Partnership Split

[Zorvan]

Hello everyone, I'm new to the forum so please excuse any mistakes.

I am currently evaluating a business opportunity that I would do with some friends as partners. I initially brought the business idea to them looking for silent partners to invest.

I would be moving to another city (increased living cost compared to where I live now), doing everything for the build out as far as finding and dealing with contractors. Going to training and also dealing with employees. I would also be managing the place on a day to day owner position. My wife would be the Manager and will simply take a managers salary as any other manager would. The other two investors will be available for their opinions and ideas, but other than that they will not be doing anything else. Capital will be invested based on percentage of ownership. There is potential that the business may become self-sustaining with little to do for me. This is an assumption and the time frame as to if/when it becomes self-sustaining is unknown.

I want to make sure that the profits are split fairly, but I feel like I'm doing all the work and to split ownership evenly would be unfair to me. I don't want to make things sour with my friends but I also want to make sure I am compensated fairly for what I am doing. Any ideas as to how to split the partnership up?

Thanks!

[vangogh]

Welcome to the forum Zorvan.

First I'm going to tell you the same thing I tell everyone who asks this question. Ultimately the right split is going to be one that all partners think fair. There's no absolute rules to what the split should be, but if one or more partners feel like they aren't being fairly compensated the potential for problems down the road increases significantly.

That said here are some thoughts. Since you mentioned bringing this idea to friends so they could be silent investors is it possible they'd be fine providing capital with a repayment schedule for you? You'd be on the hook regardless of how well the business does, but assuming it does well you wouldn't feel shortchanged doing most of the work? Naturally a part of the business could be compensation for their investment.

Based on what you've described they're putting up all the money and you're doing all the work to get this business going. I don't think it's realistic to consider increased living expenses and moving costs as investment in the business. Early on your partners are the ones taking the financial risk. Over time though that risk goes away and you're doing the work until such a point where this can be self-sustaining assume you're right.

Assuming you're right about the self-sustaining part and assuming the business is successful, then a few years down the road, your partners will have made a return on their initial financial investment and you'll have made a return on your initial work getting the business running. At this point your partners wouldn't really be doing anything and you'd be doing what sounds like minimal work. I can see where you might deserve a slightly larger % of the business, though probably not a lot. Maybe a 40/30/30 split in your favor at most. Because early on your partners are really risking more than you are you could start with an even split or even give them a little more to start (30/35/35) and over a set time frame have some of that percentage come back to. For example maybe things start at 30/35/35 for year one and then year 2 it looks like 32/34/34 and so on until you end up at 40/30/30 after 5 years.

In the end it sounds like all 3 of your are contributing a similar amount to the success of the business. Of course I don't know how much of an investment they'd be making and how much work and time you'll have to put in. I'm counting them as similar, but perhaps they aren't. I think given your partners are taking the bigger financial risk they might deserve a little more initially, while you doing all the work deserve a little more down the road once the business is running and once your partners have seen a return on their initial investment.

Hope that helps.

[Zorvan]

Thanks for your input vangogh.

I think i might have been a little confusing when I was explaining the situation. My partners are not putting in all the capital for the business. I will also be putting in capital. The way the investment capital will be split up is based on how much (%) of the partnership you own. i.e. If the investment is 100k and the partnership split it 40/30/30, I would invest 40k and my partners would invest 30k each.

The difference is that I would be doing all the work to get the business up and running smoothly. So although I may be getting a larger share of the partnership, I am also paying for that larger share, however i'm also doing all the work.

Hope this helps clear things up.

Thanks.

[vangogh]

I think I just misunderstood. You did mention that. In that case then amend what I said above. I would think under that scenario you would deserve more of the business. The hard part in figuring out how much is that it's not the easiest thing to quantify exactly what each contribution is ultimately worth towards the success of the business before it's started. Looking back it'll be easier, but it's hard to know now.

This is hardly scientific, but I tend to start with the thought that the capital is half the success and the ongoing work the other half. From there I try to think of what else each party is contributing. Sometimes one person's network is the source for customers or another person has years of experience in the industry or business in general. In your case you have the additional aspect that the financial contributions are going to match the percentage of ownership. I think in your case you would deserve more. Maybe you could bring this up with your partners. Let them know how you feel that because you're doing all the work it doesn't seem fair that the financial contribution and ownership are the same. I'm not sure how much, but it seems reasonable that some percentage is first put aside for you and the work you're doing and then everything else gets split according to your description.

For some reason 20% popped into my head. So maybe you start with 20% and then the remaining 80% of the business is divided based on the capital everyone puts in. If you then each put in 33%, it amounts to roughly 26.5% of the business so you ultimately get 46.5% that way while they each get 26.5%. You'd have to do the math better though since I just gave away 0.5% of the company to the ether.

[Zorvan]

Thank you so much for you input. I really appreciate it!

[vangogh]

Glad I could help. Hopefully others will find this thread and chime in. I'm sure some of our other members will have good thoughts that are different from mine.