I'd really like to get your opinion on the situation I'm currently going thru.
Here are the details:


Matt & Scott were going to start a new business out at the local mall.

Matt has some experience with this type/location of business.

This new business is/was Matt's idea, although it was Scotts persistence & encourgement that almost got it going.

Matt & Scott were going to split the costs 50-50 to get the business started.

Currently, Matt has a full-time job, 8-5 Mon-Fri, at which he will become 1/2 owner of in Jan '05, having agreed & signed the paperwork with the one partner of the two current owners who is retiring.

Currently, Scott is not working and lives just 5 miles away from where the business would be.

Although Matt works just 5 miles away from where the business would be, he lives,
with his fiance, about 45 miles away from the business location.

Matt has now stated a couple of times that because of his job and where he lives, he does not see himself spending much time out at the mall with the business.
Maybe one-3hr closing shift a week, if that.

The mall is open 72hrs a week, or 288hrs for a 4-week time period.

Figuring a PT person works 25/week, 100 hrs in the month, Scott would then
work the remaining hours, 160-188hrs/month.


Matt wants to distribute the money in the following way:
- 1/3rd to pay the bills;
- 1/3rd to Matt &
- 1/3rd to Scott


However, after putting some numbers down on paper, Scott does NOT think that's a fair deal for him.

For example, IF the gross was $10,000 for the month:
$3300 - bills (33%)

$3350 would go to Matt -
for being 1/2 owner AND having worked 3-12hrs for the month;

$3350 would also go to Scott -
for being 1/2 owner AND having worked 160-180hrs for the month.


Scott has suggested a lower Base Pay, and then an agreed upon Hourly amount paid per the number of hours worked.



My question, simply is: WHAT DO YOU THINK?


Is one scenario more fair than the other?
Why, or why not?


>>> IF you've gotten this far down on this thread, THANK YOU,
your thoughts & opinion are very mich appreciated, as I realize this situation REAlly only matters to one person on this bbb!

Matt needs to get off his ass and do some work

Is Matt Greek? Never partner with a Greek.

Anyway, if 1/3 is going to the bills - I would suggest the remaing 2/3 be split 70/30. 70% to the one who puts in 50% of the upfront capital and spends his life there to get it going.

I find it difficult to believe you've got a 66% profit margin. I think you've got other fixed costs not accounted for.

Out of curiosity, what type of business is it?

In my opinion a business that hasn't even gotten off the ground and has these types of problems - Scott should find another business opportunity, this just isn't going to work.

the 50% split should be of the profits... after both Scott and Matt have been paid a fair hourly rate...

using your example:
say both Matt and Scott get 15$/hour (an agreed upon rate)

10,000 revenue,
-3300 bills(fixed costs including paying the PT worker)
-15*160(rate*hours) Scott = 2400
-15*15 (rate*hours) Matt = 225
=4075

2037.5 to each of the parties involved in the business...

that would be the way I would want it if I were either party...

First thought.... pay bills first, then distribute profits.

What if bills total 80% the first two months. Does Matt still want 1/3 of revenue... and what about Scott?

If the real issue is because Matt has a day job, then he should consider working weekends and evenings if he really wants to get the business going.


Let me play devil's advocate

Again... it comes down to ownership and creation of the idea. Whose idea? Matt's. Creation of the idea has a value. Would Matt & Scott even be in this position, had Matt ever even thought of it?

Now the flip-side

Sweat equity has tremendous value. You can have all the ideas you want, but if you don't get off your ass and do something with it, it's worthless.

Here's another idea... since Matt won't work as much , then Matt can exchange $$$ for his percentage. (i.e., he pays for more/most of the up-front expense) in exchange for not having to work as much.

I always think its wise to separate and pay yourself as employees (and that would allow for the huge differential in effort) first. Then split any profits left over. Always identify the true cost of doing business - if someone has to run the business by being there, thats a cost, its NOT part of the profit to be shared out equally.

However, I honestly think its doomed under the current arrangement before you even get going.

Richard

Swood: I didn't mean to imply that we would have a 66% profit margin, it may will come down to needing more than 33% just to pay the bills, my example was just that, an example.
ie: IF there was $6700 to be divided between the two of us.


Type: a themed business, selling (duh) clothes, jewelery, sunglasses etc.



Matt made a comment when Scott brought up the unfairness, Matt said, Scott I can't be out there, I have a job!
Scott said, I know you have a job Matt, you ARE being compensated at that job!!!

Matt also believes that he is entitled to the 50-50, because he is helping Scott out,
Scott being without an income for quite some time.

Scott thinks the only way 50-50 would work is IF they get enuf employees to work the biz, then 50-50 would be fair.

Thanks again for the responses so far, they're great, keep 'em coming.


In case you're wondering: Scott has known Matt for 12yrs, and considers Matt his best friend.

Matt should feel obligated to participate equally in the work. However, life in the real world rarely works that way so the important thing is what does it say in the agreements you have together. If there are none then either get things on paper, purchase the whole thing, or cut your loses and get out as quickly as you can.

Business deals ruin friendships so, you can probably write that off.

Is your math right? How many businesses can start up with only 33% cost of doing business. Also, were are your provisions for a cash reserve?

Sorry about being so negative but I think you have a lot of stuff to work through.

Dave

Sliding scale; there is no reason to split everything at the same amount. The proportion allocated changes with revenue (or profit) so no one makes a windfall. Figure out the milestones and the ratios that make you both happy.

No one should feel obligated to work and the value of compensation can change over time too. But absent agreement to the contrary, 50:50 is presumed.

Unless you are printing money, I would take out the bare minimum. It is a rare business that suceeds so quickly. But the concept remains the same.

As an example (using random numbers, and one milestone) you split profit equally up to 5,000 and then split profit over 5,000 70:30.

Kellzey wrote:
"What if bills total 80% the first two months. Does Matt still want 1/3 of revenue... and what about Scott?"

..If I implied that either Scott or Matt wanted 1/3 of the revenue, I didn't spell out my words correctly.
The split is AFTER the bills would be paid.


CAN SOMEONE TELL ME HOW TO DO A MULTIPLE QUOTE THING?


tat2dphreak wrote:
" the 50% split should be of the profits... after both Scott and Matt have been
paid a fair hourly rate...

using your example:
say both Matt and Scott get 15$/hour (an agreed upon rate)

10,000 revenue,
-3300 bills(fixed costs including paying the PT worker)
-15*160(rate*hours) Scott = 2400
-15*15 (rate*hours) Matt = 225
=4075

2037.5 to each of the parties involved in the business..."


..Right on whole-heartedly That seems fair to Scott, and is EXACTLY one of the five scenario's Scott wrote up and gave to Matt.


Kellzey (again) wrote:
"Let me play devil's advocate

Again... it comes down to ownership and creation of the idea. Whose idea? Matt's. Creation of the idea has a value. Would Matt & Scott even be in this position, had Matt ever even thought of it?

Now the flip-side

Sweat equity has tremendous value. You can have all the ideas you want, but if you don't get off your ass and do something with it, it's worthless.

Here's another idea... since Matt won't work as much , then Matt can exchange $$$ for his percentage. (i.e., he pays for more/most of the up-front expense) in exchange for not having to work as much."


..those are both excellent points, thank you.


richardL wrote:
Always identify the true cost of doing business - if someone has to run the business by being there, thats a cost, its NOT part of the profit to be shared out equally.


..thanks Richard, that is a great point about someone running the business as being a Cost.

However, I honestly think its doomed under the current arrangement before you
even get going.

..yeah it's weird, the business hasn't even started, and doesn't look like it ever will now, and the friendship between Matt & Scott already feels strained.


and last but not least,
DNHunt wrote:
"Business deals ruin friendships, so you can probably write that off."

..I'm sure neither Matt nor Scott want THAT!


Really....
CAN SOMEONE TELL ME HOW TO DO THE MULTIPLE QUOTE THING?

just keep editing over & over?

use the "quote button"(alt+q) at the top...



no

Looks like Scott wants / needs the opportunity a lot more than Matt does. Also looks like Matt has an inflated view of his contribution to this thing.

If I were Scott, even as hungry as I might be, I'd walk away from this deal. Scott has "signed papers" to be a half-owner in ANOTHER business as of Jan '05. That's an already-up-to-speed-business compared to the Scott/Matt startup, and it will suck up his time all by itself. Between fiance, up-to-speed-business, and startup, where do you think Matt's priorities are going to lie when he runs out of hours in the day?

In addition to paying themselves as employees, perhaps Scott could offer to buy out Matt's interests in the business, ie pay him some kind of fee (out of future profits, if any) for the "idea", some chunk of future profits for access to his expertise, and interest on any money loaned. Alternately, Scott might be in an interesting negotiating position a year down the road when Matt discovers he's in over his head and needs to dial back his work load. Such a move would require a well documented contract between the two and the friendship could go either way in the outcome.

As an example of how things can go wrong my (ex) wife always wanted to open a restaurant. She and her, then, best friend planned and arranged pretty much everything. Since it was WA state I was treated as a co-owner as was the friends husband. I funded things from my consulting business.

It takes a long time to get an idea like that to reality and by the time we had an opening date the friend and her husband were moving towards an unhappy divorce. We got caught up in the 'if your not with me you are against me' BS - we couldn't kick out the husband from co-ownership (either legally or in terms of effort put in), so the friend decided to try to kill the venture - she didn't help, called in the health inspectors multiple times etc. Finally she paid a local 'punk' to firebomb the restaurant! - Not many people get to tell THAT story!!

Fortunately the kid was also an idiot and used diesel instead of gasoline in his bomb so it didn't spread fast enough. Otherwise he would have taken out a Safeway, KFC and several other businesses as well.

We reopened but never got going again... curious how people don't want to go to a business that gets firebombed. The punk got a year in jail and had to pay restitution, he pays $10 a year!

The (now ex) friend moved out of state and got away free.

I lost a boatload of money.

The morel being: choose your friends and business associates carefully.

Richard

Best way to lose a friend is to loan them large sums of money or go into business with them..... I've done both.

RUN AWAY you've got a disaster waiting to happen.

Consider a limited partnership instead of a general partnership.
Scott would be the general partner, with the day to day responsibility of operating the business. Matt would be the limited partner, with no responsibility regarding operating the business - and no say in decisions made. He also would not work at the business - not even part time.
Pay arrangements could be based purely on profit, with Scott taking no salary. Of course the profit would have to be skewed in favor of Scott, since he is taking the biggest risk - staking his income on the success of the business.
At the other end of the compensation spectrum - Scott would draw a reasonable salary for his efforts and any money left would be distributed as profit to both partners.
I went into business 16 years ago by forming a limited partnership. I did not have any money so I solicited friends with money to invest in me. Since I had no experience in business I was generous with distributing profits to the limited partners in order to attract them to the investment. I even guaranteed a minimum profit. At that time interest rates were high so I guaranteed 12% annual return on their investment. The only downside to the partners was the chance of losing the original investment. As general partner I took no salary, but received 65% of the net proceeds from operating the business. The partnership document gave me the power to buy out each limited partner after the first three years. The cost of the buyout was the amount of their original investment. Based on format of the partnership agreement it was in my best interest to make the business profitable and to buy out the others as fast as possible.
It was successful in the long run. I own 100% of the business today and I am still friends with my former partners. This is mainly because the agreement was carefully written to accomodate the needs/desires of all involved.

If the money invested in the business is equal 50-50 then the profits after expenses need to divided 50/50. If each person is going to work a scertain matter of hours a week, then a reasonable hourly wage needs to be calculated into the companies fixed expenses:

Example:

Matt (10hrs a week at $15 an hour or $600 a month)
Scott (40hrs a week at $15 an hour or $2400 a month

Gross Revenue $10,000
fixed expenses (-2,000)
Salaries (-3,000)

Net Profit $5000

Each gets $2500 a piece

If this is not agreebale then both other parties need to hire employees and stay out of the business and just split profits.

Thanks ldino21,
I think something like you said, similiar to what others here have said also, would be the fairest for all parties involved.

Hey numbnutz....guess who's Greek?

Being a small business owner myself,

My $.02 since you asked...walk away from any delusions of "50/50" partnerships.

In a small business, long term success and livable stress levels are more likely if you have AN owner, and then the "hired help". Active or inactive equity minority shareholders/investors are fine, but on a day-to-day basis, only 1 person can really run the show.

Even though I am the CEO of my employer, I am still "hired help" and satisfied with that (for now). Even though I make more than the main owner and have a ton of day-to-day control, ultimately I still have to live by the "golden rule" just like 99.9% of us do. He/she who has the gold, rules...

FWIW our company started off as an 85/15 split. The 85% guy was the MBA with the concept and financial backing; the 15% was the dude who had to bust his ass nights and weekends (working two jobs at first) to make it actually work. Go figure.

Pass on the partnership for now, get a part time or full time job doing anything, put every dime and penny you can find in the bank, sell all the toys (accept the 914) and do the thing yourself next year. If it's a good business the oporutunity will be there next year. Tell your friend you are not comfortable mixing the freindship with the business. Truely 99.99999% friendships end in ruin because of self serving self interest that develops over time. In this case you haven't even opened the doors yet and it's started already.

Run the other way screaming in terror!

I'm sure your example was a simple one for the purpose of helping us understand what you are attempting. But Don't forget when calculating your cost of doing business enter all wages. The most important thing for a business owner is to pay yourself. Without a pay check you won't have any paperwork to show a bank you earn real money. You won't be a "good risk" for a "REAL Business loan" Include your hourly wages for working the business, doing the books, late night inventory, stocking shelves after hours, etc. Figure your employees and partners wages. Then divide the profit at the end of the inventory cycle or year. Don't forget in retail you may have seasonal losses that won't show up monthly. You loss money from shoplifters, and damage.

After everything is said and done you may discover the potencial for profit isn't worth the time invested... or not...

Good luck, WEre pulling for you

The advice to pay yourself and partner a real wage (Idino 21 and Tat2d) is very important, if you are going to be the exception that proves the rule, i.e. do not go into business with friends or family.

I know of very successful exceptions to these rules, but you do need an LLC Operating Agreement or Partnership Agreeemnt written "up-front" and with the best possible projections and communication between you and significant others now.

You are going to be very resentful if cash flow does not support a staff and you get to spend every waking hour in the store.

Mail me off-line, I have many such forms that you both may want to look into before going much further.

Another thing to consider if you write up a limited partnership type of agreement (or anything for that matter) -- be sure each involved party has a well-defined "out" (buyout clause or whatnot) in case one person wants to part ways and the other(s) want to keep the business alive. You don't want to be in a situation where you've got to liquidate the whole business just to unleash one partner.

Also I would advise talking to an accountant and/or lawyer about the appropriate organizational structure for the best tax treatment. It will cost a bit up front but could save you big time in the future.

I would have never guessed, being the upstanding gentleman that you are.

Thanks! Thats exactly the words I was looking for.
The downfall to that is that you have others running and working your business, so you loose some control, and its a little less profitable.

But, you do have the opportunity to trade Your time for the profits that your employees are earning for you. (Just hope they are doing it the way you trained them.. ) Somethimes the loss in profit for employee cost is more satisfying than putting in all your time for the extra profits.

IMO, I say dont do it. Doesn't sound sucessful. But I am not a business owner, so I am not sure.

Good luck.