the other 95 posts ive read on here today! Thank you!

[C69]

Ok, so that leads me to another question. My GF has a daughter, i have two sons, all nearly the same age.
1) can the business ownership be passed down to our kids(if able, capable and willing of course)? im guessing it should be.
2) what is a fair ownership % for my GF and me if were planning ahead for our kids?
a)ownership %: 66/34 me/her--passed to 3 kids= her daughter 34%, my boys 33% each.
one foreseen issue with a 50/50 split between us now is down the road, my two sons would have to split my 50% which would only be 25% each and inferior to her daughters 50% ownership of the busniess, hypothetically.
b)& profit sharing %: 40/60 me/her. In all fairness, she would get more of the annual profits(plus a salary if she decides to keep working) in trade for me getting more ownership.

I understand it comes down to what we both feel is equal, but does that look too far fetched from you...a third party?

[Harold Mansfield]

Thanks guys, im not getting defensive, rather trying to understand how to structure the partnership. Eventually, neither of us will physically work there and just manage it and check in as needed. My perception of the Business owner's dream is to have others working for you so you dont have to...

It takes a while to get to that point. Sometimes years. If you remove yourself from the business too soon, it will fail. And even then, no business runs on auto pilot. Success is only going to come if the owners take a vested interest and put the time into it, and that never stops. Expecially with a retail store or any hospitality business.

So basically she's going to be busting ass to get it to that point and it's my opinion that she should be compensated fairly for that.

[C69]

Thanks Harold,
It would never be on complete auto pilot, i am fully aware of that, nor is a vessel or airplane for that matter. I consider it similar to my boat on auto pilot, its taking us there, im still monitoring and at the helm making any course corrections needed. at this point she works 40 hrs, m-f and thats it. once we close, we will both be "busting ass to get it to that point", working an equal amount of hours (both in and out of the shop), which i expect to be more than 40 hrs each, especially in the begining. "compensated fairly" is a bit vague. would you consider doubling her salary (once we become owners) from what it is right now? that is in addition of course to the annual profit sharing we decide on...which was my original proposal to her.

[Harold Mansfield]

"compensated fairly" is a bit vague. would you consider doubling her salary (once we become owners) from what it is right now? that is in addition of course to the annual profit sharing we decide on...which was my original proposal to her.

That's really going to be impossible for me to answer. The only people that can say what is fair are the two of you. What's fair to me, may not be fair to someone else. There isn't really a table to follow.

I would also create a contingency for what happens if the relationship ends. It's not fun to think about, but you said that this was your GF, right? Starting and running a business together can be a great strain on a relationship for all kinds of reasons.

Just cover all of your bases.

[Paul]

Ok, so that leads me to another question. My GF has a daughter, i have two sons, all nearly the same age.
1) can the business ownership be passed down to our kids(if able, capable and willing of course)? im guessing it should be.
2) what is a fair ownership % for my GF and me if were planning ahead for our kids?
a)ownership %: 66/34 me/her--passed to 3 kids= her daughter 34%, my boys 33% each.
one foreseen issue with a 50/50 split between us now is down the road, my two sons would have to split my 50% which would only be 25% each and inferior to her daughters 50% ownership of the busniess, hypothetically.
b)& profit sharing %: 40/60 me/her. In all fairness, she would get more of the annual profits(plus a salary if she decides to keep working) in trade for me getting more ownership.

I understand it comes down to what we both feel is equal, but does that look too far fetched from you...a third party?



On the profit sharing it is 50/50 AFTER salaries have been paid.

Gross profit $ 150,000
Her salary - $ 50, 000
Your salary - $ 25,000
Profit $ 75,000 is split 50/50 or $ 37,250 each

So her salary plus profit = $ 87,250 your salary plus profit = $ 75,000. If this doesn’t seem fair then try to adjust the salary, not the profit split and especially not the equity split.

On the kids it would be her 50% goes to her kid(s) and your 50% goes to your kid(s). Unless of course you make different provisions.

Usually there is some provision for one side or the other to buy the other side out in the event of death, similar to a home that is left to heirs. Usually the formula for valuing is predetermined. Often a life insurance policy is purchased for that purpose. So if one of you dies first, the other buys out the half that would have gone to heirs with the insurance money. The survivor then owns the business 100%.

You can work out a similar provision for simultaneous death; you just have to decide which side wants the business and which wants the cash. If neither wants the business then they split the insurance cash, sell the business and then split that.