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larcher100
04-30-2012, 07:12 PM
hi i am investing in jewellery business with 300k in cash and my partner investing his part in inventory alone at 300 k and expects to take a salary of 100k after 1yr with my share being at 25% and his at 75%. he has no intent to pull the principle but wants to buils on inventory and i wont see any profits or my capitol for few yrs. is this a fair deal.

krymson
04-30-2012, 09:12 PM
That's something you guys would have to sit down and talk about... In the short term who is taking the biggest risk? In the long Run who is taking the biggest risk? Keep in mind with those figures that most businesses fail within the first year... If your business were to fail within the first year who is going to be out the most... I'm sure inventory you can manage to sell back to the dealer but where you're going to be out on money is the property, the display cases, technology such as computers and POS software and merchant software... Got 50/50 on everything if you are both investing 300k wouldn't it be smart to got 150 and 150 on inventory and 150 and 150 on everything else? Then its all fair and if something bad happens its an equal share if everything goes good the its an equal share as well... Not someone is out 300k and the other person is out only 50k because that person can sell back the inventory for a little bit lower price then what they bought it for... doesnt seem right to me... someone will get screwed...

vangogh
04-30-2012, 10:09 PM
I agree with Jonathon. Fair is something only you can decide. You do want to think about what risk each of you is taking both long and short term as well as what each of you will contribute to the business both long and short term. If I'm understanding right you're both putting in $300k financially. You with cash and your partner with inventory. That sounds like as equal a split as you can get. Do you both have similar experience? Will you both be working at the store and running the business? If so what will you each be responsible for doing?

These are the kind of questions you have to think about and in the end fair really is what you and your partner agree is fair.

tmerrill
05-01-2012, 08:50 AM
I would add that you should write whatever agreement you and your partner decide upon down. It is very easy for someone to "mis-remember" several months down the line. You want to be able to show them something in writing. And if worse comes to worse, be able to show a court of law something in writing. Good luck with your new business!

MyITGuy
05-01-2012, 04:55 PM
hi i am investing in jewellery business with 300k in cash and my partner investing his part in inventory alone at 300 k and expects to take a salary of 100k after 1yr with my share being at 25% and his at 75%. he has no intent to pull the principle but wants to buils on inventory and i wont see any profits or my capitol for few yrs. is this a fair deal.

You mention that your potential partner plans to take a salary of $100K after 1 year, will you be paid a salary as well?
If the revenue does not support the salaries of the partner(s), will the salary still be paid? If so, where will the funds be drawn from? (I.E. Is he asking you for 300K in cash so he can assure he is paid a salary for the next 3 years)?
You're putting up 300K in cash, is there a budget/plan as to how this 300K will be used?
Your potential partner is putting up 300K in inventory, if things don't go as well as you hope are you able to stake a claim to this inventory? (I.E. Will the ownership of this property/inventory be transferred into the partnerships assets)?
What amount/type of work is expected of both partners?

Personally, based on what I see so far I see this as a bad deal. Your both putting up 50% of investment, but your potential partner wants 75% of the income and a salary of 100K per year after the first year...that just doesn't sit right with me.

larcher100
05-01-2012, 05:58 PM
no i am not paid a salary as i will not be doing any work but he will. i will get 25% of inventory as partnership and any profits according to the agreement but no way to get my capitol back as profits are used to build inventory.

TomWbl
05-01-2012, 07:56 PM
100K seems a large salary for year 1?

vangogh
05-01-2012, 10:01 PM
Personally, based on what I see so far I see this as a bad deal. Your both putting up 50% of investment, but your potential partner wants 75% of the income and a salary of 100K per year after the first year...that just doesn't sit right with me.

That's exactly what I was thinking too. Unless there's more to the story it sounds like you're both putting in the same thing, while you're partner is trying to take everything out. What else is he putting into the business to justify taking back so much more than you?

larcher100
05-01-2012, 11:47 PM
his expertise in jewellery business and contacts to fill in inventory which is sold ona commision basis and not part of inventory.i am a passive investor in this and so can understand not getting a salary at all but have problem with percentage between us.

vangogh
05-02-2012, 11:17 AM
Ok, that's different. If I'm understanding right this is really going to be your partner's business. He has the expertise and he's going to be doing the work and you're going to be contributing some capital as a silent partner. In that case I can see where the split is coming from. In the end no one can really tell you what is and isn't fair. That's something the two of you have to decide for yourselves, however think about what you're each contributing.

Financially your both contributing $300k. If things ended there and everything else was equal it would make sense for you both to get 50% of the company. However everything else isn't equal. After the financing it sounds like your partner is doing everything else. Outside of the financing it sounds like he should get 100% and you'd get 0%. Somewhere in between 0% and 50% is reasonable for your stake. 25% is in between and does sound reasonable. Without knowing all the details it's hard to know how fair or unfair it is, but it's certainly within reasonable limits.

Where you concerned if you are investing to become a silent partner you probably want to think about how much and how soon you'd be making money from this deal. It doesn't sound like you'd be getting anything in year one. Would you start in year two? How soon is it expected you'd get back your $300k? How much could you reasonably expect to make year over year after that? Instead of thinking about this as what's fair or not as a partnership you might think of it more like an investment. How much would you be happy getting in return for your investment and how soon do you think you can get it.

MyITGuy
05-02-2012, 07:09 PM
Ok, that's different.

....

However everything else isn't equal. After the financing it sounds like your partner is doing everything else. Outside of the financing it sounds like he should get 100% and you'd get 0%. Somewhere in between 0% and 50% is reasonable for your stake. 25% is in between and does sound reasonable. Without knowing all the details it's hard to know how fair or unfair it is, but it's certainly within reasonable limits.

If the potential partner wasn't wanting to pay himself a 100K/year salary, I would likely agree with you...however that's not the case.
Additionally, I'm not aware of when this partnership would end (I.E. Would the partnership disband after both parties were recovered their investment plus a %, or would it continue on for several years afterwards?). Without knowing this information I would recommend one of the following in this type of situation (Again, not knowing all the facts and not being an "investor" of this magnitude myself)
Option A - You both put in 50%, you split the profits 50% and your partner gets paid a salary for his work/knowledge.
Option B - You both put in 50%, you split the profits with 75% to your partner and 25% to you. This distribution compensates your partner for his work/knowledge

Below are some figures, just using a hypothetical number of 150K year of profit with no fluctuations to profit or salary
Option A - You both receive your investment back in approximately 4 years and your partner earns a salary of 300K for his work/knowledge during this time.
Option B - Your partner receives his investment back in less than 3 years, meanwhile you have to wait 8 years to recoup your investment (Not accounting for interest or etc...). Meanwhile you're partner earns another 562K in profits for years 4-8 which compensates him for his work/knowledge (Breaks down to approximately 70K/year)
Option C - Continue as your partner wants, in addition to earning the 562K in profits noted in Option B, he will also earn 700K in salary from years 2-8 (Breaks down to 158K year for him, while your only getting reimbursed at 38K/year)

In the end though, you should be speaking with local advisers (Your accountant to ensure the return is there and a lawyer to ensure that your interests are covered)

larcher100
05-02-2012, 07:23 PM
thanks for the info.so 25% is not bad deal if i get 10-15% in prfofits with inventory returning more than 300k after 3-4 yrs.

larcher100
05-02-2012, 08:08 PM
partnership will continue even after our investment is recovered.

vangogh
05-03-2012, 01:47 AM
If the potential partner wasn't wanting to pay himself a 100K/year salary, I would likely agree with you

Yeah I think that's asking a lot too. Unless he's confident the business can make that much money in it's first year. He should be taking more of the risk too if this is going to be 75% his business.


so 25% is not bad dea

It's hard to give you a definitive yes or no since we don't know all the details and again it ultimately comes down to what you consider fair. If this turns out to be a successful business then looking ahead a few years, your investment could be completely paid back and you'll be getting 25% profit from a business you don't have to work in. On the other hand the business could go under before your investment is paid back, while your partner is collecting $100k a year.

Something you might want to fight for is to get back money each year equivalent to what your partner is going to take. So instead of him getting $100k in salary what if he gets $50k and you get back $50k of your investment. Even if it's not 50/50 (it could be the same 25/75 split) something where your investment is being repaid from the beginning since your partner will be getting repaid. I think the 25% part of the business is reasonable. Maybe 35% is more fair. Maybe 20% is more fair. 25% seems reasonable to me given what each of you will be doing down the line. It's the $100k salary your partner is going to take that might not be so fair, since he's taking on much less risk for what's mostly he's business.

I would try to negotiate getting some of that money. If your partner isn't willing to budge on that you might want to ask for a higher % of the business. Under his scenario he's been repaid for his investment after 3 years while you've received nothing. At that point he also owns 75% of the business.

I still think you also want to think about how soon this business is going to be profitable and how much profit it's going to be making once it is. If you think by year two the profit is $300k a year then it'll only be a few years till your paid back on your investment and you'll be earning good money after that without having to do any work. Try to play around with some realistic numbers and think about where you'll be in 3 years, 5 years, 10 years.

lucas.bowser
05-03-2012, 11:50 AM
So how much does a jewelry store manager normally get paid? Is $100K out of line? I don't know the answer to that, but if that salary is commensurate with his position within the company, that is perfectly appropriate and should be excluded from the profit split since if he wasn't doing it you would need to hire that position anyway. As far as what his expertise is worth, I believe that is what his large salary is covering, hiring his expertise. If you feel that there is something beyond the salary that is justified, I would negotiate it as a fixed technical aid fee. This is how we handle partnerships between parties of unequal technical experience where I work. After that, I would say you should be looking at a 50/50 partnership on profits, since you are taking equal financial risk.

I would also recommend that you not distinguish which of you "owns" the inventory. It is property of the business and as such is owned in proportion to your share of the business. I would also have some governing language in your partnership agreement that governs inventory growth in relationship to dividends. Your inventory is not the same as cash in the case of a liquidation event, so you need to make sure that you are recouping your investment as early as possible to lessen your risk.

If your partner insists on the 75/25 split, you probably need to have language inserted that helps protect you in the case of business failure since it is much more likely in this event that you will not have recouped your investment. If he wants 75% of the profits on equal financial equity risk, then it seems you should receive 75% of the liquidation value up to the amount of your investment in the case of a business failure, after which you can return to 75/25 split. This allows him the opportunity to earn the unequal returns he is looking for, while protecting you on the downside. Along with this you need to establish some type of minimum inventory level that needs to be carried by the business, which also helps protect you in the case of a liquidation event. I would base this on book value of the inventory (not retail value).

vangogh
05-09-2012, 01:44 AM
Is $100K out of line?

I have a feeling that's a reasonable salary for an existing and profiting store. For a brand new store…?


you probably need to have language inserted that helps protect you in the case of business failure

That's where my concern would be. Based on the described set up larcher isn't protected at all if something happens to the business, while the partner gets his entire investment back in a few years. True it's a salary and he'd be working for it, but while both partners are investing equally where money is concerned, one is a lot more protected than the other. I think if that could be worked out this is probably a fair deal.

BNB
05-18-2012, 11:02 AM
I don't like the idea, at all, of the partner taking a $100k salary after 1 year. Oftentimes it takes far more than a year to become profitable and what if the business isn't doing great? Part of being a partner is dealing with the ups and downs.

I generally shy away from business partners. A solid business needs a leader and decision maker, and you just can't have 2 people do that.

lucas.bowser
05-18-2012, 01:18 PM
BNB, there are many different types of partners. In this case one partner's contribution to the business is primarily financial. There's nothing wrong with that, but given equal financial risk, how do you justify the working partner to share only equally in the profits of the business?

It is not atypical for an owner who doubles as the general manager/CEO/COO/etc to draw a salary. Nor is it unusual that it be comparable to what they would earn working for someone else. In fact, depending on the ceiling for this business, it is possible that a 50/50 split of profits after salary is a far better deal on the upside for the silent partner than an unequal profit sharing arrangement. In many partnership arrangements there is an unequal sharing of profits (even in the case of even financial risk) to account for domain knowledge or expertise that one party brings to the business. When the company I work for structures their J/V deals, we call this a technical aid fee (TAF). It is a fixed annual amount or % of sales that we receive to recognize the domain knowledge that we bring to the table in addition to our money.

As I said earlier in the thread. I don't have a problem with the salary, but it needs to be commensurate with the position he's filling and the deal needs to be fair in terms of financial risk/reward. If the salary is appropriate, then there are more pressing issues that need attended to in this deal.

phanio
05-19-2012, 10:54 AM
To different issues: One about investing in the business and one about who works in the business for what. You have to look at this as a financial investor would with pre- and post money. If the value of the business right now is $0 and your partner brings $300K (before you invest) - then the post money value is $300K and he owns 100%. Then, you step in and increase the business value by $300K - business's pre-value was $300K and you add $300K for a total new value (post-money) of $600K - then you added value is half that company - thus, regardless of who does what, you should own 50% of that business and get 50% of all profits and have 50% of all say. If your partner is going to work in the business and receive a salary for it (which should not be a set amount but some percentage of the profits earned) then he is getting paid for his on-going contribution - which has nothing to do with the initial capitalization of the business (both of you putting in 50%).
If your partner does not agree and continues to try to take advantage - then find another partner or invest in another company where you can get a fair deal and earn a great return on your investment.

vangogh
05-21-2012, 10:42 AM
Joseph I'd suggest the partner is contributing more than just financially and the business is worth more than his initial $300k investment. His experiences brings something to the table. I think it's also fair to consider who'll be working the business down the line. If the partner is going to be doing all the work and also bringing his experience to the business then I think it's fair he owns more of the business in the agreement.

lucas.bowser
05-21-2012, 03:48 PM
To different issues: One about investing in the business and one about who works in the business for what. You have to look at this as a financial investor would with pre- and post money. If the value of the business right now is $0 and your partner brings $300K (before you invest) - then the post money value is $300K and he owns 100%. Then, you step in and increase the business value by $300K - business's pre-value was $300K and you add $300K for a total new value (post-money) of $600K - then you added value is half that company - thus, regardless of who does what, you should own 50% of that business and get 50% of all profits and have 50% of all say. If your partner is going to work in the business and receive a salary for it (which should not be a set amount but some percentage of the profits earned) then he is getting paid for his on-going contribution - which has nothing to do with the initial capitalization of the business (both of you putting in 50%).
You always have to look at it as a financial investor when putting up money. But your approach is only a beginning framework as to how a financial investor would start to look at it. Capitalization is only a small part of any company's valuation, even at start-up. A financial investor is going to look at what they are investing, what portion of that capital is at risk, if there are assets, how risky are those underlying assets (assets composed primarily of gold, other precious metals and gem stones are a smaller risk than say t-shirts for a retail establishment) and what the expected return on that capital is (regardless of ownership %), among other factors. They are also going to evaluate what the next best alternatives are for their money at an equivalent risk profile. Likely, they will also do some comps if there is any pure-play or close to pure-play data available to make sure that they are not overpaying for their investment.

As far as fixed vs. variable salary, your position is interesting. I would say there is a real danger in not paying a market salary to the managing partner, because it gives an unrealistic picture of operating overheads when you go to sell the business or the managing partner wants to retire. It is at that point that you start to realize your business is not as valuable as you either think, or as it should be. You also need to have a business where in the case of the managing partners death or incapacitation it can continue on at a similar profit level as before. You will probably have a hard time hiring a non-partner to run your store on strictly a commission basis. Now I have no problem in splitting the salary in a fixed + variable component, so long as that formula would allow you to easily hire someone from the outside if there was ever a need.

Thousands of people become minority owners in businesses every year while putting up half of the capital or more. There is nothing wrong with this so long as they are adequately protected and the investment is sound. Many of these problems can be solved with proper incentive and governance agreements being in place between the partners so that each one is adequately compensated and protected.