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.