What is a Fair Partnership Arrangement?
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Question:
I am interested in opening a retail shoe store, but I don't have enough capital. My friend is willing loan me the capital for a stake in the business. I will do all the work and my friend will be a silent partner. What would be a fair arrangement for us as partners?
Answer:
This is an excellent question and an interesting situation from both a financial and personal perspective. Financially, if you will be running the business, then you should be entitled to receive a reasonable salary for the work that you perform and possibly a bonus based upon achieving certain levels of profitability. If your partner/friend is not working in the business then he/she should not be entitled to a salary but rather a reasonable return on their investment plus a financial stake in the business.
Obviously, it behooves you to negotiate the greatest percentage of equity for yourself in this deal but you must be fair. Of equal importance is to have an arrangement whereby you will be able to make all of the daily business decisions without their involvement. To do so means you will need to be the majority shareholder and only major decisions such as hiring people at certain salary levels, incurring any debt, binding the company, or selling any portion of the business must be subject to unanimous consent. You'll want to seek the input of a competent attorney to formulate an equitable shareholder agreement.
On a personal level, your relationship will be forever changed with this person. You both have to be mature enough to try to keep business issues separate. No opportunity is worth jeopardizing a friendship in my opinion. Plus, you must realize that they are the vehicle by which you will be able to become a business owner and that brings a substantial amount of implied debt on a personal level.
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Richard Parker author of: How To Buy A Good Business At A Great Price(TM), the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center. Richard Parker is also the author of BizQuest's Business for Sale Blog |