Need some patnership advise

[patphish]

Hello, i am new to the forum here.

I have a few questions as i am starting up a new business. Here is the deal. I will be starting a pool building and design business. I will have a partner only in the means of captiol. He will be putting in the money only. I will be the one doing all the work and labor. I guess it will be more of a silent partnership. I am trying to figure out what a fair split would be. I belive i will be taking somewhat of a salary reduced of course for the first little bit. But i i wasn't sure on the division of profits should be. Should it be 50/50 off the bat or 70/30 until investing partner gets inital investment back with some type of compounded return. Just looking for a little advise on this aspect. I have had a business in the past but the patnership thing is new to me. And i am looking to make it fair for the both of us.

[vangogh]

Welcome to the forum patphish. You probably already know this, but in the end this is something you and you're partner will have to figure out. I'll do my best to offer some things to think about though.

That you want to make this fair to both of you is a good approach to coming up with a fair agreement. Both the money and the work are important and both deserve something in return. Will the financial investment be ongoing? Could you ask your partner in a year for more money or are you thinking this is a one time investment of several investments over a short period of time? The longer your partner is willing to continue investing the more I'd think he would deserve of the business.

The day you open the doors his contribution will be greater than yours most likely, however over time it's your contribution that will be the greater. Once the business no longer needs the additional financial support there's not much, if anything, for your partner to contribute. You can work out an agreement that changes over the course of several years or redo the agreement on an annual basis to reflect the changing value of your contributions.

You might also work this as more of an investment for your partner where no ownership in the business is exchanged. Instead you agree to pay back the investment by some specified time. Maybe you could combine this in a way with ownership in the business where if you haven't paid back some % of the investment by the end of year one your partner is entitled to a percentage of the business instead or in addition to that part of the investment you haven't paid back.

There are lots of different ways you can do this. I think the best way for it to end up being fair to both of you is to communicate with your partner. Each of you share your concerns. Think through what each of you will be responsible for doing in the business. If you write down all the different aspects of running the business (daily operations, marketing, accounting, etc) it'll be easier to see what's involved in making the business into a success and to see where each of your is contributing.

More than anything communicate with your partner. That's the best way to end up with something you both agree is fair.

[patphish]

Thanks for your input. It's always nice to get someone else's point of view. I know partnerships are hard to work out.

[acctng]

I agree with vangogh. And I once got some interesting advice from a lawyer who was advising me on a partnership I was considering. Write in a clause where either partner can offer to buy out the other partner at any time by naming a price. The other partner can either take the stated price, or pay his partner the price and keep 100% of the business.

[huggytree]

no matter what % you decide on one of you will be unhappy with it

i could see 50/50 until he's paid back...then 90/10

once he's paid back why should he get much....id be thrilled to get 10% forever for borrowing some money

the smarter move is to borrow the money and skip the partner

rarely do partnerships work....i know of another one in my circles that is breaking up....you have to be a special person for a partnership...very easy going with no greed or envy....almost everyone has greed or envy to some degree...

no matter what % you decide someone will be bitter eventually over it...

good luck!

[Business Attorney]

As the others have said, there is really no one-size-fits-all answer to your question. A person who puts up $100,000 in a highly risky venture should expect a different return than a person who puts up $10,000 to get a relatively low-risk business off the ground. In both cases the funds may be the only capital in the business, but the risks in both actual dollars (magnitude) and likelihood (probability), the 2 key components of any risk analysis.

Angel and venture capital investors often look for a 30-40% expected return on their investment to offset the relatively high risk of a complete loss of their capital invested in a typical start-up or early stage investment.

To determine what is fair in your situation, you need to look at the amount of the investment and what you expect the business to make. For example, if the partner is investing $20,000 and you would expect the partnership to make a profit of $60,000 per year, a 50% interest in the partnership would throw off $30,000 a year in cash, which is really an excessive rate of return on a $20,000 investment. A 15% interest would pay off $9,000, which would be a very good annual return for a $20,000 investment.

On the other hand, if the partner is investing $100,000 and you expect the partnership to make a profit of $60,000 per year, a 50% interest in the partnership would throw off $30,000 a year in cash, which is really a borderline-low rate of return that may make sense if the new business is one with a relatively low risk of failure.

[patphish]

Thank you everyone for your input. It was very helpful.

[synconlinemedia]

This can be structured so many different ways. In my opinion you need to ensure you don't give the farm away and see if you can get the investor out of the picture at some point in the future. Five years from now when the company is doing great you will still be paying the silent partner 50% of your profits and doing all the work. I would do a 30% for 5 years then a buyout. You can do 50% until he is paid off with some sort of high interest rate on the money. Consider a step-down where they make 30% for 2 yrs, then 20% for a yr, then 15%....etc. until the partnership is over or the amount you pay out is manageable. Hope this helps.