Need Help Determining a Fair Business Agreement (1 Viewer)

[pizzatyme]

Hey all, my wife's cousin owns 100% of a "company" that can do all things engraved and screen printed, etc.She has a small and somewhat active customer base currently but wants to expand it to a full time business. She owns the equipment outright and leases a small warehouse to run the business out of.

Her cousin wants to bring her in as a partner. Wife would come in with no cash and would be the business manager/sales & marketing.

The cousin covers all business expenses, etc.

My question is, what is fair for my wife to ask for as a partner?

I'm thinking a straight % of profits.

I sell for a company and get 30% of the net profit, so I'm thinking 40-45% is reasonable for my wife to ask for.

What are your thoughts here? TIA

 

[mr roboto]

This isn't an ownership question, this is a straight commission compensation question. Why would your wife be a 'partner' instead of an employee/contracted sales person?

 

[pizzatyme]

This isn't an ownership question, this is a straight commission compensation question. Why would your wife be a 'partner' instead of an employee/contracted sales person?

Because the cousin is intent on being partners with my wife.Edit to add: My wife would be doing 90% of the work around website development, wholesale product procurement, production, etc. The cousin is the creative partner who happens to own a ####load of nice equipment due to a divorce.

Either way, whether it's partners, contracted salesperson, what do you all think is fair?

 

[Juxtatarot]

This isn't an ownership question, this is a straight commission compensation question. Why would your wife be a 'partner' instead of an employee/contracted sales person?

Because the cousin is intent on being partners with my wife.Edit to add: My wife would be doing 90% of the work around website development, wholesale product procurement, production, etc. The cousin is the creative partner who happens to own a ####load of nice equipment due to a divorce.

Either way, whether it's partners, contracted salesperson, what do you all think is fair?

50/50?

 

[Binky The Doormat]

I predict this won't end well at some point. Great way to make for ####ty family gatherings for the rest of your lives (as long as you stay married at least anyway).

Something this loose-ended from the cousin's POV just reeks of future problems. If things go well, the deal will weigh too heavily in favor of your wife. If there isn't a significant pick-up in sales then she will be blamed for dragging the business down.

Not trying to be a downer here, the money likely isn't worth the high level of risk of family issues.

 

[DiStefano]

I predict this won't end well at some point. Great way to make for ####ty family gatherings for the rest of your lives (as long as you stay married at least anyway).

Something this loose-ended from the cousin's POV just reeks of future problems. If things go well, the deal will weigh too heavily in favor of your wife. If there isn't a significant pick-up in sales then she will be blamed for dragging the business down.

Not trying to be a downer here, the money likely isn't worth the high level of risk of family issues.

You need to develop some kind of a sliding scale. Initially, your wife's cousin is bringing the most to the party. If the business grows very well, then your wife will be a major contributor. But there are whole lot of details which need to be hammered out beforehand, and put in writing. The potential for misunderstandings and future family problems is huge.

 

[pizzatyme]

So, I'm just spitballing here but came up with this as 2 different options. Obviously this is open to discussion. The cousin is asking for my wife to bring something to her as she really doesn't know how to structure it.

Wife-60% of net profit

Wife’s Role

• Website management

• Wholesale product procurement

• Retail site management

• Production-primary

• Sales/Marketing-primary

• Training/managing future staff

• Shipping finished orders

Cousin’s Role

• Sales/Marketing-support

• Design creation

• Equipment maintenance

• Financial management of the business

• Production-support

Wife-40% of net profit

Wife’s Role

• Website management

• Sales/Marketing-primary

• Production-support

Cousin’s Role

• Wholesale product procurement

• Production-primary

• Sales/Marketing-support

• Training/managing future staff

• Shipping finished orders

Thoughts on this? If I'm the cousin, I hop all over giving up 60% for what I get in return here.

Family issues are non-existent. This is a long lost relative trying to build a relationship. They are the only 2 living cousins.

 

[Binky The Doormat]

I think DiStefano's sliding scale has a lot or merit.

60% out of the box - kind of shark-tanky without the multi-million dollar expertise.

 

[mr roboto]

Are there salaries? Who's keeping the books?

% of NET as a distribution/compensation plan sounds like a disaster with 2 people who presumably haven't run a company like this before. Who will determine profit?

If you really want to grow the company, pay realistic wages to each person for their work. I'm amazed that the cousin is wanting to give equity to someone if they aren't bringing more to the table than just work. You can hire work.

 

[pizzatyme]

Are there salaries? Who's keeping the books?

% of NET as a distribution/compensation plan sounds like a disaster with 2 people who presumably haven't run a company like this before. Who will determine profit?

If you really want to grow the company, pay realistic wages to each person for their work. I'm amazed that the cousin is wanting to give equity to someone if they aren't bringing more to the table than just work. You can hire work.

I agree with your sentiment. However, she is an accountant by trade. She hasn't run a business. My wife has.

Wages are not possible as their are no current sales. I'm looking at this more like a 1099 scenario. However, that may not work if she is actually working versus a traditional sales role?!

 

[Binky The Doormat]

Are there salaries? Who's keeping the books?

% of NET as a distribution/compensation plan sounds like a disaster with 2 people who presumably haven't run a company like this before. Who will determine profit?

If you really want to grow the company, pay realistic wages to each person for their work. I'm amazed that the cousin is wanting to give equity to someone if they aren't bringing more to the table than just work. You can hire work.

No problem. Pizza will keep the books.

NOTE: See jersey fiasco.

 

[Johnny Rock]

Since the cousin got the equipment in a divorce I'm thinking she doesn't know much about building a business out of it? Or is it an operating business that is going along on its own?

You can have a bunch of fancy equipment but without the knowledge and wherewithal it's almost worthless. In that case cousin can have part of something or all of nothing. She turned to your wife to help build it into something. That's great and an opportunity for both.

If there is no entity yet I'd say maybe 51% cousin and 49% wife. If the business is already operating the wife should get less. Lots of details missing of course.

Paying a professional is worth it. Seek out a well respected CPA with an ABV (Accredited in Business Valuation) designation. Be prepared and bring all your data and information. They will have multiple ideas on structure. Then put it ALL in writing.

 

[Abraham]

Ownership should be earned/vested, not given. A commission structure at first that converts to equity over time. For example, if the business gross doubles she earns 10% equity, double again she gets 15% more, double again and she's a 50/50 partner.

 

[pizzatyme]

Ownership should be earned/vested, not given. A commission structure at first that converts to equity over time. For example, if the business gross doubles she earns 10% equity, double again she gets 15% more, double again and she's a 50/50 partner.

This seems like a great suggestion! Thanks

 

[Johnny Rock]

Ownership should be earned/vested, not given. A commission structure at first that converts to equity over time. For example, if the business gross doubles she earns 10% equity, double again she gets 15% more, double again and she's a 50/50 partner.

There are no current sales.

 

[pizzatyme]

Ownership should be earned/vested, not given. A commission structure at first that converts to equity over time. For example, if the business gross doubles she earns 10% equity, double again she gets 15% more, double again and she's a 50/50 partner.

There are no current sales.

Actually there are but they are sporadic. The cousin has occasional repeat customers for t-shirts, trophies, engraved items, etc. However, these are all inbound orders as the cousin has a full time job and isn't actively selling.

So, there is at least something to go on as far as sales are concerned.

 

[Abraham]

Ownership should be earned/vested, not given. A commission structure at first that converts to equity over time. For example, if the business gross doubles she earns 10% equity, double again she gets 15% more, double again and she's a 50/50 partner.

There are no current sales.

Actually there are but they are sporadic. The cousin has occasional repeat customers for t-shirts, trophies, engraved items, etc. However, these are all inbound orders as the cousin has a full time job and isn't actively selling.So, there is at least something to go on as far as sales are concerned.

Then it works perfectly. Say she's grossing $2k a year on these tiny orders. Your wife brings in 4k then she earns a stake. Get to 8k and that's more. Then 16 and she's 50/50...and has produced 28k gross sales. Seems fair.

 

[Koya]

The best way IMO is to work to a 50/50 split in what has been invested from an equity standpoint and then a fair delineation of duties moving forward.

The equipment has some value. The cleanest way would be to pay in the same value as the equipment and have them each contribute roughly the same in terms of time/work. Now, if this is too large an anti, I'd suggest splitting profits skewed to the cousin until she gets reimbursed for th equipment cost, whatever that split may be.

 

[mr roboto]

50/50 never works btw.

 

[Koya]

50/50 never works btw.

How is that?

 

[mr roboto]

50/50 never works btw.

How is that?

Its better to have someone in charge IMO. Especially in this instance where there's little buy-in.

 

[Koya]

50/50 never works btw.

How is that?

Its better to have someone in charge IMO. Especially in this instance where there's little buy-in.

I don't disagree, but there are plenty of 50/50 arrangements that do work. Obviously there needs to be some mechanism to make decisions when there is not an agreed path.

One other potential is to have a profit share arrangement rather than actual equity in the business with some fair percentage and potentially some terms should the business grow and be sold (and therefore a share of the profit from the sale of the business).